Measuring Economic Activity Gross domestic product (GDP). The market value of goods and services produced by labor and property in the United States, regardless of nationality; GDP replaced gross national product (GNP) as the primary measure of U.S. production in 1991.gross national product (GNP

Line 2004 I 2004 II 2004 III 2004 IV 2005 I 1 Gross domestic product11, , , , , Personal consumption expenditures8,060.28,153.88,282.58,423.38, Durable goods ,007.01,017.01, Nondurable goods2,316.62,354.62,387.22,449.72, Services4,767.34,823.84,888.24,956.65, Gross private domestic investment1,819.71,920.71,947.02,021.92, Fixed investment1,783.51,861.71,915.41,975.32, Nonresidential1,158.81,198.51,238.51,286.31, Structures Equipment and software , Residential Change in private inventories Net exports of goods and services Exports1,134.31,167.61,189.51,210.41, Goods Services Imports1,681.21,758.91,801.21,885.21, Goods1,399.21,470.11,506.91,587.21, Services Government consumption expenditures and gross investment 2,139.52,174.32,197.22,224.52, Federal National defense Nondefense State and local1,346.31,369.91,379.81,399.91,415.9

National income A broader national level economic measure than is personal income. National income includes payments to individuals (income from wages and salaries, and other income), plus payments to government (taxes), plus retained income from the corporate sector (depreciation, undistributed profits), less adjustments (subsidies, government and consumer interest, and statistical discrepancy).

LineLine 2004 I 2004 II 2004 III 2004 IV 2005 I 1Gross domestic product11, , , , , Plus: Income receipts from the rest of the world Less: Income payments to the rest of the world Equals: Gross national product11, , , , , Less: Consumption of fixed capital1,355.01,375.21,497.91,401.21, Private1,132.41,148.11,266.81,165.71, Domestic business , Capital consumption allowances 1,319.81,327.71,378.01,381.41, Less: Capital consumption adjustment Households and institutions Government General government Government enterprises Equals: Net national product10, , , , , Less: Statistical discrepancy Equals: National income10, , , , ,887.0

Personal income Measures national level income to persons and nonprofit corporations. Personal income includes payments to individuals (income from wages and salaries, and other income), plus transfer payments from government, less employee social insurance contributions

Equals: National income 10, , , , ,887.0 Less: Corporate profits with inventory valuation and capital consumption adjustments 1, , , , ,326.3 Taxes on production and imports less subsidies Contributions for government social insurance Net interest and miscellaneous payments on assets Business current transfer payments (net) Current surplus of government enterprises Wage accruals less disbursements Plus: Personal income receipts on assets 1, , , , ,416.3 Personal current transfer receipts 1, , , , ,469.0 Equals: Personal income 9, , , , ,100.2

Disposable personal income Measures the after-tax income of persons and nonprofit corporations. It is calculated by subtracting personal tax and nontax payments from personal income.

Issues GDP excludes non-market economic activity. (Washing your car vs going to the car wash.) GDP excludes illegal activity GDP doesn’t count “externalities”

Measuring Unemployment People with jobs are employed. People who are jobless, looking for jobs, and available for work are unemployed. People who are neither employed nor unemployed are not in the labor force.

Issues Who is counted as employed All persons who did any work for pay or profit during the survey reference week. All persons who did at least 15 hours of unpaid work in a family-operated enterprise. All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons. What about the underemployed?

Who Is Unemployed? All persons who were not classified as employed during the survey reference week, made specific active efforts to find a job during the prior 4 weeks, and were available for work. All persons who were not working and were waiting to be called back to a job from which they had been temporarily laid off What about discouraged workers?

Is Unemployment Bad? Almost everyone is unemployed at some point. It takes time to match workers and employers. Frictional unemployment is a term used to describe those who are seeking work but who haven’t yet found the right match. Structural unemployment describes those who are unlikely to find work because of some flaw in the economy. These are not precise terms and it can be hard to distinguish

Price Indices A price index such as the consumer price index (cpi) compares the price of bundle of goods today with the price of the same bundle in a base year. As a matter of convention, the base year price is always expressed as 100. The inflation rate is the percentage change in the index.

YearJan

Real v Nominal The Nominal value of some variable is simply the actual dollar amount (e.g., GDP was about $12.5 trillion.) The Real value of a variable is the nominal value adjusted for inflation. That is Real = nominal/price index

Issues How do you compare a standard bundle of goods from one time with another? (e.g., computers today and computers in 1980). How do you deal with long lived assets (houses are a huge problem). How do you deal with the fact that people change their consumption in response to changes in prices?

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Is Inflation Bad? Does it matter if a clock is 10 minutes fast or slow? Inflation can do two bad things –Reduce the value of monetary assets. (But this can accomodated by various kinds of indexing) –Distort the “information” contained in prices This all means that we should distinguish anticpated and unanticipated inflation.

The Simplest (and maybe most misleading) Macro Model

Definitions Y = total gross domestic product C = Consumption G= Government Expenditures T= Tax I= Investment Expenditure

Assumptions C = a + b(Y-T) (b is the “marginal propensity to consume”) Y = C+I+G (no international trade—we’ll fix that latter).

Conclusion and Implications Y = [a+I+G-bT]/(1-b) Multipliers (change in Y per unit change in G, I, or T) Investment and G = 1/(1-b) Tax = -b/(1-b)

Complication I is almost certainly determined by a number of factors, including the level of interest rates. Thus, we need to think about how the actions of the central bank influence the level of interest (and also prices).