Measuring Economic Activity: GDP and Unemployment

1
Measuring Economic Activity GDP and Unemployment
2
Introduction

• Real GDP, the value of goods and services
  produced in the U.S., grew at an annual rate of 1
  percent in the fourth quarter.

3
Introduction

• The unemployment rate last month rose to 5.8
  percent, its highest level since.

4
Introduction

• Inflation appears subdued as the consumer price
  index registered an increase of only 0.2 percent
  last month

5
Gross Domestic Product Measuring the Nations
Output

• Gross Domestic Product (GDP)
• The market value of the final goods and services
  produced in a country during a given period

6
Gross Domestic Product Measuring the Nations
Output

• Market Value
• Market value is used to aggregate the quantities
  of different goods and services into one
  measurement

7
Gross Domestic Product Measuring the Nations
Output

• Market Value
• Calculating GDP for Orchardia
• Total production 4 apples, 6 bananas, and 3
  pairs of shoes
• Price of apples 0.25
• Price of bananas 0.50
• Price of shoes 20

8
Gross Domestic Product Measuring the Nations
Output

• Market Value
• Calculating GDP for Orchardia
• GDP
• (4 x 0.25) (6 x 0.50) (3 x 20) 64

9
Gross Domestic Product Measuring the Nations
Output

• Market Value
• Observation
• More expensive items receive a higher weight than
  cheaper items.
• Orchardias production changes to 3 apples, 3
  bananas , and 4 shoes
• GDP
• (3 x 0.25) (3 x 0.50) (4 x 20) 82.25

10
Percentages of American Men and Women over Age 16
Working Outside the Home, 1960 - 2004

• 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.

11
Gross Domestic Product Measuring the Nations
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

12
Gross Domestic Product Measuring the Nations
Output

• Final Goods or Services
• Goods or services consumed by the ultimate user
  because they are the end products of the
  production process, they are counted as part of
  GDP

13
Gross Domestic Product Measuring the Nations
Output

• Intermediate Goods or Services
• Goods or services used up in the production of
  final goods and services and therefore not
  counted as part of GDP

14
Gross Domestic Product Measuring the Nations
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

15
Gross Domestic Product Measuring the Nations
Output

• Final Goods and Services
• Getting a haircut
• Barber charges 10 for a haircut
• Barber pays his assistant 2
• Contribution to GDP 10

16
Gross Domestic Product Measuring the Nations
Output

• Example A good that can be either intermediate
  or final
• Capital Good
• A long-lived good, which is itself produced and
  used to produce other goods and services

17
Gross Domestic Product Measuring the Nations
Output

• Example A good that can be either intermediate
  or final
• Capital Good
• Newly produced capital goods are classified as
  final goods.

18
Gross Domestic Product Measuring the Nations
Output

• Value Added
• For any firm, the market value of its product or
  service minus the cost of inputs purchased from
  other firms

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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 HotnFresh 2.00 1.20
0.80 Total 2.00

• The grain and flour are produced in 2005
• Bread is produced in 2006
• 1.20 is added to 2005 GDP
• 0.80 is added to 2006 GDP

20
Gross Domestic Product Measuring the Nations
Output

• Produced Within a Country During a Given Period
• Domestic
• Only production that takes place within a
  countrys border
• Examples
• Cars produced in the U.S. by foreign owned
  companies are counted.
• Cars produced in Mexico by U.S. owned companies
  are not counted.

21
Gross Domestic Product Measuring the Nations
Output

• Produced Within a Country During a Given Period
• Given Period
• Counts only goods produced during the defined
  period such as a calendar year
• Examples
• The sale of used goods is not counted.
• Real estate commissions are counted.

22
Expenditure Components of U.S. GDP, 2004
(billions of dollars)
Consumption 8,214.3 Durable goods 987.8
Nondurable goods 2,368.3 Services 4,858.2 Inve
stment 1,928.1 Business fixed
investment 1,198.8 Residential
investment 673.8 Inventory investment 55.4 Govern
ment purchases 2,215.9 Net exports -624.0 Expor
ts 1,173.8 Imports 1,797.8 Total Gross domestic
product 11,734.3
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The Expenditure Method for Measuring GDP

• Consumption Expenditure, or simply Consumption
• Spending by households on goods and services,
  such as food, clothing, and entertainment
• Consumer durables
• Consumer nondurables
• Services

24
The Expenditure Method for Measuring GDP

• Investment
• Spending by firms on final goods and services,
  primarily capital goods and housing
• Business fixed investment
• Residential investment
• Inventory investment

25
The Expenditure Method for Measuring GDP

• Government Purchases
• 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

26
The Expenditure Method for Measuring GDP

• Net Exports
• Exports minus imports

27
The Expenditure Method for Measuring GDP

• Y gross domestic product, or output
• C consumption expenditure
• I investment
• G government purchases
• NX net exports

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The Expenditure Method for Measuring GDP

• GDP

29
The Expenditure Method for Measuring GDP

• Example
• An economy produces 1 million cars valued at
  15,000 each.

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The Expenditure Method for Measuring GDP

• Production
• GDP 1 million x 15,000 15 billion

31
The Expenditure Method for Measuring GDP

• Expenditure
• 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

32
The Expenditure Method for Measuring GDP

• Expenditure
• 975,000 sold
• 25,000 inventory
• I 25,000 x 15,000 .375 billion
• GDP C I G NX
• 10.5 (3.0 .375) .75 .375 15.0 billion

33
GDP and the Incomes of Capital and Labor

• GDP Labor Income Capital Income
• Labor income
• Equals 2/3 of GDP
• Includes
• Wages
• Salaries
• Income of the self-employed

34
GDP and the Incomes of Capital and Labor

• GDP Labor Income Capital Income
• Capital income
• Equals 1/3 of GDP
• Includes
• Profits
• Rent
• Interest
• Royalties

35
The Three Faces of GDP
36
Prices and Quantities in 2004 and 2008
Quantity of pizzas
Price of pizzas
Quantity of calzones
Price of calzones
2004 10 10 15 5 2008 20 12 30 6

• GDP
• 2004 (10)(10) (15)(5) 175
• 2008 (20)(12) (30)(6) 420

• Observations
• Output doubled
• GDP increased by 2.4 times
• Prices also rose
• GDP overstates economic growth

37
Nominal GDP versus Real GDP

• Real GDP
• A measure of GDP in which the quantities produced
  are valued at the prices in a base year rather
  than at current prices
• Real GDP measures the actual physical volume of
  production

38
Nominal GDP versus Real GDP

• Nominal GDP
• A measure of GDP in which the quantities produced
  are valued at current-year prices
• Nominal GDP measures the current dollar value of
  production

39
Nominal GDP versus Real GDP

• Economic Naturalist
• Can nominal and real GDP ever move in different
  directions?

40
Prices and Quantities in 2004 and 2008
Quantity of pizzas
Price of pizzas
Quantity of calzones
Price of calzones
2004 10 10 15 5 2008 20 12 30 6

• 2004 base year
• 2008 Real GDP (20)(10) (30)(5) 350
• 2004 Real GDP (10)(10) (15)(5) 175
• Real GDP Nominal GDP in the base year

41
Real GDP is not the Same as Economic Well-Being

• Leisure Time
• Shorter work week
• Start working later
• Retire earlier

42
Real GDP is not the Same as Economic Well-Being

• Economic Naturalist
• Why do people work fewer hours today than their
  great-grandparents did?
• Hint Use the concept of opportunity cost

43
Real GDP is not the Same as Economic Well-Being

• Nonmarket Economic Activities
• Household production
• Volunteer services
• Nonmarket activities are more important in poor
  countries
• Underground economy

44
Real GDP is not the Same as Economic Well-Being

• Environmental Quality and Resource Depletion
• Benefits of environment quality are not measured.
• GDP is not adjusted for resource depletion.

45
Real GDP is not the Same as Economic Well-Being

• Quality of Life
• Crime rates
• Traffic congestion
• Civic organizations
• Open space

46
Real GDP is not the Same as Economic Well-Being

• Poverty and Economic Inequality
• GDP does not capture the effects of income
  inequality

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Share of Aggregate Income Received by Each Fifth
and Top 5 Percent of Households
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GDP Basic Indicators of Well-Being
All developing countries
Least developed countries
Industrialized countries
Indicator
GDP per person 4,054 1,307 29,000 (U.S.
dollars) Life expectancy at 64.7 50.7 78.4 birth
(years) Infant mortality rate 61 99 5 (per 1,000
live births) Under-5 mortality rate
89 157 7 (per 1,000 live births) Births attended
by skilled 55 33 99 health personnel
() Prevalence of HIV/Aids 1.2 3.4 0.3 ( in
15-49 age group) Undernourished people
() 17 37 Negligible Combined gross
enrollment 60 43 93 rate for prim/sec/tert
schools() Adult literacy rate () 76.7 52.5 99 To
tal population in group of countries
(millions) 4,936.9 700.9 911.6
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But GDP is Related to Economic Well-Being

• Economic Naturalist
• Why do far fewer children complete high school in
  poor countries than in rich countries?

51
But GDP is Related to Economic Well-Being

• Economic Naturalist
• How do economists identify the determinants of
  happiness?

52
The Unemployment Rate

• Measuring Unemployment
• The Bureau of Labor Statistics (BLS) surveys
  about 60,000 randomly selected households each
  month

53
The Unemployment Rate

• Measuring Unemployment
• Those 16 years and over are placed in one of
  three categories
• Employed
• Unemployed
• Out of the labor force
• The BLS estimates how many people in the U.S. fit
  into each category.

54
The Unemployment Rate

• Labor Force
• The total number of employed and unemployed
  people in the economy
• Unemployment Rate
• The number of unemployed people divided by the
  labor force

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The Unemployment Rate

• Participation Rate
• The percentage of the working-age population in
  the labor force (that is, the percentage that is
  either employed or looking for work)

56
The Unemployment Rate

• Measuring Unemployment
• Labor force employed unemployed

57
U.S. Employment Data, April 2005 (in millions)
Employed 141.1 Plus Unemployed 7.66 Equals
Labor force 148.76 Plus Not in labor
force 76.68 Equals Working-age (over 16)
population 225.44 Unemployment rate
unemployed/labor force 7.66/148.76
5.2 Participation rate labor force/working-age
population 148.76/225.44 66.0
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The U.S. UnemploymentRate since 1960
59
The Unemployment Rate

• The Cost of Unemployment
• Economic
• Psychological
• Social

60
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
• Chronically unemployed

61
The Unemployment Rate

• Unemployment Spell
• A period during which an individual is
  continuously unemployed
• Duration
• The length of an unemployment spell

62
The Unemployment Rate

• 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

63
The Unemployment Rate

• The Duration of Unemployment
• Discouraged workers
• Involuntary part-time workers
• In April 2005
• Official unemployment rate 5.2
• Including discouraged workers and involuntary
  part-time worker 9.0

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End of Chapter