CHAPTER 3: MEASURING MACROECONOMIC PERFORMANCE: OUTPUT AND PRICES CRITERIA FOR EVALUATING MACROECONOMIC PERFORMANCE
1. Rising living standards – economic growth Tendency for the level of output (quantity and quality of goods and services) to increase over time. 2. Stable Business Cycle – minimising the volatility in fluctuations of real output, around its trend or potential output. 3. Relatively Stable Price Level – low (positive) rates of inflation. Inflation and deflation is the tendency for price levels to change in the economy. Inflation is when prices rise while deflation is a general fall in prices. 4. Sustainable levels of Public and National Debt Public debt is the borrowing by public sector from the private sector and is influenced by budget deficits/surpluses. National debt is borrowing by domestic residents from foreign countries. This is influenced by the economy’s current account deficit/surpluses. 5. Balance between Current and Future Consumption What is the optimal level of saving that achieves the best balance between current and future needs? - Individual saving influences both the business cycle and the ability for the economy to grow in the long run. Savings also plays a huge role in nation and public debt. 6. Full Employment Provision of employment for all individuals seeking work
MEASURING NATIONAL OR AGGREGATE OUTPUT
GDP is used into two dimension (long-run growth and business cycle) o Business cycle shows the fluctuation of the economy (sometimes sluggish and growing relatively strong) o Long-run growth shows the steady growth of the economy - First indicator of good macroeconomic performance, rising living standards and low fluctuations in the shortrun business cycle is the nation’s GDP. - Definition: the market value of final goods and services produced in a country during a given period. DECONSTRUCTING DEFINITION “During a given period” - Every quarter - Flow variable – measured over a period time o In short run: GDP fluctuates, growing relatively strong at times (expansion) and then relatively sluggishly at other times (contractions). These fluctuations are called the business cycle. o In long run: there is a reasonably steady growth in GDP. “Market Value” - GDP is a measure of aggregate production or output. This is done by summing up the market values of the goods and services produced in an economy. - Goods and services with no observed market price: o Some are included, for e.g. the salaries of teachers, costs of textbooks and supplies etc account for the price of education. Cost of buying equipment, wages of soldiers etc is the price of national defence o Unpaid housework is excluded “Final goods and Services” - Final goods or services: those consumed by the user, they are the end products of the production process and are counted towards GDP - Intermediate goods and services: are used up in the production of final goods and thus are not counted towards GDP. - Concept of Value added: the market value of its product or service minus the cost of inputs purchased from other firms. This solves the issue of producing goods and services over more than one period. E.g In 2006, a grain company produces grain for $0.50. There are no inputs so the value added is just $0.50. In the same year, a flour company purchases the grain and produces flour for $1.20. The value added here is $0.70. It is now 2007 and a bread company purchases the flour and makes bread for $2.00. Value added is $0.80. Total value added: $0.50 + $0.70 +$0.80 = $2.00 which is the same cost as the final product. GDP added in 2006 is $1.20 and $0.80 in 2007. -
“Domestic” - Australia’s GDP includes the market value of goods and services within Australian borders, even if they are made in foreign-owned plants but does not include products produced in other countries by an Australian based company. THREE WAYS TO MEASURE GDP 1. Production Method Only the value of final goods and services will be counted in GDP measurements. This...
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