ECON 204 1st Edition Lecture 3 Outline of Last Lecture V. Gross Domestic Product: Measuring Economic Output PerformanceA. How to calculate the GDP.B. What the GDP tells us. C. Real GDP vs. Nominal GDP.Outline of Current Lecture VI. Calculating Real GDPA. What real GDP does not measureVII. The Business CycleVIII. Employment and UnemploymentCurrent LectureVI. Calculating Real GDPIn order to calculate real GDP you must pick a base/starting year and then the year you wish to find the real GDP of (we can call this year 2).The base year tells you the prices to use when calculating real GDP. Nominal and realGDP are only the same for the base year. You multiply the production of year 2 by the prices of the base year. Economists focus on real GDP because it accounts for inflation.A. What real GDP does not measure:1. A country can have a higher GDP due to a larger population (GDP per capita measures the average GDP per person but alone is not an appropriate policy goal because it neglects a lot of factors impact our everyday lives).2. Real GDP does not account for environmental degradation.3. Real GDP does not include informal, non-market social economies (underground, black markets etc…).4. Real GDP says nothing about how wealth is distributed (ex: a country could have a high GDP but only 5% of the population shares the majority of that wealth).5. Real GDP does not account for the degradation of capital.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.This proves why real GDP cannot be our sole objective; we must see how the GDP interacts with other statistics/factors.VII. The Business CycleThe business cycle is the short run alternation between economic downturns and economic upturns.VocabularyDepression: a very deep and prolonged downturn.Recession: period of economic downturns when output and employment are falling.Expansions: also known as recoveries, periods of economic upturns when output andthe employment rate riseExpansion to recession: business cycle peakRecession to expansion: business cycle troughVIII. Employment and UnemploymentEmployment is the number of people currently employed in the economy either full or part time.Labor force: the labor force is equal to the sum of employment and unemployment.LF (labor force) = employment + unemploymentLabor force participation rate: % of the population aged 16 and over (in some countries 15+) that is in the labor force. LFPR (labor force participation rate) = LF/ppl 16/15+-The LFPR can be used to divide LF in a number of ways, such as by gender or age (Ex: U.S. labor force 1972-2012 increased participation by women).Unemployment is the number of people who are actively looking for work but who are not currently employed. Unemployment rate: % of total number of people in labor force who are unemployed.Unemployment = unemployed/LFThe unemployment rate can overstate the true level of unemployment (frictional unemployment) for example people can be switching between jobs.The unemployment rate can understate unemployment by not including:1. Discouraged workers: non-working people, people who’ve given up on finding a job2. Marginally attached workers: not currently looking for a job3. Underemployment: workers willing to work full time but get a part time jobWays unemployment can be divided/different perspectives and factors: -Nonagricultural wage: not including agricultural jobs, only services and manufacturing-Reasons people are employed part-time-Amount of time people spend unemployed (ex: from 2000-2010 the number of people unemployed for 27+ weeks increased dramatically)-Temporary vs. non-temporary lay off-The relationship between education level and unemployment-Unemployment rates and