PW

Chapter 5 Macro Notes

GDP Basics

  • GDP = market value of final goods and services produced in a country in a given period.
  • Market value weights items by willingness to pay; aggregates quantities using prices.
  • Distinctions: final vs intermediate goods; value added approach; domestic production within borders; real vs nominal GDP (base year prices vs current prices).

Measuring GDP: Expenditure Approach

  • GDP can be measured by total spending on final goods (expenditure approach) or by value added; both yield the same Y.
  • Expenditure formula: Y = C + I + G + NX where NX = Exports − Imports.
  • Government purchases include spending on final goods and services; transfer payments are excluded from GDP purchases.
  • Exports add to GDP; imports subtract from GDP.

Components of Expenditure

  • Consumption (C): durable goods, non-durable goods, services (services are the largest).
  • Investment (I): business fixed investment, residential investment, inventory investment.
  • Government purchases (G): final goods and services bought by government; excludes transfers.
  • Net exports (NX): exports − imports.

Value Added and Production

  • Value added by a firm = market value of output minus cost of inputs purchased from other firms.
  • GDP equals the sum of value added across all firms in the economy.

Real vs Nominal GDP

  • Nominal GDP uses current-year prices; Real GDP uses base-year prices.
  • Real GDP measures the physical quantity of production; Nominal GDP measures current-dollar value.
  • Real GDP growth isolates quantity changes; nominal can rise due to price changes.

Real GDP Calculation Example (Pizza Economy)

  • Base year prices: Pizza = $10, Calzone = $5; Quantities (base year): 10 pizzas, 15 calzones.
  • 2024 quantities: 20 pizzas, 30 calzones; 2024 prices: Pizza = $12, Calzone = $6.
  • Real GDP 2024 (base-year prices): RealGDP_{2024} = (20 \times 10) + (30 \times 5) = 350
  • Nominal GDP 2024: NominalGDP_{2024} = (20 \times 12) + (30 \times 6) = 420
  • Real GDP often grows even if market value grows due to higher prices; real growth reflects volume changes.

GDP and Well-Being: Limitations

  • Real GDP omits nonmarket activity (household production, volunteer work).
  • Leisure, environment, and depletion of resources are not fully captured; higher output does not guarantee higher welfare.
  • GDP per capita correlates with well-being indicators but is not a perfect measure.

Nonmarket and Quality-of-Life Considerations

  • GDP excludes leisure, crime reduction, open space, civic life, and many informal activities.
  • Inequality is not directly captured by GDP.

Unemployment: Basics and Measures

  • Labor force = employed + unemployed.
  • Unemployment rate: u = \frac{\text{unemployed}}{\text{labor force}}
  • Participation rate: p = \frac{\text{labor force}}{\text{population 16+}}
  • Data (November 2023, U.S.): Employed 160.14 million; Unemployed 5.69 million; Labor force 165.83 million; Not in labor force 100.13 million; Working-age population 265.96 million; Unemployment rate 3.4%; Participation rate 62.4%.

Costs of Unemployment

  • Economic: lost wages and production; lower tax revenue; higher transfers.
  • Psychological: lower self-esteem; family stress.
  • Social: potential increases in crime and social problems; resources spent on addressing consequences.

Duration of Unemployment

  • Unemployment spell length: 5 weeks or less, 5–14 weeks, more than 14 weeks.
  • Aug 2020 distribution: 5 or less = 17%, 5–14 = 23%, more than 14 = 60%
  • Jan 2023 distribution: 5 or less = 34%, 5–14 = 31%, more than 14 = 35%

Other Unemployment Issues

  • Discouraged workers: want a job but have not looked in the last 4 weeks; counted as not in the labor force.
  • Involuntary part-time workers: want full-time but cannot find it; counted as employed.
  • The official rate can understate hardship; broader measures (including discouraged workers) would be higher, e.g., ~6.6% in some assessments.

Quick Reference: Key Formulas

  • Expenditure GDP: Y = C + I + G + NX
  • Unemployment rate: u = \frac{\text{unemployed}}{\text{labor force}}
  • Participation rate: p = \frac{\text{labor force}}{\text{population 16+}}
  • Net exports: NX = Exports - Imports
  • Real vs Nominal GDP: Real uses base-year prices; Nominal uses current-year prices.

Data Snapshots

  • 2022 U.S. GDP components (approx., in trillions): Consumption ≈ 17.36; Investment ≈ 4.63; Government purchases ≈ 4.45; Net exports ≈ -0.97; Exports ≈ 2.98; Imports ≈ 3.95.

Notes

  • GDP is a useful benchmark, but it omits nonmarket activity, the underground economy, environmental impacts, and distributional aspects of welfare.