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Production, Income and Employment

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Title: Production, Income and Employment


1
Production, Income and Employment
  • Two main concepts
  • Gross Domestic Product (GDP)
  • Unemployment Rate
  • How does the government get these statistics?
  • What do they tell us about the economy?
  • What do they NOT tell us about the economy?
  • How are they used (and sometimes misused)?

2
GDP A Definition
  • The nations gross domestic product (GDP)
  • Total value of all final goods and services
    produced for the marketplace during a given
    period within the nations borders

3
Production and Gross Domestic Product, GDP A
Definition
  • The total value
  • Add up dollar value of every good or servicethe
    number of dollars each product is sold for
  • Using the dollar prices at which goods and
    services actually sell could create a problem
  • If prices rise, then GDP will rise, even if we
    are not actually producing more
  • GDP must be adjusted to take away the effects of
    inflation
  • …of all final…
  • We do not count every good/service produced in
    the economy
  • Only those that are sold to their final users
  • Avoids over-counting intermediate products when
    measuring GDP
  • Value of all intermediate products is
    automatically included in value of final products
    they are used to create

4
Figure 1 Stages of Production
5
Production and Gross Domestic Product, GDP A
Definition
  • …goods and services…
  • We all know a good when we see one
  • Final services count in GDP in the same way as
    final goods
  • …produced…
  • In order to contribute to GDP, something must be
    produced
  • During the period being considered

6
Production and Gross Domestic Product, GDP A
Definition
  • …for the marketplace…
  • GDP does not include all final goods and services
    produced in the economy, just those that are sold
  • …during a given period…
  • GDP measures production during some specific
    period
  • Only goods produced during that period are
    counted
  • GDP is actually measured for each quarter, and
    then reported as an annual rate for the quarter
  • Once 4th quarter figures are in, government
    reports official GDP figure for entire year

7
Production and Gross Domestic Product, GDP A
Definition
  • …within the nations borders
  • GDP measures output produced within U.S. borders
  • regardless of whether it was produced by
    Americans
  • Americans abroad are not counted
  • However, foreigners producing goods or services
    within the country are

8
Who measures GDP?
  • Bureau of Economic Analysis (BEA) www.bea.gov
  • National Income and Product Accounts
  • GDP in Billions. Quarterly, Seasonally Adjusted
    Annual Rates in 2000 dollars
  • 2008-QI 11,646.0
  • 2008-QII 11,727.4
  • 2008-QIII 11,712.4
  • 2008-QIV 11,599.4
  • Actual GDP for 2008 is the last figure. The other
    three are projections.

9
How is GDP measured?
  • The BEA calculates GDP in several ways
  • The Expenditure Approach
  • Sum of all expenditures on final goods and
    services in the economy
  • The Value Added Approach
  • Sum of all value added in the economy
  • The Factor Payment (or Income) Approach
  • Sum of all payments made to factors of production
    in the economy
  • Different approaches are good for cross checking
  • They also tells us something about the structure
    of the economy.

10
The Expenditure Approach
  • Output is divided into four categories according
    to which group in the economy purchases it as
    final users
  • Consumption goods and services (C)purchased by
    households
  • Private investment goods and services
    (I)purchased by businesses
  • Government goods and services (G)purchased by
    government agencies
  • Net exports (NX)purchased by foreigners

11
The Expenditure Approach to GDP
  • Everyone who purchases a good or service included
    in U.S. GDP must be either a
  • U.S. household
  • U.S. business
  • U.S. government agency (including state and local
    government)
  • Part of the foreign sector
  • When we add up the purchases of all four groups
    we get GDP
  • GDP C I G NX

12
Consumption Spending
  • Consumption is the part of GDP purchased by
    households as final users
  • Almost all goods and services bought by
    households during the year is included as part of
    consumption spending
  • Except…
  • Construction of new private homes counted as
    private investment
  • Non-market goods and services included in GDP
  • Total value of all food products that farm
    families produce and consume themselves
  • Total value of the housing services provided by
    owner-occupied homes

13
Consumption Spending
  • All household spending is not part of GDP
  • Purchase of a used car
  • Purchase of a previously owned house
  • Purchase of stocks and bonds
  • Charitable donation
  • Only expenditures on final goods and services are
    considered

14
Private Investment
  • The three components of private investment
  • Business Purchases of Plant, Equipment, and
    Software
  • These are not intermediate goods-they last for
    several years
  • Are regarded as final goods, and firms that buy
    them as final users of those goods
  • New Home Construction
  • House will continue to provide services into the
    future, so it is more like capital than like
    consumption.
  • Changes in Inventories
  • We count the charge in firms inventories as part
    of investment in measuring GDP
  • Why?
  • When goods are produced but not sold during the
    year, they end up in some firms inventory stocks
  • Will provide services in the future, when they
    are finally sold and used
  • If change in inventories is negative, some goods
    produced in the past are being sold now and
    should be subtracted from GDP

15
Other Investment
  • In practice, apart from private investment, we
    also have
  • Government Investment
  • Capital stock owned and operated by
    governmentfederal, state, and local police
    cars, schools, military equipment etc.
  • Measured in government expenditure
  • Consumer durables
  • Goods such as furniture, automobiles, washing
    machines, home computers are capital goods
  • Provide services for many years. Measured in
    consumption expenditure
  • Human capital
  • To measure the increase in capital stock most
    broadly we include the additional skills and
    training acquired by workforce during the year.
  • Measured in consumption expenditure.
  • Some capital stock is used up every year
    (depreciation)
  • That is subtracted from investment to get net
    investment

16
Government Purchases
  • Can be consumption or investment
  • Government purchases include
  • Goods such as fighter jets, police cars, school
    buildings, spy satellites, etc.
  • Services such as those performed by police,
    legislators, and military personnel
  • Government is considered to be a purchaser even
    if it actually produces the goods or services
    itself

17
Government Purchases
  • Important to distinguish between
  • Government purchases
  • Which are counted in GDP
  • Government outlays
  • As measured by local, state, and federal budgets
    Transfer payments represent money redistributed
    from one group of citizens (taxpayers) to another
    (poor, unemployed, elderly)
  • Transfers are included in government budgets as
    outlays
  • NOT AS GDP
  • They are not purchases of currently produced
    goods and services

18
Net Exports
  • We also trade with the rest of the world
  • Many items we spend on are imported and some U.S.
    goods exported
  • Deduct all U.S. imports during the year, leaving
    us with just output produced in United States
  • Add U.S. exports during the year, including
    output produced in the U.S. but not consumed here
  • Add Net Exports (exports-imports) to other
    expenditure.

19
The Compositon of GDP 2009 Q2
20
The Value-Added Approach
  • Value added
  • Firms contribution to a product or
  • Revenue it receives for its output
  • Minus cost of all the intermediate goods that it
    buys
  • GDP is sum of values added by all firms in economy

21
Figure 1 Stages of Production
22
The Factor Payments Approach
  • In any year, value added by a firm is equal to
    total factor payments made by that firm
  • GDP equals sum of all firms value added
  • Each firms value added is equal to its factor
    payments
  • GDP must equal total factor payments made by all
    firms in the economy
  • All of these factor payments are received by
    households in the form of wages and salaries,
    rent, interest or profit
  • GDP is measured by adding up all of the
    incomewages and salaries, rent, interest, and
    profitearned by all households in the economy
  • Gives us an important insight into the
    macroeconomy
  • Total output of economy (GDP) is equal to total
    income earned in the economy

23
Measuring GDP A Summary
  • Different ways to calculate GDP
  • Expenditure Approach
  • GDP C I G NX
  • Value-Added Approach
  • GDP Sum of value added by all firms
  • Factor Payments Approach
  • GDP Sum of factor payments made by all firms
  • GDP Wages and Salaries interest rent
    profit
  • GDP Total household income

24
Real Versus Nominal GDP
  • Since GDP is measured in dollars, a serious
    problem exists when tracking change in output
    over time
  • Value of the dollarits purchasing poweris
    changing
  • Usually need to adjust our measurements to
    reflect changes in the value of the dollar
  • Nominalwhen a variable is measured over time
    with no adjustment for the dollars changing
    value
  • Realwhen a variable is adjusted for the dollars
    changing value
  • Most government statistics are reported in both
    nominal and real terms
  • Economists focus almost exclusively on real
    variables

25
Real Versus Nominal GDP
  • The distinction between nominal and real values
    is crucial in macroeconomics
  • The public, the media, and sometimes even
    government officials have been confused by a
    failure to make this distinction
  • Since our economic well-being depends, in part,
    on the goods and services we can buy
  • It is important to translate nominal valueswhich
    are measured in current dollarsto real
    valueswhich are measured in purchasing power
  • We will learn to do this next week

26
Real and Nominal GDP
27
How GDP Is Used
  • Governments reports on GDP are used to steer the
    economy over both short-run and long-run
  • In short-run, to alert us to recessions and give
    us a chance to stabilize the economy
  • In long-run, to tell us whether our economy is
    growing fast enough to raise output per capita
    and our standard of living, and fast enough to
    generate sufficient jobs for a growing population
  • Many (but not all) economists believe that, if
    alerted in time
  • Government can design policies to help keep the
    economy on a more balanced course

28
Problems With GDP Quality Changes
  • Quality changes
  • While BEA includes impact of quality changes for
    many goods and services (such as automobiles and
    computers)
  • Does not have the resources to estimate quality
    changes for millions of different goods and
    services
  • By ignoring these quality improvements, GDP
    probably understates true growth from year to year

29
Problems with GDP The Underground Economy
  • Some production is hidden from government
    authorities
  • Either because it is illegal
  • Drugs, prostitution, most gambling
  • Because those engaged in it are avoiding taxes
  • Production in these hidden markets cannot be
    measured accurately
  • BEA must estimate it
  • Many economists believe that BEAs estimates are
    too low
  • As a result, GDP may understate total output

30
Problems with GDP Non-Market Production
  • GDP does not include non-market production
  • Goods and services that are produced, but not
    sold in the marketplace
  • Childcare
  • Housework
  • Whenever a non-market transaction becomes a
    market transaction GDP will rise
  • Even though total production has remained the
    same
  • Can exaggerate the growth in GDP over long
    periods of time

31
Interpret with Caution!!
  • What do these problems tell us about value of
    GDP?
  • For certain purposesespecially interpreting
    long-run changes in GDPwe must exercise caution
  • GDP works much better as a guide to short-run
    performance of economy
  • A significant quarter-to-quarter change in real
    GDP virtually always indicates a change in actual
    production rather than a measurement problem
  • This is why policy makers, business people, and
    the media pay such close attention to GDP as a
    guide to the economy from quarter to quarter

32
Types of Unemployment
  • In United States, people are considered
    unemployed if they are not working and actively
    seeking a job
  • Unemployment can arise for a variety of reasons,
    each with its own policy implications
  • Useful to classify unemployment into four
    different categories
  • Frictional unemployment
  • Seasonal unemployment
  • Structural unemployment
  • Cyclical unemployment
  • Each arises from a different cause and has
    different consequences

33
Frictional Unemployment
  • Short-term joblessness experienced by people who
    are between jobs or who are entering the labor
    market for first time or after an absence
  • Because frictional unemployment is, by
    definition, short-term, it causes little hardship
    to those affected by it
  • By spending time searching rather than jumping at
    the first opening that comes their way
  • People find jobs for which they are better suited
    and in which they will ultimately be more
    productive

34
Seasonal Unemployment
  • Joblessness related to changes in weather,
    tourist patterns, or other seasonal factors
  • Is rather benign
  • Short-term
  • Workers are often compensated in advance for
    unemployment they experience in off-season
  • To prevent any misunderstandings, government
    usually reports the seasonally-adjusted rate of
    unemployment
  • Rate that reflects only those changes beyond
    normal for the month

35
Structural Unemployment
  • Joblessness arising from mismatches between
    workers skills and employers requirements
  • Or between workers locations and employers
    locations
  • Generally a stubborn, long-term problem
  • Often lasting several years or more

36
What can the government do?
  • These types of unemployment are due to
    microeconomic causes, i.e. changes in
    particular markets.
  • Job training programs
  • Programs to match job seekers with employers
  • Unemployment Benefits
  • Solutions are changes in labor policy, not
    macroeconomic policy

37
Cyclical Unemployment
  • When the economy goes into a recession and total
    output falls, the unemployment rate rises
  • Since it arises from conditions in the overall
    economy, cyclical unemployment is a problem for
    macroeconomic policy
  • Macroeconomists say we have reached full
    employment when cyclical unemployment is reduced
    to zero
  • But the overall unemployment rate at full
    employment is greater than zero
  • Because there are still positive levels of
    frictional, seasonal, and structural unemployment
  • How do we tell how much of our unemployment is
    cyclical?
  • Many economists believe that today, normal
    amounts of frictional, seasonal, and structural
    unemployment account for an unemployment rate of
    between 4 and 4.5 in United States

38
Figure 3 U.S. Monthly Unemployment Rate,
19502009
39
The Costs of Unemployment Economic Costs
  • Chief economic cost of unemployment is the
    opportunity cost of lost output
  • Goods and services the jobless would produce if
    they were working
  • But do not produce because they cannot find work
  • The unemployed are often given government
    assistance
  • Costs are spread among citizens in general
  • Potential output
  • Level of output economy could produce if
    operating at full employment
  • Actual output-potential output is the measure of
    the cost of unemployment

40
Figure 4 Actual And Potential Real GDP,
19502009
41
Broader Costs
  • Unemploymentespecially when it lasts for many
    months or years
  • Can have serious psychological and physical
    effects
  • Also causes setbacks in achieving important
    social goals
  • Burden of unemployment is not shared equally
    among different groups in the population
  • Tends to fall most heavily on minorities,
    especially minority youth and/or on people with
    low education

42
How Unemployment is Measured
  • The unemployed are those willing and able to
    work, but who do not have jobs
  • Others were able to work, but preferred not to
  • Including millions of college students,
    homemakers, prisoners and retired people
  • Still others were in the military and are counted
    in the population
  • But not counted when calculating civilian
    employment statistics
  • To be counted as unemployed, you must have
    recently searched for work
  • But how can we tell who has, and who has not,
    recently searched for work?

43
The Census Bureaus Household Survey
  • Every month, thousands of interviewers from
    United States Census Bureauacting on behalf of
    the U.S. Bureau of Labor Statistics (BLS)conduct
    a survey of 60,000 households across America
  • Household members who are under 16, in the
    military, or currently residing in an institution
    like a prison or hospital are excluded from
    survey
  • Official unemployment rate
  • Percentage of the labor force that is unemployed

44
Figure 5 How BLS Measures Employment Status
45
Problems In Measuring Unemployment
  • The official measure underestimates extent of
    unemployment in our society due to
  • Treatment of involuntary part-time workers
  • Should be regarded as partially employed and
    partially unemployed?
  • Treatment of discouraged workers
  • Individuals who would like to work but, because
    they feel little hope of finding a job, have
    given up searching
  • How many discouraged workers are there?
  • No one knows for sure
  • Still, the unemployment rateas currently
    measuredtells us something important
  • Number of people who are searching for jobs, but
    have not yet found them

46
Broader Measures of Unemployment (1994-2009)
47
Figure 6 Employment Status of the U.S.
Population (Millions)Aug 2009
48
Of the Total Population
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