1. GDP and Unemployment Chapter 5

2. The Circular Flow Goods Other countries Financial markets Government Firms (production) Household Taxes Factor services Savings Imports Government Spending Wages, rents, interest, profits Exports Investment Personal consumption McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

3. Definition GDP: market value of final goods and services produced in a country in a given year Real GDP: GDP adjusted for inflation.

4. 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.

5. Value Added Approach

6. Value Added Approach Eliminates Double Counting

7. Expenditure Components of U.S. GDP, 2001 (billions of dollars) Consumption Durable goods Nondurable goods Services 835.9 2,041.3 4109.9 6,987 Investment Business fixed investment Residential investment Inventory investment 1,201.6 444.8 -60.3 1,586.0 Government purchases1,858.0 Net exports Exports Imports 1,034.1 1,383.0 -348.9 Total: Gross domestic product10,082.2

8. GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income –Labor income Equals 75% of GDP Includes: –Wages –Salaries –Income of the self-employed

9. GDP and the Incomes of Capital and Labor GDP = Labor Income + Capital Income –Capital income Equals 25% of GDP Includes: –Profits –Rent –Interest –Royalties

10. The Three Faces of GDP == Market value of final goods and services ProductionExpenditureIncomeInvestment Consumption Governmentpurchases Net exports Capital Income Labor Income

11. Limitations as a Measure Not a measurement of well-being, just economic activity. Does not consider the distribution of income. Unreported economic activity is not included.

12. Problems comparing per capita GDP across countries Bangladesh $270 USA $35,000 Exchange rate method and purchasing power method.

13. The Unemployment Rate Measuring Unemployment –Labor force = employed + unemployed

14. Types of Unemployment Frictional: worker “between jobs” Cyclical: caused by bad economic conditions Structural: worker’s skill set is no longer in demand