GDP, Inflation, and Unemployment

Why is the average income high in some countries while it is low in others? Why do prices rise rapidly in some periods of time while they are stable in others? Why do production and employment expand in some years and contract in others? What, if anything, can the government do to promote rapid growth in incomes, low inflation, and stable employment?

measures total income of a nation income = expenditure most closely watched econ stat “the market value of all final goods and services produced within a country in a given period of time”

1. “the market value” = market prices 2. “of all” = all items produced in the economy and sold legally a) no illegal goods (drugs) b) no items that never enter market (home-grown veggies) 3. “final” = no intermediate goods a) Yes: Hallmark card b) No: paper sold to Hallmark to make card 4. “goods and services” = cars + haircuts

5. “produced” = current production a) Yes: new car b) No: used car 6. “within a country” a) Canadian citizen works in US  US GDP b) US citizen has factory in South Africa  SA GDP 7. “in a given period of time” a) quarter (3 mos.) or 1 year b) seasonal adjustment for quarters

Y = C + I + G + NX Y = GDP C = consumption I = investment G = government purchases NX = net exports (exports – imports)

Total (in billions) Per PersonPercent of Total GDP (Y)$8,511$31,522100% Consumption (C)5,80821,51168 Investment (I)1,3675,06316 Gov’t. purchases (G)1,4875,50718 Net exports (NX)

real GDP = the production of goods and services at constant prices est. base year for price reflects in Δ in amts. produced better measure / used most often nominal GDP = the production of goods and services at current prices reflects in Δ in amts. produced and Δ in price

Prices and Quantities YearP of Hot DogsQ of Hot DogsP of HamburgersQ of Hamburgers 2001$1100$ YearCalculating Nominal GDP 2001($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $ ($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $ ($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) = $1,200 YearCalculating Real GDP (base year 2001) 2001($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $ ($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $ ($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $1,200

“[GDP] does not allow for the health of our children, the quality of their education, or the joy of their play. It odes not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.” - Senator Robert Kennedy, 1968

CountryGDP per capita (2007 est.) Luxembourg$79,400 United States$45,800 Australia$37,300 China$5,400 Nicaragua$2,800 Zimbabwe$200 Source: CIA World Factbook

CountryReal GDP per capita, 1997 Life ExpectancyAdult Literacy United States$29,01077 years99% Japan24, Germany21, Mexico8, Brazil6, Russia4, Indonesia3, India1, Bangladesh1, Nigeria Source: Human Development Report 1999, United Nations.

What GDP leaves out: leisure value of goods/services produced at home volunteer work quality of environment income distribution

GDP (purchasing power parity) value of all goods/services produced in the country valued at U.S. prices GDP (official exchange rate) value of all goods/services, with price calculated in US$ according to official exchange rate GDP per capita average GDP per person

Gross National Product (GNP) includes income our citizens earn abroad and excludes income foreigners earn here

increase in the overall level of prices in the economy

Post-WWI Germany had hyperinflation: YearCost of Bread 1918½ mark marks bil. marks!!!

3 categories: 1. employed 2. unemployed 3. not in the labor force labor force = # employed + # unemployed unemployment rate = # unemployed labor force x 100