Principles of Macroeconomics Chapter 6 Production Income and Employment Vocabulary services or resources 1 Transfer Payments any payment that is not compensation for supplying goods 2 Employment population Ratio total employment from the household survey divided by the total population over age 16 3 Expenditure Approach measuring GDP by adding the value of goods and services purchased by each type of final user 4 Labor Force those people who have a job or who are looking for one 5 Nonmarket Production goods and services that are produced but not sold in a 6 Value Added the revenue a firm receives minus the cost of the intermediate market goods it buys 7 Gross Domestic Product GDP the total value of all final goods and services produced for the marketplace during a given year within the nation s borders 8 Seasonal Unemployment joblessness related to changes in weather tourist patters 9 Government Purchases spending by federal state and local governments on 10 Potential Output the level of output the economy could produce if operating at or other seasonal factors goods and services full employment 11 Frictional Unemployment joblessness experience by people who are between jobs or who are just entering or reentering the labor market 12 Full Employment a situation in which there is no cyclical unemployment 13 Real Variable a variable adjusted for changes in the dollar s value 14 Final Good a good sold to its final user 15 Discouraged workers individuals who would like a job but have given up 16 Value added Approach measuring GDP by summing the values added by all 17 Nominal Variable a variable measured without adjustment for the dollar s searching for one firms in the economy changing value 18 Factor Payments payments to the owners of resources that are used in production 19 Structural Unemployment joblessness arising from mismatches between workers skills and employers requirements or between workers locations and employers locations 20 Slump a period during which real GDP is below potential and or the unemployment rate is below normal 21 Unemployment Rate the fraction of the labor force that is without a job 22 Consumption the part of GDP purchased by households as final users 23 Intermediate Goods goods used up in producing final goods 24 Net Investment investment minus depreciation 25 Factor Payments Approach measuring GDP by summing the factor payments earned by all households in the economy 26 Net Exports NX total exports total imports 27 Seasonal Adjustment adjusting an economic variable to remove the effects of changes predicted to occur at that time of year 28 Cyclical Unemployment joblessness arising from changes in production over the 29 Involuntary Part time Workers individuals who would like a full time job but business cycle who are working only part time Notes Introduction The government tracks the performance of the national economy using gross domestic product and the unemployment rate Production and Gross Domestic Product GDP A Definition The nation s gross domestic product GDP is the total value of all final goods and services produced for the marketplace during a given period within the nation s borders o The total value To find GDP you must add up the dollar value of every good and service the number of dollars each product is sold for As a result GDP is measured in Advantages of this unit of measure 1 It gives us a common unit of measurement for very different things thus allowing us to add up apples and oranges 2 It ensures that producing a good that uses more resources will count more in GDP than a good that uses fewer resources Disadvantages of this unit of measure 1 If prices rise then GDP will rise even if we are not actually producing more o of all final When measuring production we only count goods and services that are sold to their final users Intermediate goods goods used up in the process of producing something else lumber mill paper mill office supplies manufacturer wholesaler Final goods a product sold to its final user sold by a retailer to you To avoid overcounting intermediate products when measuring GDP we add up the value of final goods and services only The value of intermediate products is already included in the value of the final products o goods and services Final services count in GDP in the same way as final goods The service sector has grown from about a third of U S output in 1950 to about two thirds today o produced GDP counts only things that are produced Example land stocks bonds o for the marketplace GDP does not include all final goods and services produced in the economy It includes only those produced for the marketplace with the intention of being sold For example we exclude when you clean your own home o during a given period We do not count used goods for they were not produced during a given period but in the past Example secondhand cars previously occupied homes used furniture o within the nation s borders U S GDP measures output produced within U S borders regardless of whether it was produced by Americans Include output produced by foreign owned resources and foreign citizens in the United States Tracking and Reporting GDP Annualization o GDP is a flow variable it measures a rate of production In theory we could measure it as a daily rate a monthly rate or a yearly rate In practice the government reports GDP as an annual rate each quarter o The number recorded each quarter isn t how much the U S economy actually produced but what we would have produced during an entire year if we produced at that quarter s rate for four full quarters We take the actual production during the three month period and annualize it o At the end of the fourth quarter the government reports the official GDP for the entire year what we actually produced that year Real versus Nominal GDP o We need to adjust our measurements to reflect changes in the value of the dollar value Nominal Variable when a variable is measured in dollars with no adjustment for the dollar s changing value Real Variable when a variable is adjusted for the dollar s changing o When comparing variables measured in dollars over time it is important to translate nominal values which are measured in current dollars to real values which adjust for the dollar s changing value as prices change Growth Rates o When GDP is reported the focus is on the annual growth rate of real GDP from one quarter to the next GDP Deflator Nominal GDP Real GDP x 100 Inflation Rate in 2010 100 x GDP
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