Page 104 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Unit 5: Managing Retailing in Good Times and Bad

such as: aluminium production, steel production, paper and paperboard production, industrial Notes
production, hourly earnings, weekly earnings, factory shipments, orders for durable goods,
new factory orders, new-home sales, existing-home sales, inventories, initial jobless claims,
married and jobless, help-wanted advertising, purchasing managers survey, and the U.S. trade
deficit.
As is apparent from the preceding list, economists and financial observers use observations on
numerous variables to understand the behavior of an economy. Nevertheless, the four key
macroeconomic variables summarize the most important characteristics of a macro economy.

Output–Income

An economy’s overall economic activity is summarized by a measure of aggregate output. As
the production or output of goods and services generates income, any aggregate output measure
is closely associated with an aggregate income measure. The United States now uses an aggregate
output concept known as the gross domestic product or GDP. The GDP is a measure of all
currently produced goods and services valued at market prices. One should notice several
features of the GDP measure. First, only currently produced goods (produced during the relevant
year) are included. This implies that if you buy a 150-year old classic Tudor house, it does not
count towards the GDP; but the service rendered by your real estate agent in the process of
buying the house does. Secondly, only final goods and services are counted. In order to avoid
double counting, intermediate goods—goods used in the production of other goods and
services—do not enter the GDP. For example, steel used in the production of automobiles is not
valued separately. Finally, all goods and services included in the GDP are evaluated at market
prices. Thus, these prices reflect the prices consumers pay at the retail level, including indirect
taxes such as local sales taxes.

A measure similar to GDP is the gross national product (GNP). Until recently, the government
used the GNP as the main measure of the nation’s economic activity. The difference between
GNP and GDP is rather small. The GDP excludes income earned abroad by U.S. firms and
residents and includes the earnings of foreign firms and residents in the United States. Several
other measures of output and income are derived from the GNP. These include the net national
product (NNP), which subtracts from the GNP an allowance for wear and tear on plants and
equipment, known as depreciation; the national income, which mainly subtracts indirect taxes
from the NNP; the personal income, which measures income received by persons from all
sources and is arrived at by subtracting from the national income items such as corporate profit
tax payments and social security contributions that individuals do not receive, and adding items
such as transfer payments that they do receive but are not part of the national income; and the
personal disposable income, which subtracts personal tax payments such as income taxes from
the personal income measure. While all these measures move up and down in a generally
similar fashion, it is the personal disposable income that is intimately tied to consumer demand
for goods and services—the most dominant component of the aggregate demand—and the total
demand for goods and services in the economy from all sources.

Notes It should be noted that the aggregate income/output measures discussed above are
usually quoted both in current prices (in “nominal” terms) and in constant dollars (in
“real” terms). The latter quotes are adjusted for inflation and are thus most widely used
since they are not subject to distortions introduced by changes in prices.

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