Download GDP

Principles of
UNIT II –
MEASURING NATIONAL INCOME, INFLATION AND UNEMPLOYMENT
BABY THOMAS 2016
6/15/2016
BABY THOMAS 2016
1
UNIT II –
MEASURING NATIONAL INCOME, INFLATION AND
UNEMPLOYMENT
1. Gross Domestic Product (GDP), components of GDP, real
and nominal GDP
2. Measurement of Gross Domestic Product
3. Components of GDP, real and nominal GDP
4. Gross National Product (GNP), Net National Product (NNP)
5. Meaning of inflation, types of inflation, economic effects of
inflation
6. Meaning of unemployment, measuring unemployment rate
Kinds of unemployment
6/15/2016
BABY THOMAS 2016
2
GROSS DOMESTIC PRODUCT (GDP)
• GDP is the total market value of all final
goods and services produced within a
country in a given period of time.
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
6/15/2016
BABY THOMAS 2016
3
THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
• “GDP is the Market Value . . .”
– Output is valued at market prices.
• “. . . Of All Final . . .”
– It records only the value of final goods, not intermediate
goods (the value is counted only once).
• “. . . Goods and Services . . . “
– It includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor
visits).
6/15/2016
BABY THOMAS 2016
4
THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
• “. . . Produced . . .”
– It includes goods and services currently produced, not
transactions involving goods produced in the past.
• “ . . . Within a Country . . .”
– It measures the value of production within the
geographic confines of a country.
6/15/2016
BABY THOMAS 2016
5
THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
• “. . . In a Given Period of Time.”
– It measures the value of production that takes place
within a specific interval of time, usually a year or a
quarter (three months).
6/15/2016
BABY THOMAS 2016
6
THE ECONOMY’S INCOME AND EXPENDITURE
• For an economy as a whole, income must equal expenditure
because:
– Every transaction has a buyer and a seller.
– Every dollar of spending by some buyer is a dollar of
income for some seller.
• The equality of income and expenditure can be illustrated
with the circular-flow diagram.
6/15/2016
BABY THOMAS 2016
7
The Circular-Flow Diagram
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
6/15/2016
BABY THOMAS 2016
8
Copyright © 2004 South-Western
THE COMPONENTS OF GDP
• GDP includes all items produced in the economy
and sold legally in markets.
• What Is Not Counted in GDP?
– GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
– It excludes items produced and sold illicitly, such
as illegal drugs.
6/15/2016
BABY THOMAS 2016
9
THE COMPONENTS OF GDP
• GDP (Y) is the sum of the following:
– Consumption (C)
– Investment (I)
– Government Purchases (G)
– Net Exports (NX)
Y = C + I + G + NX
6/15/2016
BABY THOMAS 2016
10
THE COMPONENTS OF GDP
• Consumption (C):
– The spending by households on goods and services, with
the exception of purchases of new housing.
• Investment (I):
– The spending on capital equipment, inventories, and
structures, including new housing.
6/15/2016
BABY THOMAS 2016
11
THE COMPONENTS OF GDP
• Government Purchases (G):
– The spending on goods and services by local, state, and
federal governments.
– Does not include transfer payments because they are not
made in exchange for currently produced goods or
services.
• Net Exports (NX):
– Exports minus imports.
6/15/2016
BABY THOMAS 2016
12
GDP and Its Components
6/15/2016
BABY THOMAS 2016
13
Copyright©2004 South-Western
GDP and Its Components (2001)
Government Purchases
18%
Net Exports
-3 %
Investment
16%
Consumption
69%
6/15/2016
BABY THOMAS 2016
14
REAL VERSUS NOMINAL GDP
• Nominal GDP values the production of goods and
services at current prices.
• Real GDP values the production of goods and
services at constant prices.
6/15/2016
BABY THOMAS 2016
15
REAL VERSUS NOMINAL GDP
• An accurate view of the economy requires adjusting
nominal to real GDP by using the GDP deflator.
6/15/2016
BABY THOMAS 2016
16
Real and Nominal GDP
6/15/2016
BABY THOMAS 2016
17
Copyright©2004 South-Western
GDP Deflator
• The GDP deflator is a measure of the level of prices
of all new, domestically produced, final goods and
services in an economy.
• The GDP deflator is a measure of the price level
calculated as the ratio of nominal GDP to real GDP
times 100.
• It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a rise in
the quantities produced.
6/15/2016
BABY THOMAS 2016
18
The GDP Deflator versus the Consumer Price
Index
• The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
100
Real GDP
6/15/2016
BABY THOMAS 2016
19
Real and Nominal GDP
6/15/2016
BABY THOMAS 2016
20
Copyright©2004 South-Western
GROSS NATIONAL PRODUCT (GNP)
Gross National Product (GNP) is the total market
value of goods and services produced by all
nationals of a country within and outside the
country for a given period.
6/15/2016
BABY THOMAS 2016
21
NET NATIONAL PRODUCT (NNP)
• Net National Product (NNP) is the total
market value of goods and services produced
by all nationals of a country within and
outside the country for a given period after
deducting depreciation.
6/15/2016
BABY THOMAS 2016
22
INFLATION
• Inflation is the percentage change in an economy’s
overall price level.
6/15/2016
BABY THOMAS 2016
23
TYPES OF INFLATION
Demand pull inflation
• Demand pull inflation occurs when aggregate demand exceeds the
aggregate supply
• Demand pull inflation is commonly referred to too much money
chasing after too few goods and services
• Rise in aggregate demand may be due to a rise in consumer
demand or level of government expenditure or investment by firm
or country’s exports or a combination of the four
6/15/2016
BABY THOMAS 2016
24
TYPES OF INFLATION
• Cost-push inflation
• Cost-push inflation refers to an increase in the general price
level associated with an increase in the cost of production.
• Inflation occurs due to the increase in the costs or supply
prices of goods caused by increase in the cost of inputs.
6/15/2016
BABY THOMAS 2016
25
ECONOMIC EFFECTS OF INFLATION
The economic effects of inflation are as follows:
1.
2.
3.
4.
5.
Inefficient market
Hoarding of Commodities
Discourages investment & saving
Higher income tax rates
Increased imports and reduced exports.
6/15/2016
BABY THOMAS 2016
26
UNEMPLOYMENT
Unemployment is the inability of labor-force
participants to find jobs.
6/15/2016
BABY THOMAS 2016
27
MEASURING UNEMPLOYMENT RATE
• The labor force is defined as the sum of the
employed and unemployed.
• The unemployment rate is defined as the
percentage of the labor force that is
unemployed.
Unemployment Rate =
Example:
Number of Unemployed  100
Labor Force
Labor Force = 145.0 + 10.1 = 155.1 million
Unemployment rate = (10.1/155.1) x 100 = 6.5%
6/15/2016
BABY THOMAS 2016
28
Kinds of Unemployment
There are four types of unemployment:
1.
2.
3.
4.
Seasonal Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
6/15/2016
BABY THOMAS 2016
29
Seasonal Unemployment
Seasonal unemployment is unemployment due
to seasonal changes in employment .
6/15/2016
BABY THOMAS 2016
30
Frictional Unemployment
Frictional unemployment is a brief period
of unemployment experienced by people
moving between jobs or into the labor
market. People have the skills and
knowledge necessary to get a job, and the
jobs are available.
Examples of frictionally unemployed
people include new college graduates and
people quitting a job and looking for
something different or better.
6/15/2016
BABY THOMAS 2016
31
Structural Unemployment
Structural unemployment is unemployment caused by a mismatch
between the skills or location of job seekers and the requirements
or location of available jobs.
Jobs may be available in other geographic areas or for individuals
with specific skills and abilities.
Examples include laid off steelworkers in the 1980s and defense
contractors in the 1990s. Also teenagers and others with a lack of
job skills are included.
6/15/2016
BABY THOMAS 2016
32
Cyclical Unemployment
Cyclical unemployment is unemployment
caused by lack of job vacancies; an
inadequate level of aggregate demand.
Cyclical unemployment commonly occurs
during recessions. Companies cut back
on workers due to reduced sales, fears of
an economic recession, and insufficient
consumer demand.
6/15/2016
BABY THOMAS 2016
33
Principles of
UNIT II
MEASURING NATIONAL INCOME, INFLATION AND UNEMPLOYMENT
BABY THOMAS 2016
6/15/2016
BABY THOMAS 2016
34