Chapter 7: Taking the Nation’s Economic Pulse• Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country during a specific period. NOTE: It is not a perfect measureo Market value is goods that are weighted according to the purchase price of the goods and service. The dollar is the common measure for the value of the good or service produced Goods that are worth more add more to the GDP Total spending on all goods and services produced during the year is summed to obtain annual GDPo Final goods and services are purchased by their ultimate usero Intermediate goods and services are purchased for resale or for use in producing another good or service. Avoid double counting; we do not count intermediate goods because their value is contained within the final good.o Only goods and services that are produced are included in the GDP, transfers are not.o GDP counts only goods and services produced within the geographic borders of a country.o During a specific period are included, for example a good sold in 2008 are included in the figure for 2008 GDP.• How to measure GDPo Expenditure approach: Y=C+I+G+NX Y is GDP Consumption is household spending on goods and services during the current period.• C= durable goods+ nondurable+ services• Largest component of GDP Investment is the production or construction of capital goods that provide future services.• I= fixed investments+ inventory investment• Net investment= investment-depreciation Government expenditures are government consumption and gross investment• G= goods and services+ capital goods• Does not include transfer payments• Government expenditures are counted at cost (not value) to tax payers NX is net exports= exports- imports• Exports are domestically produced goods and services sold abroad.• Imports are foreign produced goods and services purchased domestically.o Resource cost-income approach Y=employee compensation + proprietor’s income + rent + corporate profits + interest income + indirect business taxes + depreciation + net income of foreigners• Gross National Product (GNP) is total market value of all final goods and services produced by the citizens of a countryo Counts the income Americans earn abroado Ignores the income foreigners earn in the US• Adjusting for price changeso Nominal values are values expressed in current dollarso Real values are values that have been adjusted for the effects of inflation (Nominal value x PIBASE)/PI PIBASE is usually 1• Price Index is the measures the cost of purchasing a market basket of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period.o PI= cost of bundle in current year/ cost of same bundle in base yearo Consumer price index (CPI) is an indicator of general level of prices. Compares the cost of a typical market basket in a specific period to the cost of the same basket in a different period. Designed to measure the impact of price changes on the cost of the typical bundle of goods purchased by households.o GDP deflator reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year. Broader than CPI, it includes capital goods and other goods purchased by businesses and government.• Calculating real valueso Nominal valueso Price index for the current year and the year you are comparing it to• Limitations of GDPo Excludes non-market productiono Excluded the underground economy Underground economy are any transactions that take place outside recorded market channelso Excludes leisure and human costso Difficulties measuring quality variation and introduction of new goodso Excluded the cost of harmful side effects• Per capita GDPo GDP/ populationo Per capita GDP is a broad indicator of general living standards, for example the higher the per capita GDP, the better the standard of living.Chapter 8: Economic fluctuations, Unemployment, and Inflation• The business cycle is fluctuations in the general level of economic activity.o Measures Changes in real GDP Unemployment rateo Expansion is characterized by growing GDP and declining unemploymento Peak (booms) is the height of the expansion phaseo Contraction is characterized by falling GDP and rising unemploymento Trough is the lowest point of the contraction phaseo Recession is a decline in real GDP for two or more consecutive quarterso Depression is a prolonged and severe recession• A person is employed if he or she has worked full or part-time in the past week or is on vacation or sick leave from a regular job. • A person is unemployed if…o Actively seeking employment (in the last four weeks)o Waiting to start or return to a jobo Those who do not have a job and are not seeking employment are not considered unemployed.o Types of unemployment Fictional unemployment (Uf) results from changes in the economy and imperfection information that prevents workers from being immediately matched up with existing job openings. Structural unemployment (Us) is due to structural characteristics of the economy that prevent the matching of available jobs with available workers. Cyclical unemployment (Uc) is due to recessions and inadequate labor demands.• High during recessions• Negative during expansions• Civilian labor force is the number of people age 16 and older who are employed or unemployed• Labor force participation rate is the percent of the population age 16 and older who are in the civilian labor forceo Civilian labor force/ population (16+)• Unemployment rate is the percent of people in the labor force who are unemployedo Unemployment/ civilian labor force• Employment/population ratio is the percent of the population age 16 and older who are employed• Natural rate of unemployment (U*) is the normal unemployment rate when the economy is operating at a sustainable rate of output.o U*=Us+Ufo Not fixed, but it is affected by the structure of the labor force and public policy Structure of the labor force: young vs old workers Public policy: unemployment benefits, welfare, regulations• Actual rate of unemployment (U) id the sum of all types of unemploymento U= Us+Uf+Uc or U=U*+Uco During expansion U*>Uo During recession U*<U• Full employment occurs when the economy is experiencing the highest rate of output that it can sustaino Full employment
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