MBMC Measuring Economic Activity: GDP and Unemployment

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 2 Gross Domestic Product: Measuring the Nation’s Output Gross Domestic Product (GDP) The market value of all the final goods and services produced in a country during a given period Market Value Market value (i.e. dollar value) is used to aggregate the quantities of different goods and services into one measurement

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 3 Gross Domestic Product: Measuring the Nation’s Output Produced Within a Country (“Domestic”) Only production that takes place within a country’s border is included in this country’s GDP Examples  Cars produced in the U.S. by foreign owned companies are counted.  Car produced in Mexico by U.S. owned companies are not counted.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 4 Gross Domestic Product: Measuring the Nation’s Output During a Given Period Given Period  Counts only goods produced during the defined period such as a calendar year  Examples oThe sale of used goods, i.e. goods produced in previous periods, is not counted. oBut the value added in servicing and selling the used goods is counted. For example, real estate commissions are included in GDP.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 5 Gross Domestic Product: Measuring the Nation’s Output Final Goods or Services Goods or services consumed by the ultimate user; Intermediate Goods or Services Goods or services used up in the production of final goods and services, whose values become part of the of market value of the final goods and services.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 6 Gross Domestic Product: Measuring the Nation’s Output Final Goods and Services Bread Production  Milling Co. pays $0.50 for wheat  Bakery pays $1.20 for flour  Bakery sells bread for $2.00  Contribution to GDP = $2.00

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 7 Gross Domestic Product: Measuring the Nation’s Output Value Added For any firm, the market value of its product or service minus the cost of inputs purchased from other firms

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 8 Value Added in Bread Production Company Revenues – Cost of purchased inputs = Value added ABC Grain$0.50$0.00$0.50 General Flour$1.20$0.50$0.70 Hot’n’Fresh$2.00$1.20 $0.80 Total$2.00 The grain and flour are produced in 2002 Bread is produced in 2003 $1.20 is added to 2002 GDP $0.80 is added to 2003 GDP What if grain and flour are both produced in 2003? The sum of value added from all stages of bread pro- duction is equal to the price of bread.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 9 Percentages of American Men and Women over Age 16 Working Outside the Home, 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.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 10 Gross Domestic Product: Measuring the Nation’s Output Economic Naturalist Why has female participation in the labor market increased by so much? What explains the trends illustrated in the previous figure?  Hint: The concept of comparative advantage

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 11 The Expenditure Method for Measuring GDP Consumption Expenditure, or simply Consumption (C) Spending by households on goods and services, such as food, clothing, and entertainment  Consumer durables  Consumer nondurables  Services

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 12 The Expenditure Method for Measuring GDP Investment (I) Spending by firms on final goods and services, primarily capital goods and housing  Business fixed investment  Residential investment  Inventory investment

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 13 The Expenditure Method for Measuring GDP Government Purchases (G) Purchases by federal, state, and local governments of final goods and services Does not include transfer payments Does not include interest paid on government debt

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 14 The Expenditure Method for Measuring GDP Net Exports (NX) Exports minus imports The net demand for domestic goods from the rest of the world

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 15 GDP The Expenditure Method for Measuring GDP

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 16 Expenditure Components of U.S. GDP, 2001 (billions of dollars) Consumption6,987.0 Durable goods835.9 Nondurable goods2,041.3 Services4,109.9 Investment1,586.0 Business fixed investment1,201.6 Residential investment444.8 Inventory investment-60.3 Government purchases1,858.0 Net exports Exports1,034.1 Imports1,383.0 GDP (sum of underlined items)10,082.2

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 17 The Expenditure Method for Measuring GDP Example: An economy produces cars only It produces in a year 1 million cars valued at $15,000 each. By the definition of GDP: GDP = 1 million x $15,000 = $15 billion What about by the Expenditure Approach?

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 18 The Expenditure Method for Measuring GDP Here are data on where the cars go: 700,000 sold to consumers  C = 700,000 x $15,000 = $10.5 billion 200,000 sold to businesses  I = 200,000 x $15,000 = $3.0 billion 50,000 sold to government  G = 50,000 x $15,000 = $.75 billion 25,000 exported (no imports)  NX = 25,000 x $15,000 = $.375 billion

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 19 The Expenditure Method for Measuring GDP In other words, 975,000 sold 25,000 inventory  Inven. = 25,000 x $15,000 = $.375 billion By Expenditure Approach GDP = C + I + G + NX = $ ( ) = $15.0 billion

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 20 The Income Approach to Measuring GDP GDP = Labor Income + Capital Income Labor income  Is about 75% of GDP  Includes: oWages & Salaries oFringe Benefits such as health insurance and pension oIncome of the self-employed

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 21 GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income Capital income  Is about 25% of GDP  Includes: oProfits oRent oInterest Income oRoyalties

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 22 The Three Faces of GDP == Market value of final goods and services ProductionExpenditureIncomeInvestment Consumption Governmentpurchases Net exports Capital Income Labor Income

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 23 Prices and Quantities in 2000 and 2004 Quantity of pizzas $1015$ $1230 $6 Price of pizzas Quantity of calzones Price of calzones GDP for the two years: 2000: 10x$ x$5 = $ : 20x$ x$6 = $420 From 2000 to 2004: Output as measured by quantity doubled GDP, however, increased by 2.4 times … … because prices also rose. So GDP overstates economic growth

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 24 Nominal GDP versus Real GDP Real GDP A measure of GDP in which the quantities produced are valued at the prices from a base year rather than at current prices Real GDP measures the actual physical volume of production  Nominal GDP Is obtained when the quantities produced are valued at current-year prices

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 25 Real GDP is not the Same as Economic Well-Being Leisure Time is not valued in GDP Shorter work week Start working later Retire earlier

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 26 Real GDP is not the Same as Economic Well-Being Nonmarket Economic Activities are not included in GDP. Household production Volunteer services Nonmarket activities are more important in poor countries Underground economy

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 27 Real GDP is not the Same as Economic Well-Being Environmental Quality and Resource Depletion are not reflected in GDP. Benefits of environment quality are not measured. GDP is not adjusted for resource depletion.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 28 Real GDP is not the Same as Economic Well-Being Quality of Life is not reflected in GDP Crime rates Traffic congestion Civic organizations Open space Poverty and Economic Inequality GDP does not capture the effects of income inequality

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 29 But GDP is Related to Economic Well-Being Because higher GDP per person means higher affordability of goods and service, including health and education.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 30 The Unemployment Rate Measuring Unemployment The Bureau of Labor Statistics (BLS) surveys 60,000 randomly selected households each month Those 16 years and over are placed in one of three categories:  Employed  Unemployed  Out of the labor force

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 31 The Unemployment Rate Measuring Unemployment Labor force = employed + unemployed

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 32 U.S. Employment Data, July 2002 (in millions) Employed Unemployed8.35 = Labor force Not in labor force71.63 =Working-age (over 16) population Unemployment rate = unemployed/labor force = 8.35/ = 5.9% Participation rate = labor force/working-age population = / = 66.5%

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 33 The U.S. Unemployment Rate since 1960

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 34 The Unemployment Rate The Cost of Unemployment Economic: hardship for the unemployed and lost output for the entire economy Psychological: emotional distress Social: social problems may deteriorate with unemployment rate rising.

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 35 The Unemployment Rate The Duration of Unemployment The impact of unemployment is influenced by how long individuals have been unemployed.  The unemployment spell  The duration of unemployment  Long-term unemployed: over 6 months w/o a job  Chronically unemployed

Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 36 The Unemployment Rate Unemployment Spell A period during which an individual is continuously unemployed Duration The length of an unemployment spell Discouraged workers: People who say they would like to have a job but have not made an effort to find one in the last four weeks. They are not counted as unemployed b/c they are not considered in the labor force any more.