Measurement of Economic Performance

12-16% of the test.

A . National income accounts

1 . Circular flow

2 . Gross domestic product- A nation's output within a given time period.

3 . Components of gross domestic product

Expenditures approach= Consumer spending ($10.7trillion)+Gross Investment of businesses ($1.9t)+Government ($3.2t)+Net Exports (-$.578t).

Income approach:

  1. Wages, salaries, and supplementary labor income

  2. Corporate profits

  3. Interest and miscellaneous investment income

  4. Farmers’ income

  5. Income from non-farm unincorporated businesses

4 . Real versus nominal gross domestic product

Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.

GDP deflator. Using the statistics on real GDP and nominal GDP, one can calculate an implicit index of the price level for the year. This index is called the GDP deflator and is given by the formula

B. Inflation measurement and adjustment

1 . Price indices

Consumer Price Index (CPI)-the CPI measures only the change in the prices of a “basket” of goods consumed by a typical household. The CPI uses base year quantities rather than current year quantities in calculating the price level index value. The formula for the CPI is given as

2 . Nominal and real values

NOMINAL-refers to a value expressed in money terms (that is, in units of a currency) in a given year or series of years.

REAL-adjusts nominal value to remove effects of price changes over time.

3 . Costs of inflation

Increased transactions to keep up with the loss of purchasing power

Menu costs-businesses cannot change their menu every time prices change.

Disinflation-reducing the money supply to slow transactions can cause a recession

C . Unemployment

1 . Definition and measurement

To be unemployed a person aged 16 or older that is not institutionalized (prison or military) must be looking for work.

A survey of 60,000 households provides the sample size to represent the population.

2 . Types of unemployment

Labor force participation rate-the percentage of adults (16 and older not institutionalized) that have a job or are looking for a job.

Employed worker-must work at least one hour per week.

Unemployed-seeking work

Frictional unemployment-people between jobs with a job lined up

Structural unemployment-people with an obsolete skill set, rules like minimum wage, and public policy.

Cyclical unemployment-people that were let go due to poor economic conditions.

Discouraged worker-stopped looking for work--not part of the labor force.

3 . Natural rate of unemployment

Natural rate of unemployment is equal to frictional and structural unemployment only.

The overall unemployment rate is the natural rate + cyclical unemployment.