© 2001 South-Western, a division of Thomson Learning Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman © 2001 South-Western, a division of Thomson Learning

Production, Income, and Employment © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product GDP: A Definition The Expenditure Approach to GDP Other Approaches to GDP Measuring GDP: A Summary Real Versus Nominal GDP How GDP Is Used Problems with GDP © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product 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. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Intermediate Goods Goods used up in producing final goods. Final Good A good sold to its final user. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Flow Variable A measure of a process that takes place over a period of time. Stock Variable A measure of an amount that exists at a moment in time. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Expenditure Approach: Measuring GDP by adding the value of goods and services purchased by each type of final user. GDP = C + I + G + NX. Consumption (C): The part of GDP purchased by households as final users. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Capital Stock: The total value of all goods that will provide useful services in future years. Private Investment (I): The sum of business plant and equipment purchases, new home construction, and inventory changes. Net Investment: Total investment minus depreciation. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Government Purchases (G) Spending by federal, state, and local governments on goods and services. Transfer Payment Any payment that is not compensation for supplying goods or services. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Net Exports (NX) Total exports minus total imports. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Value Added The revenue a firm receives minus the cost of the intermediate goods it buys. Value-Added Approach Measuring GDP by summing the value added by all firms in the economy. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Factor Payments Payments to the owners of resources that are used in production. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Factor Payments Approach Measuring GDP by summing the factor payments made by all firms in the economy. GDP = Wages and salaries + interest + rent + profit = Total household income © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Nominal Variable A variable measured without adjustment for the dollar’s changing value. Real Variable A variable adjusted for changes in the dollar’s changing value. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product We use GDP in the short run to alert us to recessions and give us a chance to stabilize the economy and, in the long run, to tell us whether our economy is growing fast enough to raise output per capita and our standard of living, and fast enough to generate sufficient jobs for a growing population. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Nonmarket Production Goods and services that are produced, but not sold in a market. © 2001 South-Western, a division of Thomson Learning

Production and Gross Domestic Product Short-term changes in real GDP are fairly accurate reflections of the state of the economy. A significant short-term drop in real GDP virtually always indicates a decrease in production, rather than a measurement problem. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment Types of Unemployment The Costs of Unemployment How Unemployment Is Measured Problems in Measuring Unemployment © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment Frictional Unemployment Joblessness experienced by people who are between jobs or who are just entering or re-entering the labor market. Seasonal Unemployment Joblessness related to changes in weather, tourist patterns, or other seasonal factors. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment Structural Unemployment Joblessness arising from mismatches between workers’ skills and employers’ requirements or between workers’ locations and employers’ locations. Cyclical Unemployment Joblessness arising from changes in production over the business cycle. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment In macroeconomics, full employment is achieved when cyclical unemployment has been reduced to zero. But the overall unemployment rate at full employment is greater than zero because there are still positive levels of frictional, seasonal, and structural unemployment. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment When there is cyclical unemployment, the nation produces less output, and so some group or groups within society must consume less output. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment Potential Output The level of output the economy could produce if operating full employment. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment Labor Force Those people who have a job or are looking for one. Unemployment Rate The fraction of the labor force that is without a job. © 2001 South-Western, a division of Thomson Learning

Employment and Unemployment Involuntary Part-Time Workers Individuals who would like a full-time job, but who are working only part time. Discouraged Workers Individuals who would like a job, but have given up searching for one. © 2001 South-Western, a division of Thomson Learning