Hsieh 1 Macroeconomic principles Macroeconomics economic principles October 3rd Main components of Macroeconomics GDP total monetary value of all the goods and services produced within the geographical boundaries either by US citizens or legal foreign nationals in a year Net value approach only take into account the net values of each process primary secondary tertiary etc so the government doesn t double count the values of each process The crucial criterion of determining the GDP is that production of something has to take place either a good or a service The Transactions not included in the GDP 1 public transfer payments tuition subsidies 2 private transfer payments government makes payments to someone social security welfare Medicare payment from one individual to another scholarship This is not included in the GDP because production didn t take place 3 securities transactions transactions taking place in financial markets such as stocks stock market primary when a company that used to be owned by an individual or a family decides to come into Wall Street and become public IPO initial public offering secondary if the stocks shares of an existing stock company are bought and sold between individuals 4 second hand sales used items the revenue is already included the year the product is produced 1 used houses with renovation will be included in the GDP because the renovating process is a new production taking place in that year 2 5 non market transactions even though household services house chores babysitting etc fit the criterion of production there is no monetary value to the service Hsieh 2 Macroeconomic principles Real GDP Nominal GDP increases 1 produce more products October 8th Macroeconomics GDP growth rate 2 produce same amount of products but inflation causes a nominal increase the GDP growth rate has to remain at 1 to ensure constant output per capita assuming if the population growth is 1 each year Purchasing power parity PPP P497 Underground economy 1 illegal workers professions not supposed to be counted in GDP anyways people who work for the mafia Drug dealers however they contribute to the GDP by providing consumption and adding to the final count when the government calculates the final prices the Bureau of Economic Analysis does not attempt to include illegal business into the GDP growth rate because the relative change in such industry does not have radical fluctuations 2 household workers moms baby sitters Unemployment seasonal factors corresponding to specific time phases weather tourist factor ie Mall santa clause during winter certain sectors of a company would close frictional first time entry or re entry in the labor force lack of info imbalances in the labor market that are natural to exist process before actually getting a job application interview etc house wives re enter labor force after taking care of children lack of information trying to get a new job from a different profession structural innovations outsourcing mismatches between workers skills and employer s requirements needs innovations doesn t necessarily cause unemployment technological innovation may create an influx of labor need as quantity supplied increases or just open to more job opportunities outsourcing only started in the last 20 years due to breaking of trade barriers discussed in the late 1940s GATT EU North American Free Trade Association Macroeconomic principles result of regional and international trade associations cyclical decline of spending Hsieh 3 Economic principles October 10th Chapter 6 Types of unemployment continued Structural unemployment worst kind of unemployment technological advancement makes skills obsolete forces people to retrain themselves which takes more time and money unavoidable can t stop technological innovation and the laborer remains unemployed during the time period before he is retrained recent increase in outsourcing GATT general agreement on trade and tariffs EU NAFTA North America free trade agreement outsourced products low skilled easily transported low technology and imperishable goods Outsourcing Advantages US workers Vietnamese workers Wage 100 10 Quantity produced Unit labor cost 100 pairs 5 pairs 1 dollar pair 2 dollar pair Conclusion the wage does influence choice of outsourcing but it s more important to take into account the unit labor cost If there are no significant difference in the productivity of the two workers then wage will dictate the decision i e Boeing decided to insource in the United States the technological level of the products is too high for outsourcing in countries with cheaper labor productivity level and wage are equal to other airplane manufacturing countries such as Spain England and Germany so it s more profitable to produce it in the country to save transportation costs Cyclical unemployment unemployment decline of spending bound to cause a recession and therefore causes cyclical Macroeconomic principles Hsieh 4 People buy less suppliers produce less less laborers are needed cyclical unemployment people have less money people buy less vicious cycle can be avoided during an expansion the only kind that can be avoided Natural rate of unemployment seasonal frictional structural operate at the lowest rate of unemployment around 4 which is the lowest it got during USA s economic booming period The US operates at full employment when it operates at the natural rate of unemployment thus operates on the PPF in terms of employment rate Potential GDP NRE changes The economy can operate below the NRE tiny bit above the potential GDP but only in very exceptional situations i e during the WWII the government companies trained paid workers to better prepare for war it s also important to know that the the unemployment benefits are better today so more people would be more stagnant in looking for a job so the NRE is higher today the economy operates above the NRE but isn t in recession because even during the expansion phase the employment rate isn t recovering fast enough to catch up with the rate of expansion comparing the white and blue collar workers the blue collar workers have a higher percentage of unemployment most blue collar workers work in the durable good manufacturing sector of the economy which is also the first sector that would be disregarded when the economy is bad gender comparison in unemployment male more male work in blue collar jobs male wage is relatively higher female frictional unemployment when re