Chapter 7: Tracking the Economy

Economic Indicators

Various statistics used to monitor changes in the economy over time.

Aggregate Measure

A summary of data created by combining multiple values into a single value.

Price Index

A list tracking price changes for various goods and services.

Gross Domestic Product (GDP)

The most important measure of an economy’s size.

National Income and Product Accounts (NIPA)

Measures national economic performance and compares U.S. income and output with other nations.

GDP Formula

C+I+G+NX=GDP, where C is Consumer Spending, I is Investment Spending, G is Government Purchases, and NX is Net Exports.

Consumer Spending (C)

Household spending on goods and services.

Investment Spending (I)

Spending on productive physical capital such as machinery and construction.

Government Purchases (G)

Total spending by federal, state, and local governments.

Net Exports (NX)

Calculated as Exports (X) minus Imports (IM).

Three ways to Calculate GDP

Production Approach, Expenditure Approach, and Income Approach

Production Approach

Calculates GDP by adding up the total value of all final goods and services produced.

Expenditure Approach

Calculates GDP by adding up all spending on domestically produced final goods and services.

Income Approach

Calculates GDP by adding up total factor income earned by households from firms.

What’s included in GDP?

Domestically produced final goods and services, including:

• Capital goods (e.g., trucks)

• New construction of structures

• Changes in inventories

What’s not included in GDP?

Intermediate goods and services
❌ Inputs (raw materials)
❌ Used goods
❌ Financial assets (stocks, bonds)
❌ Goods and services produced outside the country

GDP Definition

The market value of all final goods and services produced within a country in a given year.

Gross National Product (GNP)

Measures production by American firms, regardless of location.

Recession

A slowdown in the circular flow of economic activity.

GDP vs. GNP

GDP measures production within a country’s borders; GNP measures production by American firms, regardless of location.

Nominal GDP

Measures GDP using current prices in a given year.

Real GDP

Adjusts for inflation by using prices from a base year.

Chained Dollars

A method for calculating changes in real GDP by averaging growth rates between an earlier and later base year.

GDP Per Capita

Measures average GDP per person and is better for comparing living standards.

Aggregate Price Level

Represents the overall price level in an economy.

Market Basket

A hypothetical set of consumer purchases used to measure price changes.

Inflation Rate

Yearly percentage change in a price index.

Consumer Price Index (CPI)

Measures changes in the price level of a market basket of consumer goods and services.

Producer Price Index (PPI)

Tracks price changes for producers.

GDP Deflator

Measures inflation across the entire economy.

Quality of Life and GDP

GDP does not measure well-being or happiness.

Key Takeaways About GDP

Higher GDP generally means better economic conditions, but wealth is not everything and should be analyzed alongside social factors.

Price Index Formula

Price Index in a given year= (Cost of basket in given year/ cost of basket in base year) x 100