1. MBMC Measuring Economic Activity: GDP and Unemployment

2. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 2 Introduction “Real GDP, the value of goods and services produced in the U.S., grew at an annual rate of 1 percent in the fourth quarter….”

3. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 3 Introduction “The unemployment rate last month rose to 6.1 percent, its highest level since….”

4. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 4 Introduction “Inflation appears subdued as the consumer price index registered an increase of only 0.2 percent last month…”

5. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 5 Gross Domestic Product: Measuring the Nation’s Output Gross Domestic Product (GDP) The market value of the final goods and services produced in a country during a given period

6. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 6 Gross Domestic Product: Measuring the Nation’s Output Market Value Market value is used to aggregate the quantities of different goods and services into one measurement

7. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 7 Gross Domestic Product: Measuring the Nation’s Output Market Value Calculating GDP for Orchardia  Total production = 4 apples, 6 bananas, and 3 pairs of shoes oPrice of apples = $0.25 oPrice of bananas = $0.50 oPrice of shoes = $20

8. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 8 Gross Domestic Product: Measuring the Nation’s Output Market Value Calculating GDP for Orchardia  GDP o(4 x $0.25) + (6 x $0.50) + (3 x $20) = $64

9. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 9 Gross Domestic Product: Measuring the Nation’s Output Market Value Observation  More expensive items receive a higher weight than cheaper items. Orchardia’s production changes to 3 apples, 3 bananas, and 4 shoes  GDP o(3 x $0.25) + (3 x $0.50) + (4 x $20) = $82.25

10. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 10 Percentages of American Men and Women over Age 16 Working Outside the Home, 1960 - 2001. Increase in female labor force participation increases the demand for housekeeping and child care. Unpaid household work is not counted in GDP. Paid household work is counted in GDP. The increase in female labor force participation has overstated GDP growth.

11. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 11 Gross Domestic Product: Measuring the Nation’s Output Economic Naturalist Why has female participation in the labor market increased by so much? What explains the trends illustrated in the previous figure?  Hint: The concept of comparative advantage

12. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 12 Gross Domestic Product: Measuring the Nation’s Output Final Goods or Services Goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of GDP

13. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 13 Gross Domestic Product: Measuring the Nation’s Output Intermediate Goods or Services Goods or services used up in the production of final goods and services and therefore not counted as part of GDP

14. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 14 Gross Domestic Product: Measuring the Nation’s Output Final Goods and Services Bread Production  Milling Co. pays $0.50 for wheat  Bakery pays $1.20 for flour  Bakery sells bread for $2.00  Contribution to GDP = $2.00

15. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 15 Gross Domestic Product: Measuring the Nation’s Output Final Goods and Services Getting a haircut  Barber charges $10 for a haircut  Barber pays his assistant $2  Contribution to GDP = $10

16. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 16 Gross Domestic Product: Measuring the Nation’s Output Example: A good that can be either intermediate or final: Capital Good  A long-lived good, which is itself produced and used to produce other goods and services

17. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 17 Gross Domestic Product: Measuring the Nation’s Output Example: A good that can be either intermediate or final: Capital Good  Newly produced capital goods are classified as final goods.

18. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 18 Gross Domestic Product: Measuring the Nation’s Output Value Added For any firm, the market value of its product or service minus the cost of inputs purchased from other firms

19. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 19 Value Added in Bread Production Company Revenues – Cost of purchased inputs = Value added ABC Grain$0.50$0.00$0.50 General Flour$1.20$0.50$0.70 Hot’n’Fresh$2.00$1.20 $0.80 Total$2.00 The grain and flour are produced in 2002 Bread is produced in 2003 $1.20 is added to 2002 GDP $0.80 is added to 2003 GDP

20. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 20 Gross Domestic Product: Measuring the Nation’s Output Produced Within a Country During a Given Period Domestic  Only production that takes place within a country’s border  Examples oCars produced in the U.S. by foreign owned companies are counted. oCar produced in Mexico by U.S. owned companies are not counted.

21. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 21 Gross Domestic Product: Measuring the Nation’s Output Produced Within a Country During a Given Period Given Period  Counts only goods produced during the defined period such as a calendar year  Examples oThe sale of used goods is not counted. oReal estate commissions are counted.

22. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 22 Expenditure Components of U.S. GDP, 2001 (billions of dollars) Consumption6,987.0 Durable goods835.9 Nondurable goods2,041.3 Services4,109.9 Investment1,586.0 Business fixed investment1,201.6 Residential investment444.8 Inventory investment-60.3 Government purchases1,858.0 Net exports-348.9 Exports1,034.1 Imports1,383.0 Total: Gross domestic product10,082.2

23. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 23 The Expenditure Method for Measuring GDP Consumption Expenditure, or simply Consumption Spending by households on goods and services, such as food, clothing, and entertainment  Consumer durables  Consumer nondurables  Services

24. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 24 The Expenditure Method for Measuring GDP Investment Spending by firms on final goods and services, primarily capital goods and housing  Business fixed investment  Residential investment  Inventory investment

25. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 25 The Expenditure Method for Measuring GDP Government Purchases Purchases by federal, state, and local governments of final goods and services Does not include transfer payments Does not include interest paid on government debt

26. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 26 The Expenditure Method for Measuring GDP Net Exports Exports minus imports

27. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 27 The Expenditure Method for Measuring GDP Y = gross domestic product, or output C = consumption expenditure I = investment G = government purchases NX = net exports

28. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 28 GDP The Expenditure Method for Measuring GDP

29. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 29 ‘Twin Deficit’ Accounting (Y -C -T) + (T-G) - I = NX (Net Exports) S(priv) + S(gov) – Investment ≡ Net Nat’l Saving Y = C + I + G + NX Net Nat’l Savings = Net Exports

30. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 30 The Expenditure Method for Measuring GDP Example An economy produces 1 million cars valued at $15,000 each.

31. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 31 The Expenditure Method for Measuring GDP Production GDP = 1 million x $15,000 = $15 billion

32. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 32 The Expenditure Method for Measuring GDP Expenditure 700,000 sold to consumers  C = 700,000 x $15,000 = $10.5 billion 200,000 sold to businesses  I = 200,000 x $15,000 = $3.0 billion 50,000 sold to government  G = 50,000 x $15,000 = $.75 billion 25,000 exported (no imports)  NX = 25,000 x $15,000 = $.375 billion

33. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 33 The Expenditure Method for Measuring GDP Expenditure 975,000 sold 25,000 inventory  I = 25,000 x $15,000 = $.375 billion GDP = C + I + G + NX $10.5 + (3.0 +.375) +.75 +.375 = $15.0 billion

34. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 34 GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income Labor income  Equals 75% of GDP  Includes: oWages oSalaries oIncome of the self-employed

35. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 35 GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income Capital income  Equals 25% of GDP  Includes: oProfits oRent oInterest oRoyalties

36. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 36 The Three Faces of GDP == Market value of final goods and services ProductionExpenditureIncomeInvestment Consumption Governmentpurchases Net exports Capital Income Labor Income

37. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 37 Prices and Quantities in 2000 and 2004 Quantity of pizzas 200010$1015$5 200420$1230 $6 Price of pizzas Quantity of calzones Price of calzones GDP 2000 = (10)($10) + (15)($5) = $175 2004 = (20)($12) + (30)($6) = $420 Observations Output doubled GDP increased by 2.4 times Prices also rose GDP overstates economic growth

38. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 38 Nominal GDP versus Real GDP Real GDP A measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices Real GDP measures the actual physical volume of production

39. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 39 Nominal GDP versus Real GDP Nominal GDP A measure of GDP in which the quantities produced are valued at current-year prices Nominal GDP measures the current dollar value of production

40. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 40 Prices and Quantities in 2000 and 2004 Quantity of pizzas 200010$1015$5 200420$1230 $6 Price of pizzas Quantity of calzones Price of calzones 2000 = base year 2004 Real GDP = (20)($10) + (30)($5) = $350 2000 Real GDP = (10)($10) + (15)($5) = $175 Real GDP = Nominal GDP in the base year

41. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 41 Real GDP is not the Same as Economic Well-Being Leisure Time Shorter work week Start working later Retire earlier

42. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 42 Real GDP is not the Same as Economic Well-Being Economic Naturalist Why do people work fewer hours today than their great-grandparents did?  Hint: Use the concept of opportunity cost

43. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 43 Real GDP is not the Same as Economic Well-Being Nonmarket Economic Activities Household production Volunteer services Nonmarket activities are more important in poor countries Underground economy

44. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 44 Real GDP is not the Same as Economic Well-Being Environmental Quality and Resource Depletion Benefits of environment quality are not measured. GDP is not adjusted for resource depletion.

45. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 45 Real GDP is not the Same as Economic Well-Being Quality of Life Crime rates Traffic congestion Civic organizations Open space

46. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 46 Real GDP is not the Same as Economic Well-Being Poverty and Economic Inequality GDP does not capture the effects of income inequality

47. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 47 GDP & Basic Indicators of Well-Being Indicator All developing countries GDP per person 3,5301,17025,860 (U.S. dollars) Life expectancy at 64.551.778.0 birth (years) Infant mortality rate 611006 (per 1,000 live births) Under-5 mortality rate 891596 (per 1,000 live births) Doctors 7830252 (per 100,000 people) Incidence of HIV/Aids1.34.30.3 (% in 15-49 age group) Undernourished1838Negligible people (%) Primary enrollment85.760.499.9 rate (as % of age group) Secondary enrollment60.431.296.2 rate (as % of age group) Adult literacy rate (%)72.951.798.6 Least developed countries Industrialized countries

48. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 48 But GDP is Related to Economic Well-Being Economic Naturalist Why do far fewer children complete high school in poor countries than in rich countries?

49. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 49 The Unemployment Rate Measuring Unemployment The Bureau of Labor Statistics (BLS) surveys 60,000 randomly selected households each month

50. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 50 The Unemployment Rate Measuring Unemployment Those 16 years and over are placed in one of three categories:  Employed  Unemployed  Out of the labor force The BLS estimates how many people in the U.S. fit into each category.

51. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 51 The Unemployment Rate Measuring Unemployment Labor force = employed + unemployed

52. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 52 U.S. Employment Data, July 2002 (in millions) Employed134.04 Plus: Unemployed8.35 Equals: Labor force142.39 Plus: Not in labor force71.63 Equals: Working-age (over 16) population214.02 Unemployment rate = unemployed/labor force = 8.35/142.39 = 5.9% Participation rate = labor force/working-age population = 142.39/214.02 = 66.5%

53. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 53 The U.S. Unemployment Rate since 1960

54. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 54 The Unemployment Rate The Cost of Unemployment Economic Psychological Social

55. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 55 The Unemployment Rate The Duration of Unemployment The impact of unemployment is influenced by how long individuals have been unemployed.  The unemployment spell  The duration of unemployment  Long-term unemployed  Chronically unemployed

56. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 56 The Unemployment Rate Unemployment Spell A period during which an individual is continuously unemployed Duration The length of an unemployment spell

57. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 57 The Unemployment Rate The Duration of Unemployment Discouraged workers Involuntary part-time workers In July 2002:  Official unemployment rate = 5.9%  Including discouraged workers and involuntary part-time worker = 9.4%

58. MBMC Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 58 The Unemployment Rate Discouraged Workers People who say they would like to have a job but have not made an effort to find one in the last four weeks

59. MBMC End of Chapter End of Chapter