GNP & CONSUMER PRICE

INDEX (CPI)

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

2.

3.

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
1.

Read the Business Week article on page

362
a. What impact will immigrants have on
our GDP?
b. Based upon the contributions that legal
and illegal immigrants can provide,
should we or should we not limit
immigration in the United States?
c. Share with a partner
d. Turn-in on your way out the door