GDP GDP Market Value of all final goods and services produced within a country in a year Market Value the goods and services must be bought and sold within a market private transactions don t count eg Taking care of your own kids Final The final transaction of a product does not doublecount the costs that occur during processes Produced In a year Financial assets such as stocks and bonds don t count as GDP Used Goods don t count Within a country No matter the firm s original location the GDP counts the production plant s location Measuring GDP National Income Accounting Calculated by the Bureau of Economic Analysis NIPA National Income Product Accounts The Expenditure Method Calculates GDP by adding up all expenditures Breakdown Plant and Equipment is biggest in investment 2nd Residential 3rd Change in investment Govt Services not part of GDP Social Security payments Y C I G NX aggregate expenditure Y GDP C Consumption Expenditures I Investment Expenditures G Govt Purchases NX Net Exports negative sign Per Capita GDP GDP Population Potential GDP Estimate of what GDP would have been if all factors of production e g Labor and Capital had been used at their normal rates Measure of economy s capacity to produce not actual production Nominal GDP Value of all goods and services measured at current prices Assume there are N goods produced in the economy 2014 Nominal GDP P14 The reason why nominal GDP increases over the years is because of inflation and price changes 2 etc P Price Q Quantity 17 3T 1 P14 1Q14 2Q14 Real GDP Value of all goods and services measured at a constant price level 2014 Real GDP P05 2 16T 1 P05 2Q14 1Q14 Notation for the Rest of the Course Y Real GDP adjusted P Price level GDP Deflator P Y Nominal GDP Inflation Measures of the Price Level the GDP Deflator GDP Deflator Nominal GPD Real GDP 100 When Nominal GDP Real GDP deflator 0 P stands for price level measured by GDP Deflator Inflation percentage change in P P OR cant add up because it is calculated year by year CPI Consumer Price Index Measures changes in the prices of things that an average consumer buys Most closely watched Tracks changes in typical household s cost of living Adjusts many contracts for inflation Calculate the CPI in a given month as follows Cost of basket in that month Cost of basket in base period 100 between 2 years Disinflation is when inflation is going down so prices are still increasing just not as fast Deflation is when prices are going down The GDP deflator Ratio of nominal GDP to real GDP times 100 Interest Rates Nominal interest rate i Real interest rate r Inflation rate i r r i Value in later year dollars C P I Value in earlier year dollars C P I L a t e r E a r l i e r As P goes up goes up As goes up e goes up Since i r e as e goes up i goes up P i Employment Employed Worked even part time in the last week age 16 Unemployed Did not work in the last week but did look for job over the last month Employed Unemployed Labor Force Unemployment Rate Number Unemployed Number in Labor Force Not in Labor Force Did not work in the last week or actively look for job in last month retired people Adult Non institutional population Labor Force Not in Labor Force Labor Force participation rate Labor Force Civilian Non institutional population Types of Unemployment Frictional People transitioning in between jobs Structural job applicant skills are not matched up with job skill demand Fructional Structural Natural rate of Unemployment Normal Rate of unemployment Legal restrictions on hours vacations retirement and esp firing restrict in EU Factors which influence the natural rate Govt Policies Training Programs are needed decrease structural Unemployment Compensation increase frictional Reduces opportunity cost of unemployment In U S equals half of average wage for 6 months Labor Market Policies Min Wage Laws 7 25 nationally Efficiency wage Above equilibrium wage paid Quantity of labor supplied Quantity of labor demanded More Important Cyclical Unemployment keep this not unemployment at 0 Deviation of unemployment from its natural rate Increases in recession Decreases in expansion Economic Growth Growth change in real GDP over time no change in price level Growth Rate annual percentage change in real GDP Y R e a l G D P R e a l G D P E a r l i e r Y e a r L a t e r Y e a r R e a l G D P E a r l i e r Y e a r The Rule of 70 G r o w t h R a t e 7 0 What matters is the change in real per capita GDP correlates to living standards Per capita GDP Real GDP Population Growth rate of real per capita GDP Y POP Y Pop Economic Growth is the ultimate determinant of such variables as Nutrition Literacy Infant Mortality Life expectancy Small diff in growth rates even differences of 1 or 2 percent makes a difference Productivity The quantity of goods and services that can be produced by one hour of work Person hour one worker working one hour Y real GDP quantity of output produced L number of labor hours Productivity Y L output per labor hour If a nation s workers are very productive real GDP is large and incomes are high Productivity rises Living Standard Rises Determinants Capital Office buildings machines tools etc Technological change Productivity Slowdown in 1973 1994 speculations Measurement problems Health and Safety Deterioration of US educational system The stock of equipment and structures used to produce G S physical capital K L Labor Hours K L Capital per labor hour Increase in K L leads to increase in Y L Productivity is higher when the average worker has more human capital education skills etc Technology process a firm uses to turn inputs into outputs 1 Better machinery and equipment Computers etc 2 3 Better organization and management of production Increases in human capital Education training experience Per worker production function The relationship between real GDP per hour worked productivity and capital hour worked K L holding the level of technology constant Diminishing marginal product of capital If workers have little K giving them more increases their productivity a lot If workers already have a lot of K giving them more increases productivity fairly little Solution Technological change New Growth Theory New growth theory model of long run economic growth emphasizes that tech change is influenced by economic incentives determined by the working of the market system Key to economic growth accumulation of knowledge capital Physical capital subject to decreasing returns Knowledge capital