Economic Performance

GDP and circular flow

GDP and Business Cycle
The Science of Choice and Efficiency

1. What to Produce?
2. How to Produce?
3. For Whom to Produce?

Measuring performance give feedback on the quality of our past

choices and informs our next and future choices.
 MACROECONOMICS

 Study of the the Economy as a Whole in order to:

1. Measure the health of the whole economy
2. Guide government policies to fix problems in the economy.
 Goals in Every Economy
1. Promote Economic Growth – Improved productivity and
efficiency to increase the amount of good and services
2. Limit Unemployment – Keep people working thus providing
ample and stable labor force as well as supporting household
income
3. Keep Stable Prices (limit inflation) – Protecting the buying
power of currency
Realizing growth or loss informs our relative:
Economic
Security
National

Dependency/Interdependency on
Foreign Nations regarding loans,
currency, trade balance.
Extent of Self-Sufficiency
Domestic self-sufficiency to provide
necessities, capital, production
What should be measured?

 Production
 Income
 Consumption
Gross Domestic Product (GDP)

 Largest grain measure and most commonly quoted

 Total value of all FINAL goods and services produced within a country in a given calendar
year.
 Only Final goods to prevent double counting
 Only new products – measures production not sales
 Includes only products within the border regardless of who produces it
 Not domestic owned companies producing overseas.
 Does include foreign companies producing in the target country
 Net Exports
Product Market Foreign Nations

Gross Investment Government Personal Consumption

Purchases Expenditures

Firms Government Households

 Output-Expenditure Model

C + I + G + (X-M) = GDP
C= Personal Consumption Expenditures (durable goods, non-durable goods, services)
I = Gross Investment (Fixed investment, Inventory investment)
G = Government Purchases (Spending on goods and services by national, regional, local government
excluding transfer payments)
X = Exports (Domestic production sold in foreign countries)
M = Imports (Excludes Foreign produced purchased domestically)
(X-M) = Net Exports
Consideration of inflation

 Nominal GDP = GDP expressed in the currency of that

year
 Real GDP = GDP expressed in inflation adjusted currency
for comparison over time.
 Price Index used to adjust for inflation
Business Cycle: Fluctuations in the economic activity along
the long term trend measured by change in real GDP.
4 Phases of the Business Cycle:

 Expansion: A period of the business cycle during which economic activity

is speeding up and overall economic indicators are increasing toward a
peak.
 Peak: The highest point of the business cycle and turning point of
expansion shifting to contraction.
 Contraction: A period in the business cycle during which business activity
slows down and overall economic indicators declining toward a trough.
 Trough: The lowest point of a business cycle and turning point from
contraction to expansion.
 Economic Indicators during Expansion

Demand: increasing willingness/ability to purchase; sales increase

Production: Firms increasing production
Employment: New Jobs created; unemployment decreasing
Wages/Standard of Living: Real (nominal) income increases
Firm inventories: inventory decreases
 Economic Indicators during Contraction

Demand: decreasing willingness/ability to purchase; sales decrease

Production: Firms decreasing production
Employment: No or few jobs created; layoffs, unemployment increasing
Wages/Standard of Living: Real (nominal) income stagnate/fall
Firm inventories: inventory increase
Other terms

Recession: Contraction extending two consecutive quarters.

Recovery: Period between the trough and trend line during an
expansion.
Boom: Period between the trend line and peak during an expansion
Depression: Extreme recession
Symptoms above and below the trend line
The trend line represents growth of GDP and full employment.

Above the trend line there is pressure on prices to increase = inflationary

pressures. High competition for factors of production

Below the trend line there are tendencies toward reducing the use of the factors of
production - underutilization of the factors of production and increasing
unemployment.

Peaks and Troughs are the turning points brought about by the pressures.
 Economic Shocks – Unexpected events that
lead to changes in supply or demand
Demand-side shocks are unexpected events that lead to increases or decreases in
demand https://www.investopedia.com/ask/answers/060115/what-are-some-common-examples-demand-shock.asp
Positive demand shocks lead to increasing aggregate demand leading to increased
consumption.
Negative demand shocks lead to decreasing aggregate demand which lead to decreased
consumption.
Supply-side shocks are unexpected events that lead to increases or decreases in
supply. https://www.investopedia.com/terms/s/supplyshock.asp
Positive supply shocks lead to increasing aggregate supply leading to increased production.
Negative supply shocks lead to decreasing aggregate supply which lead to decreased
production.
Influence on the Business Cycle

 Business Investment: high levels encourage economic

activity; low levels discourage economic activity
1. Purchasing capital goods creates demand
2. New capital increase efficiency/productivity
3. Research/Development stimulates technology/innovation
 Influence on the Business Cycle
 Availability of money credit: Amount of money in circulation
influences interest rates to increase or decrease. Government policy
influence this availability
1. Low Interest rates encourages less savings and encourages investment.
2. Low Interest rates reduces the cost of borrowing money for households and
business.
3. High interest rates encourages more savings and discourages investment.
4. High interest rates increases the cost of borrowing money for households and
business.
Influence on the Business Cycle
 Expectations about the future: Expectations of firms and
households impact spending/saving decisions
 Belief that economy is strong and prosperous influences a
tendency to increase hiring, spending and investment
 Belief that the economy is weakening or moving toward
contraction influence tendency to reduce hiring, spending, and
investment
Influence on the Business Cycle

 External Factors: Changes in the world’s economic and political

climate impact the changes in the cycle.
 War/Conflict
 Extreme disaster
 Crashes of markets abroad
Predicting the Business Cycle: Forecasts used
for strategic planning and policy making
Leading Indicators: Indicators that tend to change prior to changes
in GDP. Ex. Building permits, orders for new goods, price of raw
materials, stock prices
Coincident Indicators: Change as the economy moves between
phases. Personal income, sales volume, and industrial production
levels.
Lagging Indicators: Indicators that reveal their change after the
upturn/downturn. Credit Card/Consumer loan; changes in business
incomes
Importance of Economic Growth

 Maintaining or improving standard of living

 Consider population growth (real GDP per capita)
 Ability to compete globally
 Ability to deal with domestic problems
 Maintaining or improving standard of living

 People well being declines without sufficient growth

 Growth increases firms and household ability to consume
 Growth provide increase choice of goods and services
 Growth enables increased leisure
 Growth reduces domestic problems with poverty, crime, and health
 Caution consider that growth overall doesn’t necessarily mean equal
distribution of benefit.
 Competing in the Global Market
 Influence in the global market is relative to global share of production
 Extent of dependence..interdependence..independence

Ability to deal with Domestic Problems

 Increased tax base distributes tax burden over more of society
 Increased income increased tax revenue so government can support
society-wide concerns or allow for lower taxes
 Requirements for Economic Growth
 Increased factors of production
 Import or conserve natural resources
 Size, skill, and hours of the labor force
 Production dependent on capital resources
 Increased productivity of the factors of production
 Level of available technology
 Capital-to-labor ratio
 Education/Skill of Labor Force