CHAPTER 11 Measuring Economic Activity n n Business

CHAPTER 11 Measuring Economic Activity

n n Business Cycle Alternating periods of economic expansion and contraction Peak Inflation Recovery Recession Depression

GDP n GDP measures the market value of final goods and services produced within a country’s border during a given time period

Three approaches to measurement n n n Value added Expenditure method Income method

What is not included in GDP? n n n Used goods Financial transactions Underground transactions Transfer payments Barter transactions Some non-market production

Expenditure Method n GDP = C + I + G + (x - m) n n C =Personal consumption expenditure I =Gross private domestic investment G =Government consumption expenditures and investment (x-m)= net exports

Components of GDP n Personal consumption expenditures n Durable goods n n Non-durable goods Services Spending on durable goods tends to be highly volatile during business cycles

Components of GDP n Gross private domestic investment n Fixed investment n n n Non-residential (structures equipment & software) Residential (new houses by HH and landlords) Changes in private inventories n Goods produced but not sold during a given year

Components of GDP Govt. consumption Exp. & Gross investment n Federal n n n National defense Non-defense State and local

Components of GDP n Exports n n n Goods Services Imports n n Goods Services

Income Method Gross domestic product Less: Depreciation Plus: Statistical discrepancy Equals: National income Compensation of employees Proprietor’s income Rental income Corporate profits Net interest

Income Method cont… Less: Plus: Equal: Less: Equals: Income earned but not received Income received but not earned Personal income personal taxes disposable income personal consumption personal savings

Measurement of Price level n Inflation n n Deflation n n A sustained increase in price level A sustained decrease in price level Main Indices n n n Consumer price index (CPI) Producer price index (PPI) GDP deflator

Measurement of Employment n Population 16 years of age or older Less: members of armed forces Less: Institutionalized persons (in jails or nursing homes) Equals: Civilian Non-institutional population Cont….

Measurement of Employment Less: Persons who are not actively seeking jobs (housewives, retirees, students, discouraged workers) Equals: Civilian labor force

Unemployment rate n # of persons unemployed = Labor force X 100 Natural rate of unemployment n Minimum level of unemployment that can be achieved with current institutions without causing inflation to accelerate

Relevance for the manager inflation recession In contraction phase, generally, GDP, P, employment, profits & production show a downward trend

Relevance for the manager In Expansion phase, generally, GDP, P, employment, profits and production show an upward trend Demand for firm’s product is influenced by the business cycle. Policy changes also take place