1. Gross Domestic Product, GDP: A Definition
A nation’s gross domestic product (GDP)
Total value of all final goods and services produced for the marketplace during a given period within the nation’s borders

2. Gross Domestic Product, GDP: A Definition
The total value
Approach of GDP is to add up dollar value of every good or service—the number of dollars each product is sold for
However, using the dollar prices at which goods and services actually sell also creates a problem
If prices rise, then GDP will rise, even if we are not actually producing more
GDP must be adjusted to take away the effects of inflation
Nominal GDP vs. Real GDP
…of all final…
When measuring production, we do not count every good or service produced in the economy
Only those that are sold to their final users
Avoids over-counting intermediate products when measuring GDP
Value of all intermediate products is automatically included in value of final products they are used to create

3. Gross Domestic Product, GDP: A Definition
…goods and services…
Goods: cars, furniture, computers, beer, etc.
Services: medical, financial, educational, etc.
…produced…
In order to contribute to GDP, something must be produced.
Q: should stocks or bonds be included in the calculation
of GDP?

4. Gross Domestic Product, GDP: A Definition
…for the marketplace…
GDP does not include all final goods and services produced in the economy
Includes only the ones produced for the marketplace—that is, with the intention of being sold
…during a given period…
GDP measures production during some specific period of time
Only goods produced during that period are counted
how about used goods?
GDP is actually measured for each quarter, and then reported as an annual rate for the quarter
Once fourth quarter figures are in, government also reports official GDP figure for entire year

5. Gross Domestic Product, GDP: A Definition
…within the nation’s borders
U.S. GDP measures output produced within U.S. borders
Regardless of whether it was produced by Americans
Americans abroad are not counted
However, foreigners producing goods or services within the country are included:
Chinese Acrobat Team, Honda, Rolling Stones

6. The Expenditure Approach to GDP
Expenditure approach divides output into four categories according to which group in the economy purchases it as final users
Consumption goods and services (C)—purchased by households
Private investment goods and services (I)—purchased by businesses
Government goods and services (G)—purchased by government agencies
Net exports (NX)—purchased by foreigners

7. The Expenditure Approach to GDP
When we add up the purchases of all four groups we get GDP
GDP = C + I + G + NX

8. Consumption Spending
Consumption is the part of GDP purchased by households as final users
Almost everything households buy during the year is included as part of consumption spending when we calculate GDP
One exception is construction of new homes
Counted as private investment

9. Private Investment Private investment has three components
Business Purchases of Plant, Equipment, and Software
A firm’s plant, equipment, and software are intended to last for many years—only a small part of them is used up to make the current year’s output
Are regarded as final goods, and firms that buy them as final users of those goods
New Home Construction
Residential housing is an important part of nation’s capital stock
House will continue to provide services into the future
Changes in Inventories
We count the change in firms’ inventories as part of investment in measuring GDP
Why?
When goods are produced but not sold during the year, they end up in some firm’s inventory stocks
Part of the nation’s capital stock
Will provide services in the future, when they are finally sold and used

10. Government Purchases
Purchases by state, local governments and federal government are included
Government purchases include
Goods
Fighter jets, police cars, school buildings, spy satellites, etc.
Services
Such as those performed by police, legislators, and military personnel
Government is considered to be a purchaser even if it actually produces the goods or services itself

11. Government Purchases
Transfer payments represent money redistributed from one group of citizens (taxpayers) to another (poor, unemployed, elderly)
While transfers are included in government budgets as outlays they are not purchases of currently produced goods and services
Not included in government purchases or in GDP

12. Net Exports
Once we recognize dealings with the rest of the world, we must correct an inaccuracy in our measure of GDP
Deduct all U.S. imports during the year, leaving us with just output produced in United States
To properly account for output sold to, and bought from, foreigners
We must include net exports—difference between exports and imports—as part of expenditure in GDP

13. Other Approaches to GDP: The Value-Added Approach
Firm’s contribution to a product or
Revenue it receives for its output
Minus cost of all the intermediate goods that it buys
GDP is sum of values added by all firms in economy

14. Other Approaches to GDP: The Factor Payments Approach
In any year, value added by a firm is equal to total factor payments made by that firm
Thus, GDP must equal total factor payments made by all firms in the economy
All of these factor payments are received by households in the form of wages and salaries, rent, interest or profit
GDP is measured by adding up all of the income—wages and salaries, rent, interest, and profit—earned by all households in the economy
Gives us an important insight into the macroeconomy
Total output of economy (GDP) is equal to total income earned in the economy

15. Measuring GDP: A Summary
Different ways to calculate GDP
Expenditure Approach
GDP = C + I + G + NX
Value-Added Approach
GDP = Sum of value added by all firms
Factor Payments Approach
GDP = Wages and Salaries + interest + rent + profit
Therefore, Total output = Total household income

16. Problems With GDP Quality Changes Underground Economy
Non-market Production
Not a perfect measure of economic well-being

17. Quality Change
While BEA includes impact of quality changes for many goods and services (such as automobiles and computers)
Does not have the resources to estimate quality changes for millions of different goods and services
By ignoring these quality improvements, GDP probably understates true growth from year to year.

18. The Underground Economy
Some production is hidden from government authorities
Either because it is illegal or
Drugs, prostitution, most gambling
Because those engaged in it are avoiding taxes
Production in these hidden markets cannot be measured accurately

19. Non-Market Production
GDP does not include non-market production
Goods and services that are produced, but not sold in the marketplace
Whenever a non-market transaction becomes a market transaction GDP will rise
Even though total production has remained the same
Can exaggerate the growth in GDP over long periods of time
What do these problems tell us about value of GDP?
For certain purposes—especially interpreting long-run changes in GDP—we must exercise caution

20. Not a perfect measure of economic well-being
No value measured on leisure
“Bad” things can raise GDP.
Disasters, wars, etc.
Externality – ecological cost

21. Types of Unemployment
In United States, people are considered unemployed if they are not working AND actively seeking a job
Unemployment can arise for a variety of reasons, each with its own policy implications
This is why economists have found it useful to classify unemployment into four different categories
Frictional unemployment
Seasonal unemployment
Structural unemployment
Cyclical unemployment

22. Frictional Unemployment
Short-term joblessness experienced by people who are between jobs or who are entering the labor market for first time or after an absence
Because frictional unemployment is, by definition, short-term, it causes little hardship to those affected by it
By spending time searching rather than jumping at the first opening that comes their way
People find jobs for which they are better suited and in which they will ultimately be more productive

23. Seasonal Unemployment
Joblessness related to changes in weather, tourist patterns, or other seasonal factors
Is rather benign
Short-term
predictable
Workers are often compensated in advance for unemployment they experience in off-season
To prevent any misunderstandings, government usually reports the seasonally-adjusted rate of unemployment

24. Structural Unemployment
Joblessness arising from mismatches between workers’ skills and employers’ requirements
Or between workers’ locations and employers’ locations
Generally a stubborn, long-term problem
Often lasting several years or more

25. Cyclical Unemployment
When the economy goes into a recession and total output falls, the unemployment rate rises
Since it arises from conditions in the overall economy, cyclical unemployment is a problem for macroeconomic policy

26. Figure 3: U.S. Quarterly Unemployment Rate, 1960–2003

27. Figure 4: Actual And Potential Real GDP, 1960–2003

28. How Unemployment is Measured
The unemployed are those willing and able to work, but who do not have jobs
Others were able to work, but preferred not to
Including millions of college students, homemakers, and retired people
Still others were in the military and are counted in the population
But not counted when calculating civilian employment statistics
To be counted as unemployed, you must have recently searched for work
But how can we tell who has, and who has not, recently searched for work?

29. Figure 5: How BLS Measures Employment Status

30. Problems In Measuring Unemployment
Treatment of involuntary part-time workers
Some economists have suggested that involuntary part-time workers should be regarded as partially employed and partially unemployed
Treatment of discouraged workers
Individuals who would like to work but, because they feel little hope of finding a job, have given up searching

31. Figure 6: Employment Status of the U.S. Population—June 2003