Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Measuring Economic Activity: GDP and Unemployment Principles of Macroeconomics Dr. Gabriel X. Martinez Ave Maria University 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….” “The unemployment rate last month rose to 6.1 percent, its highest level since….” “Inflation appears subdued as the consumer price index registered an increase of only 0.2 percent last month…” Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 2 Gross Domestic Product: Measuring the Nation’s Output • Measuring economic variables is essential. – You are a tenth-century doctor. – Your best guess at human anatomy is pig’s anatomy. – Your best guess at a good cure is leeches. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 3 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 4 Gross Domestic Product: Measuring the Nation’s Output • Measuring economic variables is essential. – We cannot understand the economy without precise measurement of economic activity. – Governments cannot use economic policy if they don’t know what is happening. – Firms and individuals need precise information. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 5 The Three Faces of GDP Production Market value of all final goods and services produced in a country during a given period Expenditure Income Consumption Labor Income = = Investment Government purchases Capital Income Net exports Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 6 The Production Approach to GDP agriculture mining othergovernment services utilities hotel and food arts and construction entertainment health care education administrative and waste services management of companies professional services manufacturing real estate, rental and leasing wholesale finance and insurance Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. transportationretail and warehousing information Chapter 18: Measuring Economic Activity: GDP and Unemployment 8 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. – We’ll examine each part of this definition in detail. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 9 Gross Domestic Product: Measuring the Nation’s Output • The Market Value … – Market value is used to aggregate the quantities of different goods and services into one measurement. – We use prices, at current levels, for aggregation. • E.g., we could use today’s prices to measure today’s GDP. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 10 Market Value and GDP Quantity Unit Price Market Value PxQ Apples 4 $0.25 $1.00 Bananas 6 $0.50 $3.00 Shoes 3 $20.00 $60.00 Total $64.00 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 11 Gross Domestic Product: Measuring the Nation’s Output • Market Value – More expensive items receive a higher weight than cheaper items. – Suppose production of cheap items falls but production of expensive items rises: GDP will often rise. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 12 Market Value and GDP Quantity Unit Price Market Value PxQ Quantity Unit Price Market Value PxQ Apples 4 $0.25 $1.00 3 $0.25 $0.75 Bananas 6 $0.50 $3.00 3 $0.50 $1.50 Shoes 3 $20.00 $60.00 4 $20.00 $80.00 Total $64.00 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment $82.25 13 Gross Domestic Product: Measuring the Nation’s Output • Market Value – Many goods and services that do not have market value are not counted in GDP. • That is, goods and services that cannot be bought and sold (such as care of one’s own children and homemaking) do not count. • If I pay someone to take care of my children, the quality of child care may decline, but GDP will rise. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 14 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. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 15 Gross Domestic Product: Measuring the Nation’s Output • Market Value – Goods and services provided by the Government do not have market value, but they are counted in GDP. • But they do have dollar figures attached to them. • One could imagine that these goods and services could be bought and sold, even if they often are not. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 16 See Excel Handout “Calculating Nominal GDP” Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 17 Gross Domestic Product: Measuring the Nation’s Output • … of Final Goods or Services … – Not all goods and services that can be bought and sold are counted. – Intermediate goods (non-durable goods used to produce other goods) are not counted. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 18 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. • 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. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 19 Gross Domestic Product: Measuring the Nation’s Output • Final Goods and Services: Example • Milling Co. pays $0.50 for wheat to make flour. • Bakery pays $1.20 for flour to make bread. • Bakery sells bread for $2.00 • Contribution to GDP = $2.00 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 20 Gross Domestic Product: Measuring the Nation’s Output • Value Added – For any firm, Market Value of Good or Service Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Cost of Inputs bought from other firms Chapter 18: Measuring Economic Activity: GDP and Unemployment Value Added 21 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 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 22 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 – The contribution of the assistant is included in the final market value of the haircut. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 23 Gross Domestic Product: Measuring the Nation’s Output • Example: – Capital Good • A long-lived good, which is itself produced and used to produce other goods and services. – – – – – Tools. Buildings. Factories. Machines. Software. • Newly produced capital goods are classified as final goods. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 24 Gross Domestic Product: Measuring the Nation’s Output • … Produced Within a Country … – Domestic • Only production that takes place within a country’s border. • Examples – Cars produced in the U.S. by foreign owned companies are counted. – Car produced in Mexico by U.S. owned companies are not counted. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 25 Gross Domestic Product: Measuring the Nation’s Output • … During a Given Period – Given Period • Counts only goods produced during the defined period such as a calendar year. • Examples – The sale of used goods is not counted. – Real estate commissions, earned this year, on a house produced 3 years ago, are counted (but the sale of the house is not). Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 26 The Expenditure Approach to GDP The Expenditure Method for Measuring GDP • Every good that is produced must be purchased. – If it is a consumer good, by consumers. – If it is a capital good, by firms. – If it is a government good, by governments. • So measuring the market value of production is identical to measuring the dollar value of expenditures. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 28 Expenditure Components of U.S. GDP, 2001 (billions of dollars) Consumption Durable goods 69.30% 1,586.0 15.73% 1,858.0 18.43% -348.9 -3.46% 835.9 Nondurable goods 2,041.3 Services 4,109.9 Investment Business fixed investment 1,201.6 Residential investment 444.8 Inventory investment -60.3 Government purchases Net exports Exports 1,034.1 Imports -1,383.0 Total: Gross domestic product Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 6,987.0 Chapter 18: Measuring Economic Activity: GDP and Unemployment 10,082.2 100.00% 29 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 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 30 The Expenditure Method for Measuring GDP • Investment – Spending by firms on final goods and services, primarily capital goods and housing. • Business fixed investment – Increases the country’s capacity to produce. • Residential investment • Inventory investment – Inventories accumulate if sales are less than production. – Inventory is treated as “bought” by firms. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 31 The Expenditure Method for Measuring GDP • Investment – Purchases of new capital (durable goods used to produce other goods). • Financial investment – Purchases of stocks (and so), which involve buying existing capital. – This is not investment in our sense. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 32 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. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 33 The Expenditure Method for Measuring GDP • Net Exports – Exports minus imports • Exports – Goods and services produced domestically but sold abroad. • Imports – Goods and services produced abroad but bought domestically. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 34 The Expenditure Method for Measuring GDP • Y = gross domestic product, or output • C = consumption expenditure • I = investment • G = government purchases • NX = net exports Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 35 The Expenditure Method for Measuring GDP • The Expenditure Method for Measuring GDP Y C I G NX Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 36 The Expenditure Method for Measuring GDP • Example – An economy produces 1 million cars valued at $15,000 each. • From the production side, this is … – GDP = 1 million x $15,000 = $15 billion Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 37 The Expenditure Method for Measuring GDP • From the Expenditure side … – 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 – 30,000 exported – 5,000 imported • NX = 25,000 x $15,000 = $.375 billion Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 38 The Expenditure Method for Measuring GDP • From the Expenditure side (cont.)… – 975,000 sold – 25,000 inventory • Additional I = 25,000 x $15,000 = $0.375 billion • GDP = C + I + G + NX – $10.5 + (3.0 +0.375) + .75 + .375 = $15.0 billion Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 39 The Income Approach to GDP The Income Method for Measuring GDP • Every purchase means someone earns income: – If I buy a pen, the bookstore earns $0.60. – If Ford buys a factory, the builder earns $60 million. – If the government buys a highway, the contractor earns $600 million. – If Americans buy French computers, the French earn $50,000. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 41 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 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 42 GDP and the Incomes of Capital and Labor • GDP = Labor Income + Capital Income – Capital income • Equals 25% of GDP • Includes: – – – – Profits Rent Interest Royalties Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 43 Percentage of Aggregate Income Received by Income Quintiles, 2001 Quintiles Lowest 2nd 3rd 4th Highest Perfect Equality 20 20 20 20 20 Income 3.5 8.8 14.5 23.1 50.1 Source: US Census Bureau, Current Population Survey, 2002 Annual Demographic Supplement A “Quintile” is a fifth of the population. So the poorest 20% of all Americans is the “lowest quintile”; the next-poorest 20% is the “second quintile,” and so on. The richest 20% is the “highest quintile.” Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 44 The Three Faces of GDP Production Market value of final goods and services Expenditure Income Consumption Labor Income = = Investment Government purchases Capital Income Net exports Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 45 Nominal GDP versus Real GDP Prices and Quantities in 2000 and 2004 Quantity of pizzas Price of pizzas Quantity of calzones Price of calzones GDP 2000 (10 x $10) + (15 x $5) = $175 2004 (20 x $12) + (30 x $6) = $420 Observations •Physical production of each good doubled •GDP increased by 2.4 times •Aha!! Prices also rose •Market-Value GDP overstates economic growth Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 47 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. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 48 Nominal GDP versus Real GDP • Real GDP – Real GDP measures the actual physical volume of production. – To do this, we must eliminate the effect of changing prices. How? – The quantities produced are valued at the prices in a base year rather than at current prices. This is Real GDP. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 49 Prices and Quantities in 2000 and 2004 Quantity of pizzas Price of pizzas Quantity of calzones Price of calzones GDP 2000 (10 x $10) + (15 x $5) = $175 2004 (20 x $12) X + (30 x $6) X = $420 X (20 x $10) + (30 x $5) = $350 Observations •Physical production of each good doubled •Real GDP also doubles. •We use the prices of the year 2000. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 50 See Excel Handout “Real versus Nominal GDP” Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 51 Nominal GDP, Real GDP, and Inflation Real GDP Growth Rate Nominal GDP Growth Rate – Inflation Rate Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 52 5.00% 4.00% 3.00% 2.00% 1.00% -2.00% Real GDP growth rate Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Nominal GDP growth rate Chapter 18: Measuring Economic Activity: GDP and Unemployment Inflation Rate 53 Jan-04 Jan-02 Jan-00 Jan-98 Jan-96 Jan-94 Jan-92 Jan-90 Jan-88 Jan-86 Jan-84 Jan-82 Jan-80 Jan-78 Jan-76 Jan-74 Jan-72 Jan-70 Jan-68 Jan-66 Jan-64 Jan-62 Jan-60 Jan-58 Jan-56 Jan-54 Jan-52 Jan-50 -1.00% Jan-48 0.00% GDP and Well-Being Real GDP is not the Same as Economic Well-Being • GDP doesn’t take into account – The increase in Leisure Time. – Nonmarket Economic Activities. – Environmental Quality and Resource Depletion. – Increases or decreases in the Quality of Life – Poverty and Economic Inequality Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 55 Real GDP is related to Economic Well-Being • Higher GDP often leads to more – Life expectancy at birth – Doctors per person – School enrollments – Literacy • Higher GDP also leads to less – Infant mortality – Incidence of AIDS – Undernourishment Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 61 Unemployment The Unemployment Rate • Measuring Unemployment – The Bureau of Labor Statistics (BLS) surveys 60,000 randomly selected households each month. – 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. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 65 The Unemployment Rate • Measuring Unemployment – Labor force = employed + unemployed unemployed Unemployme nt rate labor force labor force Participation rate population 16 and over Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 66 Working-Age Population Frictional Employed Labor Force Unemployed Homemakers, Retired People, Disabled, Discouraged Workers, Students Ages 0 - 15 Structural Cyclical Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 67 U.S. Employment Data, July 2002 (in millions) Employed 134.04 Plus: Unemployed Equals: Labor force 8.35 142.39 Plus: Not in labor force 71.63 Equals: Working-age (over 16) population 214.02 Unemployment rate = unemployed/labor force = 8.35/142.39 = 5.9% Participation rate = labor force/working-age population = 142.39/214.02 = 66.5% Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 68 The U.S. Unemployment Rate since 1960 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 69 The Unemployment Rate • The Cost of Unemployment – Economic • People don’t receive income. Resources are not utilized. – Psychological • Loss of self-esteem, depression, suicide. – Social • Increases in crime, drug use, etc. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 70 The Unemployment Rate • The Duration of Unemployment – The impact of unemployment is influenced by how long individuals have been unemployed. • The unemployment spell: time without employment while in the labor force. • The duration of unemployment: length of spell. • Long-term unemployed: 6 mths or more • Chronically unemployed: in and out of work, in and out of the labor force. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 71 The Unemployment Rate • In July 2002: – Official unemployment rate = 5.9% – Including discouraged workers and involuntary part-time worker = 9.4% • 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 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 72 Workers, Wages, and Unemployment in the Modern Economy Unemployment: Types, Causes, and Costs Types of Unemployment and Their Costs • Three kinds of unemployment – Frictional Unemployment • Due to minor problems – Structural Unemployment • Due to lack of skills, etc. – Cyclical Unemployment • Due to recessions Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 74 Types of Unemployment and Their Costs • Frictional Unemployment – The short-term unemployment associated with the process of matching workers with jobs Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 75 Types of Unemployment and Their Costs • Characteristics of Frictional Unemployment – Short-term – May lead to a better match between the worker and job – Necessary in a dynamic economy Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 76 Types of Unemployment and Their Costs • Structural Unemployment – Long-term and chronic unemployment that exists even with the economy is producing at a normal rate Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 77 Types of Unemployment and Their Costs • Causes of Structural Unemployment – Lack of skills, language barrier, discrimination – Long-term mismatch – Structural features of the labor market, such as technological change. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 78 Types of Unemployment and Their Costs • Cost of Structural Unemployment – Loss in economic output – May not develop new skills – Psychological damage Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 79 Types of Unemployment and Their Costs • Cyclical Unemployment – The extra unemployment that occurs during periods of recession – May lead to discouraged workers – But it may be an occasion for far-reaching change and re-training. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 80 Impediments to Full Employment • Labor Unions – Benefits • Reduced worker exploitation • Support progressive labor legislation • Increase productivity • Promote democracy in the workplace Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 82 Impediments to Full Employment • Labor Unions – Costs • Unions cause otherwise competitive labor markets to function inefficiently. • Unions may prevent companies from competing in the global economy. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 83 Impediments to Full Employment • Unemployment Insurance: – Helps to reduce the costs of unemployment. – May give the unemployed an incentive to search longer and less intensely. – Unemployment benefits must balance the benefit of providing support to the worker with the cost of reducing the incentive to work. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 84 Unemployment • Economic Naturalist – Why are unemployment rates so high in western Europe? – Europe has significant Structural Rigidities • Regulated labor markets – It’s difficult to fire or hire people. • High minimum wages • Generous unemployment benefits • Powerful labor unions Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 87 Unemployment Rates in Western Europe, 1980 - 2001 Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 88 What You’ve Learned Today • The meaning and measurement of GDP. • The meaning of: market value, final good, capital good, and domestic. • The components of aggregate expenditure. • Basics of income distribution. • The difference between real and nominal GDP. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 89 What You’ve Learned Today • The difference between GDP and welfare. • The meaning and measurement of unemployment. • The types, causes, and costs of unemployment. Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Measuring Economic Activity: GDP and Unemployment 90