GDP & unemployment

Why study the whole economy (Why GDP)

• field of mac. economics was born during the great depression

• gov didn’t understand how to fix a depressed economy w/ a 25% unemployment rate

• created to 

  • measure health of whole economy

  • guide policies to fix problems

Private Sector

part of the economy that is run by individuals & businesses

Public Sector

part of the economy that is controlled by the gov

factor payments

payment for the factors of production (rent, wages, interest, & profit)

transfer payments

when the gov redistributes income (ex: welfare, social security)

subsidies

gov payments to businesses

3 macroeconomic goals all countries have

1. promote economic growth

2. limit unemployment

3. keep prices stable (limit inflation)

GDP

the dollar value of all final goods & services produced within a country in one year (measured in $)

GDP tells us

how well the country is doing financially

uses of GDP

• compare to previous years (was there growth)

• compare to policy changes (did a new policy work)

formula for measuring growth from year to year

% change in GDP = ((year 2-year1)/year 1)x100

GDP per capita

GDP/population

• identifies on average how many products each person makes

• best measure of a nation’s standard of living

why do some countries have higher GDPs

1. economic system - capitalism promotes innovation & provides incentives to improve productivity

2. rule of law - countries w/ solid institutions & political stability have historically had more economic growth

3. capital stock - countries w/ more machines & tools are more productive

4. human capital - countries that have a better education & training are more productive

5. natural resources - in general, countries that have access to more natural resources are more productive

what is not included in GDP

1. Intermediate goods - goods inside the final goods

2. nonprofit transactions - financial transactions (nothing produced ie stocks/bonds/real estate

3. nonmarket & illegal activities - things made at home & black market

4 components of GDP

1. consumer spending ~ 70% of US GDP (purchases of final goods & services by individuals) (C)

2. Business Investment ~16% of US GDP (business spending on tools & equipment) (I)

3. Gov Spending ~ 17% of US GDP (schools/roads/ect NOT transfer payments) (G)

4. Net exports - Exports-Imports ~ -3%     (X-M)

Formula for GDP

C+I+G+(X-M)

3 components of consumer spending

1. durable goods (washing machines/cars/ect)

2. non-durable goods (food/cloths/ect)

3. services (dental work/reparir/ect)

Investment is …

when businesses buy capital (tools/machines/resources)

*real estate is always capital 

inventories

goods & products held in storage in anticipation of later sales

• counted in the year they are produced

• change in inv is a valuable economic indicator

gov explained

gov expenditures tracks the spending made in the public sector

formula for unemployment rate

# unemployed/ # in labor force x 100

unemployment

workers that are actively looking for a job but are not working

unemployment rate

the % of people in the labor force who want a job but are not working

who is in the labor force

• > 16

• able & willing to work

• not institutionalized

• not in military in school full time or retired

3 types of unemployment

frictional, structural, cyclical

frictional unemployment

temporary unemployment or being between jobs

• ppl are qualified workers w/ transferabe skills

• seasonal unemployment

structural unemployment

changes in labor force make some skills obsolete

• workers don’t have transferable skills

• jobs will never come back

• permanant loss of these jobs=creative destruction

• technological unempl. - automation replaces workers

cyclical unemployment

unemployment caused by a recession

Natural rate of unemployment

frictional + structural

rate of unemployment that exists when the economy is healthy & growing

full unemployment output

real gdp when there is no cyclical unemployment

• for us 4-6 %

things unemployment rate doesn’t account for

• discouraged workers

• labor force participation rate

• underemployed workers

• race/age effects on unemployment