EXAM CARDS

Gross Domestic Product (GDP)

GDP is the total market value of all final goods and services produced within the U.S. borders (U.S. soil) in one year.

Scope of GDP

Includes goods and services, both tangible and intangible, produced inside the country, even by foreign companies. Excludes production outside U.S. borders, even by U.S. companies.

NIPA system developer

Simon Kuznets, an economist who developed the system to help the government understand the economy during the Great Depression.

Solution to comparing different goods in NIPA

Use the dollar value (market price) of all final goods and services as a common unit of measurement.

Types of services included in GDP

Services are included only if they are reported or recorded in business records (e.g., healthcare, education, legal advice).

Unreported services in GDP

Unreported, off-the-books services (e.g., household chores, babysitting within families) are missed.

Solution to transfer payments in NIPA

Excluded from GDP as they don't represent new production, just a transfer of money or ownership.

NIPA problem of the underground economy

Legal or illegal transactions not reported (off-the-books production, informal work) are not included in GDP, causing the official GDP to understate actual economic activity.

NIPA problem of household production

Productive activities done for yourself (e.g., cooking, cleaning, DIY repairs) are not counted, causing GDP to be understated.

Solution to timing problem in NIPA

The product is counted in the first year's GDP as 'Changes in Inventory' under the Investment (IG) category.

Solution to resale of secondhand goods in NIPA

Excluded from GDP as these goods were already counted in GDP in the year they were originally produced.

NIPA problem of changes in product quality

No precise method exists to adjust GDP for quality changes, causing GDP to be understated or overstated.

NIPA problem of environmental damage

Environmental harm is not deducted from GDP, inflating or overstating true economic activity and well-being.

Solution to double counting in NIPA

Count only the value of FINAL goods and services or use the Value-Added Approach.

Final Good

A final good is sold to its end user (e.g., a finished car).

Intermediate Good

An intermediate good is used as an input to produce another good, and its value is embedded in the final product.

Value-Added Approach

A method to avoid double counting by summing the value added at each stage of production.

Price Level

A macro measure of the average prices across all goods and services, used to adjust Nominal GDP to Real GDP.

Nominal GDP

Measures production using current-year prices (unadjusted).

Real GDP

Measures production using prices from a fixed base year (e.g., 2017) to remove the effects of inflation and measure volume changes more accurately.

Base Year

The year selected as a reference point (e.g., 2017) for prices when calculating Real GDP. In the base year, Nominal GDP = Real GDP. The base year is periodically updated.

Adjustment of Nominal GDP to Real GDP

Before the base year (e.g., 2010): Prices are 'inflated' up to the base year level, so Real GDP > Nominal GDP. After the base year (e.g., 2024): Prices are 'deflated' down to the base year level, so Real GDP < Nominal GDP.

NIPA problems causing GDP to be understated

Underground economy, household production, and quality improvements in goods.

NIPA problems causing GDP/well-being to be overstated

Environmental damage and (arguably) declines in product quality.

Exclusion from GDP

Transfer payments, purely financial transactions, and secondhand sales are excluded from GDP.

International GDP comparisons problem

They are complex and often unreliable because different countries may have different accounting systems, definitions, and variations in how they measure things like household production, services, and the underground economy.

Four Components of GDP (Expenditures Approach)

GDP = C + IG + G + (X - M) Consumption (C) ≈ 70% Gross Private Domestic Investment (IG) ≈ 17% Government Purchases (G) ≈ 17% Net Exports (X-M) ≈ negative %.

Subcategories of Personal Consumption (C)

Services (largest, ≈ 65% of C) Non-Durable Goods (≈ 22% of C) * Durable Goods (smallest, ≈ 13% of C).

Durable Good

Expected to last at least 3 years (e.g., cars, appliances, electronics).

Non-Durable Good

Lasts less than 3 years (e.g., food, gasoline, clothing).

Good

A tangible item (e.g., a book).

Service

An intangible action or task performed (e.g., a haircut, medical services).

Subcategories of Gross Private Domestic Investment (IG)

Nonresidential Construction (business buildings, factories) Machinery & Equipment Residential Construction (new houses) Changes in Inventory.

Positive Change in Inventory

Can temporarily inflate GDP, but may signal overproduction or a future slowdown in production.

Negative Change in Inventory

Inventories are decreasing, indicating that future production may increase.

New Housing in Investment (IG)

Residential Construction is treated as a long-lasting capital asset that adds to the economy's productive capacity, providing a 'service' (shelter) over many years, similar to a factory or machine.

Government Purchases (G)

Includes government spending on new goods and services (e.g., roads, military equipment, salaries).

Government Transfers

(e.g., Social Security, unemployment benefits) are EXCLUDED from G because they don't represent new production.

Net Exports (X-M)

The value of (Exports) - (Imports). Exports (X) are goods/services produced domestically and sold abroad. Imports (M) are goods/services produced abroad and bought domestically.

Trade Deficit

Currently negative, meaning the U.S. imports more than it exports. This has been the case since the early 1970s (approximately -4%).

GDP Expenditures Approach Identity (Formula)

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

Three Types of Unemployment

Frictional, Structural, Cyclical

Frictional Unemployment

Unavoidable, short-term unemployment from the time it takes to match workers with jobs (people transitioning between jobs or into the workforce). It is always present and part of a healthy economy.

Structural Unemployment

Unavoidable, long-term unemployment from a mismatch between worker skills and available jobs. Causes: Minimum wages, unions, efficiency wages, government policies, and technological/economic shifts.

Cyclical Unemployment

Avoidable unemployment caused by a downturn in the business cycle (a recession). It rises during recessions and falls during expansions. Managing it involves macroeconomic policies.

Full Employment

A situation where the only unemployment is frictional and structural. The unemployment rate equals the natural rate. It does NOT mean 0% unemployment.

Natural Rate of Unemployment (NAIRU)

The 'best-case' equilibrium unemployment rate, consisting of only frictional and structural unemployment (i.e., it excludes cyclical unemployment). The consensus range is between 3.8% and 4.3% in the U.S.

Actual Unemployment Rate vs. Natural Rate

If Actual Rate > Natural Rate: Cyclical unemployment exists (recession). If Actual Rate < Natural Rate: Economy is 'overheating' (inflation likely). If Actual Rate = Natural Rate: Economy is at full employment.

Bureau of Labor Statistics (BLS)

The agency that collects labor force statistics, part of the U.S. Department of Labor.

Household Survey

Surveys approximately 60,000 households for unemployment rate/labor force.

Establishment Survey

Surveys approximately 600,000 job sites for jobs, wages, hours.

Unemployed Definition (BLS Statistics)

A person must have actively looked for work in the past 4 weeks (e.g., job search, application, interview).

Labor Force Definition

Labor Force = Employed + Unemployed. It includes employed persons (full-time and part-time) and those actively seeking employment.

Excluded from Labor Force

Those not working and not actively seeking work, including: People under 16 years old, Institutionalized individuals (e.g., jail, long-term facilities), Retirees, full-time students, homemakers, Marginally Attached and Discouraged Workers.

Marginally Attached Worker

Individuals not in the labor force but who want and are available for work and have looked for a job in the recent past.

Discouraged Worker

A subset of marginally attached workers who have stopped looking for work because they believe no jobs are available for them.

Official Unemployment Rate Understatement

It generally understate the true level of joblessness because it excludes Marginally Attached Workers, Discouraged Workers, and Involuntary Part-Time Workers (underemployed) who want full-time work but are counted as employed.

Jobless Recovery

A recovery where Real GDP increases, but the unemployment rate does not decrease or continues to rise. This occurs because the US tends to lay off quickly but re-hires slowly.

Unemployment Rate Formula

Unemployment Rate = (Number of Unemployed / Labor Force) x 100

Labor Force Participation Rate Formula

LFPR = (Labor Force / Working-Age Population) x 100

Inflation Rate Formula using CPI

Inflation Rate = ((CPI Later - CPI Earlier) / CPI Earlier) x 100

GDP Deflator Formula

GDP Deflator = (Nominal GDP / Real GDP) x 100