Chapter 5: Measuring Economic Activity: GDP and Unemployment ...
Chapter 5: Measuring Economic Activity: GDP and Unemployment Gross Domestic Product: Measuring the Nation’s Output - Most common measure of an economies output = GDP (measures how much is made during a given period) GDP: the market value of the final goods/services produced in a country given a specific period - Market Value Services provided by government employees is generally not market place therefore included in GDP Goods/services produced by unpaid household labour for use within household (mowing the lawn) is NOT included in GDP - Final Goods and Services Summing all value added by all firms in the production process yields the value of the final good/service Final Goods or Services: consumed by the ultimate consumer, b/c they are the end products of the production process they are counted as part of GDP Intermediate Goods or Services: used up in the production of final goods/services and therefore not counted in GDP Value Added: the market value of its product or service minus the cost of inputs purchased from other firms (revenues-cost of intermediate goods=value added) The Expenditure Method for Measuring GDP - GDP is a measure of the quantities of the goods/serviced produced by an economy - Divide goods into four categories: households, firms, governments, and the foreign sector - Relationship between GDP and expenditures of goods/services can be summarized by this equation… Y=C+I+G+NX Where… Y= GDP or Output C= Consumption Expenditure I= Private-Sector Investment G= Government Purchases NX= Net Exports Consumption: spending by households on goods and services (food, clothing, entertainment) Divided into four subcomponents: durable goods, semi-durable goods, non-durable goods, services Private-Sector Investment: spending by firms on final goods/services, primarily capital goods and housing Divided into three subcomponents: non-residential structures and equipment, residential structures, business investment in inventories
Government Purchases: purchases by federal, provincial and municipal governments of final goods/services do NOT include government transfer payments or interest paid on public debt Divided into two major subcomponents: net government current expenditure on goods/services (e.g. office supplies), and government gross fixed capital formation (e.g. buying new structures/equipment) Net Investment: investment that adds to the total capital stock of the economy Net Exports: exports – imports Who Makes the Expenditure Households Firms
Type of Expenditure
Governments
Consumption Private-Sector Investment Government Purchases
Foreign Sector
Net Exports (or E-I)
Example Food, Clothes, Hair Cuts, New Car New Factories/ Equipment/ Houses, Increase in Inventory Stocks New School Buildings/ Roads, Docks, Salaries of Civil Servants Exported Manufactured Goods, Resource Exports, Financial Services provided by Domestic Residents to Foreigners
GDP and the Incomes of Capital and Labour - GDP in terms of income in four major components i. Wages, salaries, and supplementary labour income ii. Corporate and like profits before taxes (e.g. corporate income paid out as dividends) iii. Net farm and small business income (e.g. unincorporated businesses and most rental income) iv. Interest and miscellaneous investment income (e.g. interest/other investment income – net investment income from abroad – interest on public debt) - Three ways to think about GDP Production Expenditure Income Consumption Labour Income Market value of final goods and services
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Private-Sector Investments Government Purchases Net Exports
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Capital Income
Nominal GDP vs. Real GDP - Comparisons of economic activity at different times should always be done using 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 Nominal GDP: a measure of GDP in which the quantities produced are valued at current-year prices (measures the current-dollar value of production) GDP Deflator: a measure of the price level of goods/services included in GDP Formula: Real GDP = (Nominal GDP/GDP Deflator) X 100 Real GDP is Inappropriate as the Sole Economic Goal - Maximizing the growth of real GDP should not be the sole goal because… o Shortcomings of using total GDP as a measure of the benefits people derive from the output of the economy o Shortcoming of common proposals to increase GDP at the expense of other things that people value Gross National Product (GNP): the market value of goods/services produced by factors of production owned by the residents of a country; equivalent in magnitude to gross national income (GNI) But Real GDP per Capita is related to Living Standards - Real GDP is an objective measure of the market value of goods/services - Maximizing real GDP growth is not as appropriate as the sole normative goal for economic policy The Unemployment Rate Labour Force: the total number of unemployed and employed people in the economy Unemployment Rate: the number of unemployed people/labour force Participation Rate: the percentage of the working-age population in the LF Employment Rate: the percentage of the working-age population that is employed
Government Purchases: purchases by federal, provincial and municipal governments of final goods/services do NOT include government transfer payments or interest paid on public debt Divided into two major subcomponents: net government current expenditure on goods/services (e.g. office supplies), and government gross fixed capital formation (e.g. buying new structures/equipment) Net Investment: investment that adds to the total capital stock of the economy Net Exports: exports – imports Who Makes the Expenditure Households Firms
Type of Expenditure
Governments
Consumption Private-Sector Investment Government Purchases
Foreign Sector
Net Exports (or E-I)
Example Food, Clothes, Hair Cuts, New Car New Factories/ Equipment/ Houses, Increase in Inventory Stocks New School Buildings/ Roads, Docks, Salaries of Civil Servants Exported Manufactured Goods, Resource Exports, Financial Services provided by Domestic Residents to Foreigners
GDP and the Incomes of Capital and Labour - GDP in terms of income in four major components i. Wages, salaries, and supplementary labour income ii. Corporate and like profits before taxes (e.g. corporate income paid out as dividends) iii. Net farm and small business income (e.g. unincorporated businesses and most rental income) iv. Interest and miscellaneous investment income (e.g. interest/other investment income – net investment income from abroad – interest on public debt) - Three ways to think about GDP Production Expenditure Income Consumption Labour Income Market value of final goods and services
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Private-Sector Investments Government Purchases Net Exports
=
Capital Income
Nominal GDP vs. Real GDP - Comparisons of economic activity at different times should always be done using 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 Nominal GDP: a measure of GDP in which the quantities produced are valued at current-year prices (measures the current-dollar value of production) GDP Deflator: a measure of the price level of goods/services included in GDP Formula: Real GDP = (Nominal GDP/GDP Deflator) X 100 Real GDP is Inappropriate as the Sole Economic Goal - Maximizing the growth of real GDP should not be the sole goal because… o Shortcomings of using total GDP as a measure of the benefits people derive from the output of the economy o Shortcoming of common proposals to increase GDP at the expense of other things that people value Gross National Product (GNP): the market value of goods/services produced by factors of production owned by the residents of a country; equivalent in magnitude to gross national income (GNI) But Real GDP per Capita is related to Living Standards - Real GDP is an objective measure of the market value of goods/services - Maximizing real GDP growth is not as appropriate as the sole normative goal for economic policy The Unemployment Rate Labour Force: the total number of unemployed and employed people in the economy Unemployment Rate: the number of unemployed people/labour force Participation Rate: the percentage of the working-age population in the LF Employment Rate: the percentage of the working-age population that is employed
