Output, Income and the Price Level Topic Index

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Data Connections and Additional Resources
Consumer Price Index (CPI)

If gross domestic product (GDP) rises, we may not know whether this is due to an increase in output, or an increase in the price level. We can find out by computing real GDP, which adjusts for inflation by holding prices constant over time. Increases in real GDP reflect increases in output, or economic growth. Likewise we can adjust income by inflation to determine real income, from which we can determine whether our material standard of living is rising or falling.

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Current Account

Gross domestic product (GDP) is made up of consumption spending, investment spending, government spending, and net exports. Net exports are a major element of the current account balance. When the U.S. runs a trade deficit with the rest of the world, U.S. import purchases exceed foreign purchases of U.S. goods and services, and so net exports make a negative contribution to U.S. GDP.

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Housing Starts

Housing starts are a leading indicator of output in the economy. A rise in residential building permits indicates future construction activity and an increased production of new homes. New homes are included in GDP.

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Interest Rate Spread

The interest rate spread reveals the prevailing opinion among investors regarding future economic conditions. During a recession, when output is declining, interest rates also tend to decline because the demand for borrowed funds is low. If investors anticipate a future recession and declining short-term interest rates, they will sell off their short-term bonds and buy longer-term bonds, which can cause the interest rate spread to invert, or become negative.

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Labor Cost Per Unit of Output

Gains in labor productivity are economically beneficial because they increase output, and can allow worker incomes to rise while at the same time holding unit labor costs constant and limiting inflationary pressures.

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Money Supply (M2)

The supply of money in the economy impacts output and income. For example, an increase in the money supply will reduce interest rates and spur new investment, thus raising productivity and income. Excessive growth in the money supply will lead to inflation.

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Real GDP

If Gross Domestic Product (GDP) rises, we may not know whether this is due to an increase in output or an increase in the price level. We can find out by computing real GDP, which adjusts for inflation by holding prices constant over time. Increases in real GDP reflect increases in output, or economic growth.

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Real Per-Capita Disposable Income

Real per-capita disposable personal income is derived from national income accounts. Total personal income in a country is equal to its GDP minus depreciation and indirect business taxes. If we subtract personal taxes and inflation, and divide by population, we then have real per-capita disposable personal income.

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