1. A Tour of the Book
Chapter 2

2. Aggregate Output, GDP
The measure of aggregate output in the national income accounts is called the GDP. GDP has three equivalent definitions:
From the production side, GDP is the value of final goods and services produced in the economy during a given period,
From the production side, GDP is the sum of value added during a given period. The value added by a firm is the value of its production minus the value of the intermediate goods used in the production.
From the income side, GDP is the sum of labor and capital income and indirect taxes. Indirect taxes are the revenues paied to the government in the form of sales taxes.

3. Calculating GDP Steel Company (Firm 1) Revenues from sales $100
Expenses
$80
Wages $80
Profit
$20
Car Company (Firm 1)
$200
$170
Wages $70
Steel purchases $100
$30

4. Nominal and Real GDP
Nominal GDP is the sum of the quantities of final goods multiplied by their current prices. Nominal GDP increases over time because
The production of most goods increase over time
The prices of most goods increase over time
Real GDP is constructed as the sum of the quantities of the final goods by constant prices.

5. An example Year Quantity of Cars Price of Cars Nominal GDP
Real GDP (in 2000 dollars)
1999 10
$20,000
$200,000
$240,000
2000 12
$24,000
$288,000
2001 13
$26,000
$338,000

6. GDP per capita and Economic Growth
GDP per capita is the ratio of real GDP to the population of the country. It shows average standard of living.
The growth rate of real (nominal) GDP is the rate of change of real (nominal) GDP.
Periods of positive GDP growth are called expansions; periods of negative growth, recessions.

7. Limitations of GDP Three limitations on GDP as a welfare measure.
GDP values goods and services at market prices. However, some valuable things are not sold on markets such as government services and owner-occupied housing.
Some goods and services not traded in markets such as the value of leisure and the value of services performed in the household are not included in GDP
Depletion of natural and environmental resources is omitted.

8. The Unemployment rate

9. Those persons of working age who do not have a job and are not looking for one are classified as out of the labor force.
The participation rate is the ratio of the labor force to the size of the working age population.
When unemployment is high, some of the unemployed give up looking for a job and no longer counted as unemployed. These are discouraged workers.

10. Why do we care about unemployment?
First, unemployed suffer financially and psychologically. Ethnic minorities, the young, and the less skilled tend to be more susceptible to unemployment and to remain unemployed much longer than average.
Second, the unemployment rate helps policymakers assess how well the economy is utilizing its resources. A high rate of unemployment rate means that labor resources are idle.

11. Inflation Rate The GDP deflator The consumer price index
Inflation is a sustained increase in the general level of prices.
The inflation rate is the growth rate of the aggregate price level.
Macroeconomists use two measures of the pricel level, two prices indexes:
The GDP deflator
The consumer price index

12. The GDP deflator

13. The Consumer Price Index
The CPI measures the price of representative basket of private consumption.
Inflation calculated from the CPI provides a measure of the percentage change in the price of the domestic consumption basket.
Domestic consumption includes goods imported from abroad, and domestic production includes final goods used for purposes other than domestic consumption.

14. Why do we care about inflation?
A faster but proportional increase in all prices and wages is called pure inflation. There is no such thing as pure inflation.
İnflation affects income distribution as not all prices and wages rise proportionately.
Inflation leads to variations in relative prices and produce uncertanity.
Deflation would create many of the same problems as high inflation. Moreover, deflation limits the ability of monetary policy to affect output.
Best rate of inflation is between 0% and 3%.

15. The Short run, the Medium Run, and the Long Run
. In the short run (a time frame of a few years), output is determined primarily by demand.
In the medium run (a time frame of a decade or so), output is determined by the level of technology and the size of capital stock, both of which are more or less fixed.
In the long run (a time frame of a half century or more), output is determined by technological progress and capital accumulation.

16. Nominal and real U.S. GDP, 1960–2010

17. Nominal and Real Turkish GDP, 1998–2010

18. Growth rate of U.S. GDP, 1960–2010

19. Growth rate of Turkish GDP, 1998-2010

20. U.S. unemployment rate, 1960–2010

21. The Unemployment rate in Turkey, 1988-2012

22. 2-4 Inflation rate, using the CPI and the GDP deflator, 1960–2010

23. The inflation Rate in Turkey, 1983-2010

24. 2-4 Output, Unemployment, and the Inflation Rate: Okun’s Law and the Phillips Curve
Figure 2-5 Changes in the unemployment rate versus output growth in the United States, 1960– 2010

25. 2-4 Output, Unemployment, and the Inflation Rate: Okun’s Law and the Phillips Curve
Figure 2-6 Changes in the inflation rate versus the unemployment rate in the United States, 1960–2010

26. 2-6 A Tour of the Book
Figure 2-7 The organization of the book