Chapter 6

# Chapter 6 - Chapter 6 Taking the Nation's Economic Pulse...

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Chapter 6 - Taking the Nation's Economic Pulse See graphs on pages 137-138 and the questions posed. In this chapter we look at how the economy's output is measured. We use the national income accounting system developed during the 1920s and 1930s to measure national income or national output. Just like a firm needs accounting to measure income to calculate profits or losses, the entire economy needs an income statement. GDP is the most widely used measure of economic performance around the world. We currently have about \$8T of annual GDP and we measure GDP in dollars. GDP measures the total market value or total spending on all final goods and services produced domestically during a specific period, usually quarters or years. Dept of Commerce tracks the economy and releases the figures on GDP on a quarterly basis. Time frame - we just ended the fourth quarter of 1997 (October, Nov, Dec). The first estimate of fourth quarter GDP will be released around Feb 1, second estimate on March 1 and the final estimate around April 1. It takes three months after the EOQ to finalize data. What GDP Counts and Doesn't Count: 1. Only final goods and services purchased by final users. Retail sales. GM buys steel or tires or transmissions, that doesn't count because it would be double-counting. For example, suppose GM spends \$15,000 for a car and sells it to a deal for \$16,000 and the dealer sells it for \$17,000. We only count the \$17,000 for the final retail sale. We can't count 15+16+17. Example , page 142. Bread example. 2. Only goods and services produced during the time period are counted. Only new production is counted, not secondhand sales. Example: sales of used cars and used houses don't count. They were already counted as new production in the year built. Resale doesn't get counted in current GDP. Commissions on sales would get counted, because they are current services. Since GDP only counts durable goods like cars when they are produced, it may not accurately reflect economic activity. Example, during a recession, there may be fewer durable goods produced in the current period, but people will still have the use of goods produced in previous periods. More active secondhand market for resale. GDP would understate actual consumption during a recession. And during expansion, production of new goods will increase in the current period even though they will last for many years. In this case, the current GDP may overstate consumption during an expansion.

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3. Financial transactions and income transfers are excluded. Example: stock or bond purchase is just a transfer of money from one ind to another. Commission would count. Or if you get a gift, it doesn't count. Income transfers (Soc Security, welfare, veterans' pmts, etc) don't count. Dollars are the common denominator for GDP. GDP = total spending on all goods and
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## This note was uploaded on 11/18/2011 for the course ECON 101 taught by Professor Gottlieb during the Fall '08 term at Rutgers.

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Chapter 6 - Chapter 6 Taking the Nation's Economic Pulse...

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