And Unemployment and Inflation GDP And Unemployment and Inflation

National income accounting Measures the economy’s overall performance Assesses the economy at regular intervals Tracks the long-run (years) Has it grown, been constant, or stayed the same? The Bureau of Economic Analysis can then make policies that can fix economic problems A major tool used is the Gross Domestic Product

Gross domestic product The total output of goods and services (the aggregate output) The aggregate output of the economy is called the Gross Domestic Product (GDP) The total market value of all final goods and services produced in a given year Includes all domestic goods and services produced in a nation REGARDLESS OF OWNERSHIP Ex: American-owned Ford factories here in the U.S.A. and a Japanese-owned Honda factory in Ohio

What is it? It is a monetary measure of comparing the relative values of all goods and services produced here It DOES NOT include intermediate goods (goods not finished being made/sold or goods that are purchased for resale) GDP only counts final goods Aggregate output goods and services are counted ONCE AND ONLY ONCE Final Good  Intermediate Good 

Videos! GDP Video

Not included GDP does not include: Intermediate Goods Public Transfer Payments (Welfare payments) Private Transfer Payments (Cash gifts, babysitting money) Stock Market Transactions (Stocks and Bonds) Secondhand Sales (used books, cars, homes) Black Market

How? There are two ways to calculate the GDP (Expenditure Method & Income Method) The Expenditure Method counts all new goods and services that are purchased by consumers, businesses, government, and net exports (output approach) The Income Method counts all earnings received by those who produce goods and services (earnings approach) Expenditure = Income (MUST EQUAL EACH OTHER)

Expenditure method The Expenditure Method = C + Ig + G + Xn C = Personal Consumption Expenditures (cars, refrigerators, toothpaste, food, services like a lawyer or doctor) Ig = Gross Private Domestic Investment (purchases of machinery and tools by a business, all construction, and changes in inventories) G = Government Purchases (Expenditures) Xn = Net Exports Calculate Xn: X – M = Xn X = exports M = imports

example

Income method The Income Method = W + R + I + P W = Employee Compensation R = Rent Received for Use of Property I = Interest Received for Use of Money P = Profits Received by Proprietors and Corporation Owners All adds up to National Income

What happens if they don’t equal? This is why the government uses accountants to make accounting adjustments so that the balance ends up equaling

Net foreign factor income We have to “adjust” our GDP with income earned abroad Net Foreign Factor Income = Foreign-owned earnings here in U.S. minus American-owned earnings abroad National Income = the total income of Americans, earned here in the U.S. and/or abroad + Net Foreign Factor Income = GDP

2 more accounts Using the GDP, we can adjust it to find out two more account information Net Domestic Product = GDP – consumption of fixed capital (depreciation) National Income = W.R.I.P. earned by Americans National Domestic Product – Net Foreign Factor Income – Indirect Business Taxes = National Income

Nominal gdp vs. real gdp……huh??? Money value constantly changes Nominal GDP = unadjusted GDP Real GDP = prices adjusted for inflation/adjusted GDP

Comparing gdp’s across the world

Business cycle We want our economy to grow We measure “growth” by either real GDP increases or GDP per capita increases How does it grow? Increase in resources or increased productivity (higher education, more training, motivation, health of workers)

Business cycle graph

Explain, please! Peak = maximum production level is reached temporarily (full employment) Recession/Contraction = period of decline in business activity for 6 months or longer Depression = long, severe period of economic decline Trough = the lowest point of a recession/depression Expansion = the recovery of economic activity leading to improved conditions

Explain more, please! Peak = top of the cycle, real GDP is at the maximum, unemployment is low, inflation may be high Recession/Contraction = real GDP is falling for two consecutive quarters (6 months), unemployment is increasing, inflation can fall Trough = unemployment is very high Expansion = real GDP is growing, unemployment decreasing, inflation is increasing Global Business Cycle Map

Unemployment  There is always some level of unemployment on a national/international level Labor Force = over 16 years old, willing and able to work, must be actively seeking work Does not count: Under 16 or unable to work (institutionalized people) Potential workers who are not seeking work (homemakers, students, retirees) Discouraged workers - no longer seeking work

3 types of unemployment Frictional = workers who are “between jobs” (laid off, fired, new workers, or voluntarily changing jobs) Structural = workers whose skills are no longer in demand (must be re-trained in a new skill or move to a new location) Cyclical = workers who lose jobs due to economic recessions

Inflation Inflation = a rise in the level of prices Normal economic growth = 2-3% change Hyperinflation = price increases are out of control German children playing with stacks of cash as “blocks” German deutschmarks became nearly worthless after WWI

2 types of inflation Demand/Pull Inflation = failure to produce more goods drives up the price Cost/Push Inflation = increased cost in factors of production, so businesses raise prices to continue making profits

Phillips curve Short run = inflation and unemployment are inversely related Long run = unemployment is unaffected by inflation