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GDP, Inf lation, and Unemployment
 Why is the average income high in some countries
while it is low in others?
 Why do prices rise rapidly in some periods of time
while they are stable in others?
 Why do production and employment expand in some
years and contract in others?
 What, if anything, can the government do to promote
rapid growth in incomes, low inflation, and stable
employment?
 measures total income of a nation
 income = expenditure
 most closely watched econ stat
 “the market value of all final goods and services
produced within a country in a given period of time”
“the market value” = market prices
2. “of all” = all items produced in the economy and sold
legally
1.
a)
no illegal goods (drugs)
b) no items that never enter market (home-grown
veggies)
3. “final” = no intermediate goods
Yes: Hallmark card
b) No: paper sold to Hallmark to make card
a)
4.
“goods and services” = cars + haircuts
“produced” = current production
a) Yes: new car
b) No: used car
6. “within a country”
a) Canadian citizen works in US  US GDP
b) US citizen has factory in South Africa  SA GDP
7. “in a given period of time”
a) quarter (3 mos.) or 1 year
b) seasonal adjustment for quarters
5.
Y = C + I + G + NX
Y = GDP
C = consumption
I = investment
G = government purchases
NX = net exports (exports – imports)
Total (in
billions)
Per Person
Percent of Total
GDP (Y)
$8,511
$31,522
100%
Consumption (C)
5,808
21,511
68
Investment (I)
1,367
5,063
16
Gov’t. purchases (G)
1,487
5,507
18
Net exports (NX)
-151
-559
-2
 real GDP = the production of goods and services at
constant prices
 est. base year for price
 reflects in Δ in amts. produced
 better measure / used most often
 nominal GDP = the production of goods and services
at current prices
 reflects in Δ in amts. produced and Δ in price
Prices and Quantities
Year
P of Hot Dogs
Q of Hot Dogs
P of Hamburgers
Q of Hamburgers
2001
$1
100
$2
50
2002
2
150
3
100
2003
3
200
4
150
Year
Calculating Nominal GDP
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) =
$600
2003
($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) =
$1,200
Year
Calculating Real GDP (base year 2001)
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $600
2003
($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) =
“[GDP] does not allow for the health of our children, the
quality of their education, or the joy of their play. It odes
not include the beauty of our poetry or the strength of
our marriages, the intelligence of our public debate or
the integrity of our public officials. It measures neither
our courage, nor our wisdom, nor our devotion to our
country. It measures everything, in short, except that
which makes life worthwhile, and it can tell us
everything about America except why we are proud that
we are Americans.”
- Senator Robert Kennedy, 1968
Country
GDP per capita (2007 est.)
Luxembourg
United States
$79,400
$45,800
Australia
China
$37,300
$5,400
Nicaragua
$2,800
Zimbabwe
$200
Source: CIA World Factbook
Country
Real GDP per
capita, 1997
Life Expectancy
Adult Literacy
United States
$29,010
77 years
99%
Japan
24,070
80
99
Germany
21,260
77
99
Mexico
8,370
72
90
Brazil
6,480
67
84
Russia
4,370
67
99
Indonesia
3,490
65
85
India
1,670
63
53
Bangladesh
1,050
58
39
Nigeria
920
50
59
Source: Human Development Report 1999, United Nations.
What GDP leaves out:
 leisure
 value of goods/services produced at home
 volunteer work
 quality of environment
 income distribution
 GDP (purchasing power parity)
 value of all goods/services produced in the country
valued at U.S. prices
 GDP (official exchange rate)
 value of all goods/services, with price calculated in US$
according to official exchange rate
 GDP per capita
 average GDP per person
 Gross National Product (GNP)
 includes income our citizens earn abroad and excludes
income foreigners earn here
 increase in the overall level of prices in the economy
Post-WWI Germany had
hyperinflation:
Year
1918
1922
1923
Cost of Bread
½ mark
160 marks
2 bil. marks!!!
 3 categories:
employed
2. unemployed
3. not in the labor force
1.
labor force = # employed + # unemployed
 unemployment rate = # unemployed
x 100
labor force
