GDP and Unemployment Chapter 5

Wages, rents, interest, profits The Circular Flow Wages, rents, interest, profits Firms (production) Household Factor services Goods Government Spending Other countries Financial markets Government Taxes Savings Investment Personal consumption Exports Imports McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Definition GDP: market value of final goods and services produced in a country in a given year Real GDP: GDP adjusted for inflation.

Percentages of American Men and Women over Age 16 Working Outside the Home, 1960 - 2001. Increase in female labor force participation increases the demand for housekeeping and child care. Unpaid household work is not counted in GDP. Paid household work is counted in GDP. The increase in female labor force participation has overstated GDP growth.

Value Added Approach

Value Added Approach Eliminates Double Counting

Expenditure Components of U.S. GDP, 2001 (billions of dollars) Consumption Durable goods Nondurable goods Services 835.9 2,041.3 4109.9 6,987 Investment Business fixed investment Residential investment Inventory investment 1,201.6 444.8 -60.3 1,586.0 Government purchases 1,858.0 Net exports Exports Imports 1,034.1 1,383.0 -348.9 Total: Gross domestic product 10,082.2

GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income Labor income Equals 75% of GDP Includes: Wages Salaries Income of the self-employed

GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income Capital income Equals 25% of GDP Includes: Profits Rent Interest Royalties

Market value of final goods and services The Three Faces of GDP = Market value of final goods and services Production Expenditure Income Investment Consumption Government purchases Net exports Capital Income Labor Income

Components of GDP C: consumption I : investment in plant & equipment G: government spending X-M: net exports

Limitations as a Measure Not a measurement of well-being, just economic activity. Does not consider the distribution of income. Unreported economic activity is not included.

Problems comparing per capita GDP across countries Bangladesh $270 USA $35,000 Exchange rate method and purchasing power method.

The Unemployment Rate Measuring Unemployment Labor force = employed + unemployed

Types of Unemployment Frictional: worker “between jobs” Cyclical: caused by bad economic conditions Structural: worker’s skill set is no longer in demand

Question 4 Your mother-in-law buys a new car from a U.S. producer. Your mother-in-law buys a new car imported from Sweden. Your mother-in-law’s car rental business buys a new car from a U.S. producer. Your mother-in-law’s car rental business buys a new car imported from Sweden. The U.S. government buys a new domestically produced car for the use by your mother-in-law, who has been appointed the ambassador to Sweden.

Question 8: Labor Force, unemployment rate & Participation Rate 65 people 10 <16 years of age 10 retired 25 full-time jobs 5 part-time jobs 5 full-time homemakers 5 full-time students over 16 2 disabled and cannot work Rest did not have jobs but wanted one but one has not searched in 3 months.