1. GDP and Unemployment
Chapter 5

2. Wages, rents, interest, profits
The Circular Flow
Wages, rents, interest, profits
Firms (production)
Household
Factor services
Goods
Government Spending
Other countries
Financial markets
Government
Taxes
Savings
Investment
Personal consumption
Exports
Imports
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3. Definition
GDP: market value of final goods and services produced in a country in a given year
Real GDP: GDP adjusted for inflation.

4. Percentages of American Men and Women over Age 16 Working Outside the Home, 1960 - 2001.
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.

5. Value Added Approach

6. Value Added Approach Eliminates Double Counting

7. Expenditure Components of U.S. GDP, 2001 (billions of dollars)
Consumption
Durable goods
Nondurable goods
Services
835.9
2,041.3
4109.9
6,987
Investment
Business fixed investment
Residential investment
Inventory investment
1,201.6
444.8
-60.3
1,586.0
Government purchases
1,858.0
Net exports
Exports
Imports
1,034.1
1,383.0
-348.9
Total: Gross domestic product
10,082.2

8. GDP and the Incomes of Capital and Labor
GDP = Labor Income + Capital Income
Labor income
Equals 75% of GDP
Includes:
Wages
Salaries
Income of the self-employed

9. GDP and the Incomes of Capital and Labor
GDP = Labor Income + Capital Income
Capital income
Equals 25% of GDP
Includes:
Profits
Rent
Interest
Royalties

10. Market value of final goods and services
The Three Faces of GDP =
Market value of final goods and services
Production
Expenditure
Income
Investment
Consumption
Government
purchases
Net exports
Capital Income
Labor Income

11. Components of GDP C: consumption I : investment in plant & equipment
G: government spending
X-M: net exports

12. Limitations as a Measure
Not a measurement of well-being, just economic activity.
Does not consider the distribution of income.
Unreported economic activity is not included.

13. Problems comparing per capita GDP across countries
Bangladesh $270
USA $35,000
Exchange rate method and purchasing power method.

14. The Unemployment Rate Measuring Unemployment
Labor force = employed + unemployed

15. Types of Unemployment Frictional: worker “between jobs”
Cyclical: caused by bad economic conditions
Structural: worker’s skill set is no longer in demand

16. Question 4 Your mother-in-law buys a new car from a U.S. producer.
Your mother-in-law buys a new car imported from Sweden.
Your mother-in-law’s car rental business buys a new car from a U.S. producer.
Your mother-in-law’s car rental business buys a new car imported from Sweden.
The U.S. government buys a new domestically produced car for the use by your mother-in-law, who has been appointed the ambassador to Sweden.

17. Question 8: Labor Force, unemployment rate & Participation Rate
65 people
10 <16 years of age
10 retired
25 full-time jobs
5 part-time jobs
5 full-time homemakers
5 full-time students over 16
2 disabled and cannot work
Rest did not have jobs but wanted one but one has not searched in 3 months.