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Measuring Economic
Activity: GDP and
Unemployment
MB
MC
MB MC
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….”
Copyright c 2004 by The McGraw-Hill
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 2
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Introduction

“The unemployment rate last month
rose to 6.1 percent, its highest level
since….”
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 3
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Introduction

“Inflation appears subdued as the
consumer price index registered an
increase of only 0.2 percent last
month…”
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 4
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
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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 5
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
Gross Domestic Product:
Measuring the Nation’s Output
Market Value

Market value is used to aggregate the
quantities of different goods and services
into one measurement
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 6
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
Gross Domestic Product:
Measuring the Nation’s Output
Market Value

Calculating GDP for Orchardia
 Total
production = 4 apples, 6 bananas, and 3
pairs of shoes
o Price of apples = $0.25
o Price of bananas = $0.50
o Price of shoes = $20
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 7
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
Gross Domestic Product:
Measuring the Nation’s Output
Market Value

Calculating GDP for Orchardia
 GDP
o (4 x $0.25) + (6 x $0.50) + (3 x $20) = $64
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 8
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
Gross Domestic Product:
Measuring the Nation’s Output
Market Value

Observation
 More
expensive items receive a higher weight
than cheaper items.

Orchardia’s production changes to 3
apples, 3 bananas , and 4 shoes
 GDP
o (3 x $0.25) + (3 x $0.50) + (4 x $20) = $82.25
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 9
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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.
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 10
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
Gross Domestic Product:
Measuring the Nation’s Output
Economic Naturalist
Why has female participation in the labor
market increased by so much?
 What explains the trends illustrated in the
previous figure?

 Hint:
Copyright c 2004 by The McGraw-Hill
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The concept of comparative advantage
Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 11
MB MC

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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 12
MB MC

Gross Domestic Product:
Measuring the Nation’s Output
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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 13
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
Gross Domestic Product:
Measuring the Nation’s Output
Final Goods and Services

Bread Production
 Milling
Co. pays $0.50 for wheat
 Bakery pays $1.20 for flour
 Bakery sells bread for $2.00
 Contribution to GDP = $2.00
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 14
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
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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 15
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
Gross Domestic Product:
Measuring the Nation’s Output
Example: A good that can be either
intermediate or final:

Capital Good
A
long-lived good, which is itself produced and
used to produce other goods and services
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 16
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
Gross Domestic Product:
Measuring the Nation’s Output
Example: A good that can be either
intermediate or final:

Capital Good
 Newly
produced capital goods are classified as
final goods.
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 17
MB MC

Gross Domestic Product:
Measuring the Nation’s Output
Value Added

For any firm, the market value of its
product or service minus the cost of inputs
purchased from other firms
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 18
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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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 19
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
Gross Domestic Product:
Measuring the Nation’s Output
Produced Within a Country During a
Given Period

Domestic
 Only
production that takes place within a
country’s border
 Examples
o Cars produced in the U.S. by foreign owned
companies are counted.
o Car produced in Mexico by U.S. owned companies
are not counted.
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 20
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
Gross Domestic Product:
Measuring the Nation’s Output
Produced Within a Country During a
Given Period

Given Period
 Counts
only goods produced during the defined
period such as a calendar year
 Examples
o The sale of used goods is not counted.
o Real estate commissions are counted.
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 21
MB MC
Expenditure Components of
U.S. GDP, 2001 (billions of dollars)
Consumption
6,987.0
Durable goods
835.9
Nondurable goods
2,041.3
Services
4,109.9
Investment
1,586.0
Business fixed investment
1,201.6
Residential investment
444.8
Inventory investment
-60.3
Government purchases
1,858.0
Net exports
-348.9
Exports
1,034.1
Imports
1,383.0
Total: Gross domestic product
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
10,082.2
Slide 22
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
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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 23
MB MC

The Expenditure Method for
Measuring GDP
Investment

Spending by firms on final goods and
services, primarily capital goods and
housing
 Business
fixed investment
 Residential investment
 Inventory investment
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 24
MB MC

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

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 25
MB MC

The Expenditure Method for
Measuring GDP
Net Exports

Exports minus imports
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 26
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The Expenditure Method for
Measuring GDP

Y = gross domestic product, or output

C = consumption expenditure

I = investment

G = government purchases

NX = net exports
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 27
MB MC

The Expenditure Method for
Measuring GDP
GDP
Y  C  I  G  NX
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 28
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‘Twin Deficit’ Accounting
Y = C + I + G + NX
(Y -C -T) + (T-G) - I
= NX (Net Exports)
S(priv) + S(gov) – Investment
≡ Net Nat’l Saving
Net Nat’l Savings = Net Exports
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 29
MB MC

The Expenditure Method for
Measuring GDP
Example

An economy produces 1 million cars
valued at $15,000 each.
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 30
MB MC

The Expenditure Method for
Measuring GDP
Production

GDP = 1 million x $15,000 = $15 billion
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 31
MB MC

The Expenditure Method for
Measuring GDP
Expenditure

700,000 sold to consumers
C

200,000 sold to businesses
I

= 200,000 x $15,000 = $3.0 billion
50,000 sold to government
G

= 700,000 x $15,000 = $10.5 billion
= 50,000 x $15,000 = $.75 billion
25,000 exported (no imports)
 NX
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= 25,000 x $15,000 = $.375 billion
Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 32
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
The Expenditure Method for
Measuring GDP
Expenditure
975,000 sold
 25,000 inventory

I

= 25,000 x $15,000 = $.375 billion
GDP = C + I + G + NX

$10.5 + (3.0 +.375) + .75 + .375 = $15.0
billion
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 33
MB MC

GDP and the Incomes of
Capital and Labor
GDP = Labor Income + Capital Income

Labor income
 Equals
75% of GDP
 Includes:
o Wages
o Salaries
o Income of the self-employed
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 34
MB MC

GDP and the Incomes of
Capital and Labor
GDP = Labor Income + Capital Income

Capital income
 Equals
25% of GDP
 Includes:
o
o
o
o
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Profits
Rent
Interest
Royalties
Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 35
MB MC
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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 36
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Prices and Quantities in 2000 and 2004
Quantity of
pizzas
Price of
pizzas
Quantity of
calzones
Price of
calzones
2000
10
$10
15
$5
2004
20
$12
30
$6
GDP
•2000 = (10)($10) + (15)($5) = $175
•2004 = (20)($12) + (30)($6) = $420
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Observations
•Output doubled
•GDP increased by 2.4 times
•Prices also rose
•GDP overstates economic growth
Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 37
MB MC
Nominal GDP versus 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
 Real GDP measures the actual physical
volume of production

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 38
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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

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 39
MB MC
Prices and Quantities in 2000 and 2004
Quantity of
pizzas
Price of
pizzas
Quantity of
calzones
Price of
calzones
2000
10
$10
15
$5
2004
20
$12
30
$6
•2000 = base year
•2004 Real GDP = (20)($10) + (30)($5) = $350
•2000 Real GDP = (10)($10) + (15)($5) = $175
Real GDP = Nominal GDP in the base year
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 40
MB MC

Real GDP is not the Same as
Economic Well-Being
Leisure Time
Shorter work week
 Start working later
 Retire earlier

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 41
MB MC

Real GDP is not the Same as
Economic Well-Being
Economic Naturalist

Why do people work fewer hours today
than their great-grandparents did?
 Hint:
Copyright c 2004 by The McGraw-Hill
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Use the concept of opportunity cost
Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 42
MB MC

Real GDP is not the Same as
Economic Well-Being
Nonmarket Economic Activities
Household production
 Volunteer services
 Nonmarket activities are more important in
poor countries
 Underground economy

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 43
MB MC

Real GDP is not the Same as
Economic Well-Being
Environmental Quality and Resource
Depletion
Benefits of environment quality are not
measured.
 GDP is not adjusted for resource depletion.

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 44
MB MC

Real GDP is not the Same as
Economic Well-Being
Quality of Life
Crime rates
 Traffic congestion
 Civic organizations
 Open space

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 45
MB MC

Real GDP is not the Same as
Economic Well-Being
Poverty and Economic Inequality

GDP does not capture the effects of
income inequality
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 46
MB MC
GDP & Basic Indicators of Well-Being
All developing
countries
Least developed
countries
GDP per person
(U.S. dollars)
3,530
1,170
25,860
Life expectancy at
birth (years)
64.5
51.7
78.0
Infant mortality rate
(per 1,000 live births)
61
100
6
Under-5 mortality rate
(per 1,000 live births)
89
159
6
Doctors
(per 100,000 people)
78
30
252
Incidence of HIV/Aids
(% in 15-49 age group)
1.3
4.3
0.3
Undernourished
people (%)
18
38
Negligible
Primary enrollment
rate (as % of age group)
85.7
60.4
99.9
Secondary enrollment
rate (as % of age group)
60.4
31.2
96.2
Adult literacy rate (%)
72.9
51.7
98.6
Indicator
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Industrialized
countries
Slide 47
MB MC

But GDP is Related to
Economic Well-Being
Economic Naturalist

Why do far fewer children complete high
school in poor countries than in rich
countries?
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 48
MB MC
The Unemployment Rate

Measuring Unemployment

The Bureau of Labor Statistics (BLS)
surveys 60,000 randomly selected
households each month
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 49
MB MC
The Unemployment Rate

Measuring Unemployment

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.
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 50
MB MC
The Unemployment Rate

Measuring Unemployment

Labor force = employed + unemployed
unemployed
Unemployme nt rate 
labor force
labor force
Participation rate 
population 16 and over
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 51
MB MC
U.S. Employment Data,
July 2002 (in millions)
Employed
134.04
Plus:
Unemployed
8.35
Equals: Labor force
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%
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 52
MB MC
The U.S. Unemployment
Rate since 1960
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 53
MB MC
The Unemployment Rate

The Cost of Unemployment
Economic
 Psychological
 Social

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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 54
MB MC
The Unemployment Rate

The Duration of Unemployment

The impact of unemployment is influenced
by how long individuals have been
unemployed.
 The
unemployment spell
 The duration of unemployment
 Long-term unemployed
 Chronically unemployed
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 55
MB MC
The Unemployment Rate

Unemployment Spell


A period during which an individual is
continuously unemployed
Duration

The length of an unemployment spell
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 56
MB MC
The Unemployment Rate

The Duration of Unemployment
Discouraged workers
 Involuntary part-time workers
 In July 2002:

 Official
unemployment rate = 5.9%
 Including discouraged workers and involuntary
part-time worker = 9.4%
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 57
MB MC
The Unemployment Rate

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
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Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 58
End of
Chapter
MB
MC