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Explore the complexities of Gross National Product, Consumer Price Index, & GDP calculation, and their impact on economic analysis and decision-making. Learn the importance of Real GDP for economic growth.
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PROBLEM WITH GDP • GDP can measure total output but cannot measure total income • mainly because of goods produced here by foreigners being counted and goods produced abroad by Americans that are not counted • Money that Ford makes in Mexico still makes its way back to stocks and executive pay checks
Gross National Product (GNP) • The dollar value of all final goods and services produced in one year with labor and property supplied by US residents • Takes into consideration imports and exports
HOW TO CALCULATE GNP • Start with the GDP and… • add in all payments Americans receive from outside the US • subtract all payment made to foreign-owned resources in the US • Economists prefer GDP because it focuses on production within United States borders
PRICE INDICES • Examine the chart on page 342 • Compare it to the chart on page 351 • If the total production is the same, why has the total GDP increased by $900 billion?
PRICE INDEX • A major problem with GDP is it is subject to distortions because of inflation • Inflation is a rise in the general price level • The problem comes when you attempt to compare GDP levels from one year to the next as in charts 13.1 and 13.4 • GDP can increase from one year to the next with no real increase in the amount of goods and services produced
PURPOSE OF PRICE INDEX • A price index is used to reduce the distortions of inflation • It is a statistical series that can be used to measure changes in price over time • We can measure inflation 3 different ways
CPI-CONSUMER PRICE INDEX • Start with a market basket • selection of just about everything you can imagine the average household might purchase in a year • Compare the total cost of everything in that group today in comparison to everything in that basket in the time period between 1982-1984 (average cost)
Different Indices • CPI- focuses on consumer goods (computer monthly) • Producer Price Index- Is computed monthly and focuses only on purchase of goods by producers (natural resources and capital) • Price Deflator- takes into consideration the inflation of ALL goods and services and is computed quarterly
REAL vs. NOMINAL GDP • We know that inflation can distort GDP • We know how to measure GDP • If we use this knowledge we can discover the REAL GDP • Chart 13.4 is an example of Nominal GDP because it does not take inflation into consideration
ADVANTAGE TO REAL GDP • Allows us to measure changes in production rather than changes in price
IMPORTANCE FOR GROWTH 1. Improved standard of living • More time with family, hobbies, etc. and more luxuries to make life easier • Government Spending- more money means more taxes which equals nicer roads, parks, police, etc. • Domestic Problems- growth equals more jobs and thus less poverty and crime
IMPORTANCE FOR GROWTH 4. Helping other Nations- purchasing of products as well as aid to other countries helps both the US and foreign countries 5. Global Role Model- Want developing nations to see that capitalism works and promote market economies over communism
CLOSURE • Read the Business Week article on page 362 • What impact will immigrants have on our GDP? • Based upon the contributions that legal and illegal immigrants can provide, should we or should we not limit immigration in the United States? • Share with a partner • Turn-in on your way out the door
