GDP

What is GDP? Gross Domestic Product (Duh) Output of final goods and service Income from the sale of final goods and services

Y= C+G+I+(EX-IM) Y = Output (GDP) C = Consumption G= Government Spending I = Investment Spending EX-IM = Exports-Imports – Net Exports (NX)

Fig. 1.7

As of 2014Q3 Y= Trillion C= Trillion G=3.20 Trillion I= 2.90 Trillion NX = -.52 Trillion – EX =2.37 Trillion – IM =2.88 Trillion

Consumption C = 68% of GDP Goods (4.01 Trillion) – Durable Goods – Nondurable Goods Services (7.99 Trillion) As you can see about 45% of our economy is services

I=Investment Spending 16.4% of GDP Investment spending is not the same as “making an investment” I is spending on final goods and services by firms and confusingly: households: – Fixed Investment Nonresidential ($2.24 tril) – Structures – Software and Equipment Residential ($0.57 tril) Buying a house means buying the services of the house into the future (i.e. an investment) – Inventories Produced but not sold. Future Sales = Investment

G =Government As of 2011Q4 G=18% of GDP – With Transfers G= 31% of GDP We get lazy and thing of G =Federal Gov. – However G = State, Local and Federal Government – State and Local Spending = 11% of GDP T = Taxes TR = (Net)Transfers (Transfer Spending-Transfer Taxes) – Social Security, Medicare/Medicaid Insurance, Foods Stamps, Foreign Aid etc.

Government Budgets G+TR>T 0> T-(G+TR) – Government Deficit G+TR<(T) 0< T-(G+TR) Government Surplus Government Saving (ignoring TR): T-G=S g S g = Government Savings – S g 0 (Surplus)

EX and IM NX = -2.9% of GDP Total EX + IM = 32% of GDP EX = Goods produced (income earned) but sold to foreigners. It is output above what is consumed (C+G+I) in the US IM = Goods consumed (C+G+I) in the US but produced (income earned) by foreigners. EX-IM = Trade Balance EX >IM (EX-IM >0) Trade Surplus EX <IM (EX-IM <0) Trade Deficit

Savings/Investment Identity This is an important concept – Savers = People with money sitting around – Investors (really investment spenders) = People who have a use for that money. No Gov; No Trade: Y= Income = C+S – S = Savings Y= Purchases/Output= C + I Y = C + S = C + I S = I

Savings/Investment Identity (cont) Adding Government (No Transfers) and Trade Y = Income = C + S + T Disposable Income = Y – T Y = Purchase/Product = C + G + I + (NX) Y = C + S + T = C + G + I + NX Do some math: I = (T-G) + (-NX) + S I = S g + S F + S p I = Government Savings + Foreign Savings + Private Savings

The (–NX) term The inverse of Net Exports. o -NX = -(EX-IM) = IM-EX How do you pay for imports? – Export something in exchange, kind of like barter – Offer an IOU or an Asset in exchange (-NX) is the same as the “capital account” (KA)

The Capital Account KA = KI - KO KI = Capital Inflow – Foreign Purchase of domestic assets. KO = Capital Outflow – Domestic Purchase of foreign assets. Capital Flows = FDI + Paper Assets + Loans + Reserve Assets Punchline: NX + KA = 0 – Imports must be paid for by either an offsetting export or asset transfer.

UNEMPLOYMENT

Unemployment

Other kinds of not unemployed but without a job: Marginally attached Workers – Has looked for a job in the last year – Wants to work, can’t find a job Discouraged workers Given up looking for work because they feel there are no job opportunities Involuntary Part Time Workers – Working part time for “economic reasons”

Other Ways of Thinking about Unemployment Employment/Population Ratio. U3 = Standard Definition of Unemployment U6 Includes Marginally Attached and Part Time Workers. Current Employment Survey Duration of Unemployment.

Historically: – Rising unemployment in the 1960s and 1970s – Decline in unemployment in the 1980s – Possibly explained by the baby boom Textbook page 180

Different Kinds of Unemployment The natural rate of unemployment – Rate that would prevail if the economy were in neither a boom nor a bust Cyclical unemployment – The difference between the actual rate and the natural rate – Associated with short-run fluctuations in output

The natural rate of unemployment includes two components: – Frictional unemployment workers being between jobs in the dynamic economy – Structural unemployment labor market failing to match up workers and firms in the market

Actual unemployment is the sum of frictional, structural, and cyclical unemployment.