lecture 25 - measuring economic activity: GDP and unemployment, chap 17

What is GDP?

The market value of final goods and services produced in a country during a given period.

What is consumption expenditure?

Spending by households for goods and services, including consumer durables, non-durables, and services.

What is investment in GDP terms?

Spending by firms on final goods and services aimed to increase the production capacity of the economy, including business fixed investment, residential investment, and inventory investment.

What are net exports?

Net exports = exports - imports -

Exports: goods and services produced domestically and sold abroad

Imports: purchases made from the domestic economy of goods and services produced abroad

What is the expenditure method formula for GDP?

GDP = C + I + G + (X - M)

Where: C = Consumption I = Investment G = Government spending X - M = Net exports

What is the difference between real and nominal GDP?

- Real GDP: measures GDP with quantities valued at base year prices (adjusted for inflation)

- Nominal GDP: measures GDP with quantities valued at current year prices

What are the main limitations of GDP as a measure?

• Does not account for leisure time

• Excludes nonmarket economic activities

• Doesn't capture underground economy

• Ignores environmental quality

• Doesn't account for resource depletion

• Fails to measure quality of life and inequality

How is unemployment rate calculated?

Unemployment rate = unemployed / labor force

Where labor force = employed + unemployed

What are the three main types of unemployment?

1. Frictional unemployment: short-term unemployment from job matching process

2. Structural unemployment: long-term unemployment due to skills mismatch

3. Cyclical unemployment: extra unemployment during economic recessions

What are the costs of unemployment?

Economic costs:

- Lost wages and production

- Decreased taxes and increased transfers

Psychological costs:

- Lower individual self-esteem

- Family stress

Social costs:

- Potential increases in crime and social problems

Who are discouraged workers?

People who would like to have a job but have not looked for work in the past four weeks because they believe no jobs are available. They are counted as out of the labor force.

What is the participation rate?

The percentage of the working population in the labor force, calculated by dividing the labor force by the working age population (16+).

income approach to GDP

GDP = labour income + capital income

• labour income → wages, salaries, benefits, and incomes of self-employed (2/3 of GDP)

• capital income → physical capital and intangibles → profits for business owners, interest for bond holders, rent for land, royalties (measured before taxes)

participation rate

Participation rate = labor force / population 16+

Laissez-Faire capitalism?

great reliance on exchange as a mode of coordination (with relatively little coordination by public administration)→ U.K. and U.S.

Administrative capitalism?

substantial reliance on public administration (as well as exchange) as a mode of coordination → Germany, Italy, France, Australia, Japan

Administrative socialism?

state ownership predominates and activity is coordinated primarily by public administration → Soviet Union, North Korea

Market Socialism (State Capitalism)?

state ownership predominates but economic activity is coordinated through markets → China, Vietnam

define neoliberalism

Neoliberalism focuses solely on economic freedom, disregarding social justice and equality. It views individuals as fully responsible for their choices and rational decision-makers, while seeing state intervention as a path to totalitarianism.