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Production, Income and Employment


Once 4th quarter figures are in, government reports official GDP figure for entire year ... Government's reports on GDP are used to steer the economy over both ... – PowerPoint PPT presentation

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Title: Production, Income and Employment

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)?

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

Production and Gross Domestic Product, GDP A
  • 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
  • …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

Figure 1 Stages of Production
Production and Gross Domestic Product, GDP A
  • …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
  • During the period being considered

Production and Gross Domestic Product, GDP A
  • …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
  • Only goods produced during that period are
  • 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

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

Who measures GDP?
  • Bureau of Economic Analysis (BEA)
  • 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.

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.

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
  • Private investment goods and services
    (I)purchased by businesses
  • Government goods and services (G)purchased by
    government agencies
  • Net exports (NX)purchased by foreigners

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
  • Part of the foreign sector
  • When we add up the purchases of all four groups
    we get GDP
  • GDP C I G NX

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

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

Private Investment
  • The three components of private investment
  • Business Purchases of Plant, Equipment, and
  • 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
  • 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

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
  • That is subtracted from investment to get net

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

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
  • They are not purchases of currently produced
    goods and services

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

The Compositon of GDP 2009 Q2
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
  • GDP is sum of values added by all firms in economy

Figure 1 Stages of Production
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
  • 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
  • Total output of economy (GDP) is equal to total
    income earned in the economy

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
  • GDP Total household income

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
  • 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
  • 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

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

Real and Nominal GDP
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

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

Problems with GDP The Underground Economy
  • Some production is hidden from government
  • 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

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
  • Can exaggerate the growth in GDP over long
    periods of time

Interpret with Caution!!
  • What do these problems tell us about value of
  • 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

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

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

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
  • Rate that reflects only those changes beyond
    normal for the month

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

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

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
  • 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

Figure 3 U.S. Monthly Unemployment Rate,
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
  • 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

Figure 4 Actual And Potential Real GDP,
Broader Costs
  • Unemploymentespecially when it lasts for many
    months or years
  • Can have serious psychological and physical
  • 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

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?

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
  • Official unemployment rate
  • Percentage of the labor force that is unemployed

Figure 5 How BLS Measures Employment Status
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

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