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.
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.