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 measure o 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 GDP o Final goods and services are purchased by their ultimate user o 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 GDP o Expenditure approach Y C I G NX C durable goods nondurable services Largest component of GDP Y is GDP Consumption is household spending on goods and services during the current period 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 country o Counts the income Americans earn abroad o Ignores the income foreigners earn in the US Adjusting for price changes o Nominal values are values expressed in current dollars o 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 year o 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 o GDP deflator reveals the cost during the current period of purchasing the items included in GDP relative to the households cost during the base year Broader than CPI it includes capital goods and other goods purchased by businesses and government Calculating real values o Nominal values o Price index for the current year and the year you are comparing it to Limitations of GDP o Excludes non market production o Excluded the underground economy Underground economy are any transactions that take place outside recorded market channels o Excludes leisure and human costs o Difficulties measuring quality variation and introduction of new goods o Excluded the cost of harmful side effects Per capita GDP o GDP population o 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 rate o Expansion is characterized by growing GDP and declining unemployment o Peak booms is the height of the expansion phase o Contraction is characterized by falling GDP and rising unemployment o Trough is the lowest point of the contraction phase o Recession is a decline in real GDP for two or more consecutive quarters o 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 job o 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 force o Civilian labor force population 16 Unemployment rate is the percent of people in the labor force who are unemployed o 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 Uf o 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 unemployment o U Us Uf Uc or U U Uc o During expansion U U o During recession U U Full employment occurs when the economy is experiencing the highest rate of output that it can sustain o Full employment exists when the economy is operating at the natural rate of unemployment Potential output Yf is the level of output that can be achieved and sustained in the future o Yf o Given U U The size of the labor force Expected
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