Production, Income, and Employment © 2003 South-Western/Thomson Learning

Production and Gross Domestic Product GDP: A DefinitionGDP: A Definition The Expenditure Approach to GDPThe Expenditure Approach to GDP Other Approaches to GDPOther Approaches to GDP Measuring GDP: A SummaryMeasuring GDP: A Summary Real Versus Nominal GDPReal Versus Nominal GDP How GDP Is UsedHow GDP Is Used Problems with GDPProblems with GDP

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

Stages of Production $1.00 (Wood Chips) $1.50 (Raw Paper) $2.25 (Notebook Paper) $3.50 (Notebook Paper) $5.00 (Notebook Paper) Lumber Mill Paper Mill Office Supplies Manufacturer WholesalerRetailer

Gross Domestic Product Intermediate Goods Goods used up in producing final goods Final Good A good sold to its final user

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

Expenditure Approach to GDP Four categories of output: Consumption: purchased by householdsConsumption: purchased by households Private Investment: purchased by businessPrivate Investment: purchased by business Government: purchased by government agenciesGovernment: purchased by government agencies Net Exports (NX): purchased by foreignersNet Exports (NX): purchased by foreigners

Expenditure Approach to GDP Measuring GDP by adding the value of goods and services purchased by each type of final user GDP = C + I + G + NX

Consumption Spending Consumption (C) The part of GDP purchased by households as final users

Private Investment 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

Government Purchases 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

Net Exports Net Exports (NX) Total exports minus total imports To properly account for output sold to and bought from foreigners, net exports must be included as part of the expenditure in GDP.

Other Approaches to GDP Value-Added Approach Measuring GDP by summing the value added by all firms in the economy Value Added: The revenue a firm receives minus the cost of the intermediate goods it buys.

Other Approaches to GDP Value-Added Approach In any year, the value added by a firm is equal to the total factor payments made by that firm.

Other Approaches to GDP Factor Payments Approach Measuring GDP by summing the factor payments made by all firms in the economy Factor Payments: Payments to the owners of resources that are used in production

Other Approaches to GDP Factor Payments Approach GDP - the total output of the economy - is equal to the total income earned in the economy.

Measuring GDP Expenditure Approach: C + I + G + NX Value-Added Approach: Sum of value added by all firms Factor Payments Approach: Sum of factor payments by all firms = Wages and salaries + interest + rent + profit = Total household income

Real vs. Nominal GDP 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

How GDP is Used 1.In the short run, GDP alerts us to recessions and gives us a chance to stabilize the economy 2.In the long run, GDP tells 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

How GDP is Used aa –3 –2 – Year GDP growth needed for constant unemployment rate GDP growth needed for constant output per capita Actual GDP growth rate Real GDP Growth Rate (Percent Change from Previous Period)

Problems with GDP Nonmarket Production Goods and services that are produced, but not sold, in a market

Short-Term Changes 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.

Employment and Unemployment Types of UnemploymentTypes of Unemployment The Costs of UnemploymentThe Costs of Unemployment How Unemployment Is MeasuredHow Unemployment Is Measured Problems in Measuring UnemploymentProblems in Measuring Unemployment

Types of 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.

Types of Unemployment Structural Unemployment Joblessness arising from mismatches between workers’ skills and employers’ requirements, or workers’ locations and employers’ locations Cyclical Unemployment Joblessness arising from changes in production over the business cycle

Full Employment In macroeconomics, full employment is achieved when cyclical unemployment has been reduced to zero. But the overall unemployment rate at full employment is > zero because there are still positive levels of frictional, seasonal, and structural unemployment.

Cyclical Unemployment

Economic Costs of Unemployment When there is cyclical unemployment, the nation produces less output, and so some group or groups within society must consume less output.

Economic Costs of Unemployment Potential Output The level of output the economy could produce if operating full employment

How Unemployment Is Measured 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

How Unemployment Is Measured aa Employed Worked one or more hours for pay? Unemployed Temporary layoff? Searched for work? Yes Not in Labor Force No

How Unemployment Is Measured Unemployment Rate

Problems in Measuring 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

GDP after September 11 The destruction caused by the terrorist attacks of 9/11 had almost no direct impact on the U.S. economy or the U.S. GDP.

Indirect Impacts on GDP Short-run impact: substantial GDP declined more that it otherwise would, deepening a recession already in progress GDP declined more that it otherwise would, deepening a recession already in progress

Indirect Impacts on GDP Long-run impact: will be negative The nation will shift away from production of other goods/services and toward security. Potential output will grow more slowly than it otherwise would have.