1Measuring Economic Activity: GDP and UnemploymentMeasuring Economic Activity: GDP and UnemploymentPrinciples of Macroeconomics Dr. Gabriel X. MartinezAve Maria UniversityChapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. IntroductionIntroduction••““Real GDP, the value of goods and services Real GDP, the value of goods and services produced in the U.S., grew at an annual rate of produced in the U.S., grew at an annual rate of 1 percent in the fourth quarter1 percent in the fourth quarter……..””••““The unemployment rate last month rose to 6.1 The unemployment rate last month rose to 6.1 percent, its highest level sincepercent, its highest level since……..””••““Inflation appears subdued as the consumer Inflation appears subdued as the consumer price index registered an increase of only 0.2 price index registered an increase of only 0.2 percent last monthpercent last month…”…”Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment33Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Gross Domestic Product: Gross Domestic Product: Measuring the NationMeasuring the Nation’’s Outputs Output••Measuring economic variables is essential.Measuring economic variables is essential.––You are a tenthYou are a tenth--century doctor.century doctor.––Your best guess at human anatomy is pigYour best guess at human anatomy is pig’’s s anatomy.anatomy.––Your best guess at a good cure is leeches.Your best guess at a good cure is leeches.Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment44Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment55Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Gross Domestic Product: Gross Domestic Product: Measuring the NationMeasuring the Nation’’s Outputs Output••Measuring economic variables is essential.Measuring economic variables is essential.––We cannot understand the economy without We cannot understand the economy without precise measurement of economic activity.precise measurement of economic activity.––Governments cannot use economic policy if Governments cannot use economic policy if they donthey don’’t know what is happening.t know what is happening.––Firms and individuals need precise Firms and individuals need precise information.information.Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment66Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. The Three Faces of GDPThe Three Faces of GDP==Market Market value of value of all final all final goods goods and and services services produced produced in a in a country country during a during a given given periodperiodProduction Expenditure IncomeInvestmentInvestmentConsumptionConsumptionGovernmentGovernmentpurchasespurchasesNet exportsNet exportsCapital Capital IncomeIncomeLabor IncomeLabor Income2The Production Approach to The Production Approach to GDPGDPChapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment88Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. agricultureminingutilitiesconstructionmanufacturingwholesaleretailtransportation and warehousinginformationfinance and insurancereal estate, rental and leasingprofessional servicesmanagement of companiesadministrative and waste serviceseducationhealth carearts and entertainmenthotel and foodother servicesgovernmentChapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment99Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Gross Domestic Product: Gross Domestic Product: Measuring the NationMeasuring the Nation’’s Outputs Output••Gross Domestic Product (GDP)Gross Domestic Product (GDP)––The market value of the final goods and The market value of the final goods and services produced in a country during a given services produced in a country during a given period.period.––WeWe’’ll examine each part of this definition in ll examine each part of this definition in detail.detail.Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment1010Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Gross Domestic Product: Gross Domestic Product: Measuring the NationMeasuring the Nation’’s Outputs Output••The Market Value The Market Value ……––Market value is used to aggregate the Market value is used to aggregate the quantities of different goods and services into quantities of different goods and services into one measurement.one measurement.––We use prices, at current levels, for We use prices, at current levels, for aggregation.aggregation.••E.g., we could use todayE.g., we could use today’’s prices to measure s prices to measure todaytoday’’s GDP.s GDP.Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment1111Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Market Value and GDPMarket Value and GDP$64.00$64.00$60.00$60.00$3.00$3.00$1.00$1.00Market Market Value Value P x QP x Q$20.00$20.00$0.50$0.50$0.25$0.25Unit Unit PricePriceTotalTotal33ShoesShoes66BananasBananas44ApplesApplesQuantityQuantityChapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment1212Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Gross Domestic Product: Gross Domestic Product: Measuring the NationMeasuring the Nation’’s Outputs Output••Market ValueMarket Value––More expensive items receive a higher weight More expensive items receive a higher weight than cheaper items.than cheaper items.––Suppose production of cheap items falls but Suppose production of cheap items falls but production of expensive items rises: GDP will production of expensive items rises: