GDP And Unemployment and Inflation NATIONAL INCOME ACCOUNTING

GDP And Unemployment and Inflation

NATIONAL INCOME ACCOUNTING • Measures the economy’s overall performance • Assesses the economy at regular intervals • Tracks the long-run (years) • Has it grown, been constant, or stayed the same? • The Bureau of Economic Analysis can then make policies that can fix economic problems • A major tool used is the Gross Domestic Product

GROSS DOMESTIC PRODUCT • The total output of goods and services (the aggregate output) • The aggregate output of the economy is called the Gross Domestic Product (GDP) • The total market value of all final goods and services produced in a given year • Includes all domestic goods and services produced in a nation REGARDLESS OF OWNERSHIP • Ex: American-owned Ford factories here in the U. S. A. and a Japanese-owned Honda factory in Ohio

WHAT IS IT? • It is a monetary measure of comparing the relative values of all goods and services produced here • It DOES NOT include intermediate goods (goods not finished being made/sold or goods that are purchased for resale) • GDP only counts final goods • Aggregate output goods and services are counted ONCE AND ONLY ONCE Final Good Intermediat e Good

VIDEOS! • GDP Video

NOT INCLUDED • GDP does not include: • Intermediate Goods • Public Transfer Payments (Welfare payments) • Private Transfer Payments (Cash gifts, babysitting money) • Stock Market Transactions (Stocks and Bonds) • Secondhand Sales (used books, cars, homes) • Black Market

HOW? • There are two ways to calculate the GDP (Expenditure Method & Income Method) • The Expenditure Method counts all new goods and services that are purchased by consumers, businesses, government, and net exports (output approach) • The Income Method counts all earnings received by those who produce goods and services (earnings approach) • Expenditure = Income (MUST EQUAL EACH OTHER)

EXPENDITURE METHOD • The Expenditure Method = C + Ig + G + Xn • C = Personal Consumption Expenditures (cars, refrigerators, toothpaste, food, services like a lawyer or doctor) • Ig = Gross Private Domestic Investment (purchases of machinery and tools by a business, all construction, and changes in inventories) • G = Government Purchases (Expenditures) • Xn = Net Exports • Calculate Xn: • X – M = Xn X = exports M = imports

EXAMPLE

INCOME METHOD • The Income Method = W + R + I + P • W = Employee Compensation • R = Rent Received for Use of Property • I = Interest Received for Use of Money • P = Profits Received by Proprietors and Corporation Owners • All adds up to National Income

WHAT HAPPENS IF THEY DON’T EQUAL? • This is why the government uses accountants to make accounting adjustments so that the balance ends up equaling

NET FOREIGN FACTOR INCOME • We have to “adjust” our GDP with income earned abroad • Net Foreign Factor Income = Foreign-owned earnings here in U. S. minus American-owned earnings abroad • National Income = the total income of Americans, earned here in the U. S. and/or abroad • + • Net Foreign Factor Income • = • GDP

2 MORE ACCOUNTS • Using the GDP, we can adjust it to find out two more account information • Net Domestic Product = GDP – consumption of fixed capital (depreciation) • National Income = W. R. I. P. earned by Americans National Domestic Product – Net Foreign Factor Income – Indirect Business Taxes = National Income

NOMINAL GDP VS. REAL GDP……HUH? ? ? • Money value constantly changes • Nominal GDP = unadjusted GDP • Real GDP = prices adjusted for inflation/adjusted GDP

COMPARING GDP’S ACROSS THE WORLD

BUSINESS CYCLE • We want our economy to grow • We measure “growth” by either real GDP increases or GDP per capita increases • How does it grow? • Increase in resources or increased productivity (higher education, more training, motivation, health of workers)

BUSINESS CYCLE GRAPH

EXPLAIN, PLEASE! • Peak = maximum production level is reached temporarily (full employment) • Recession/Contraction = period of decline in business activity for 6 months or longer • Depression = long, severe period of economic decline • Trough = the lowest point of a recession/depression • Expansion = the recovery of economic activity leading to improved conditions

EXPLAIN MORE, PLEASE! • Peak = top of the cycle, real GDP is at the maximum, unemployment is low, inflation may be high • Recession/Contraction = real GDP is falling for two consecutive quarters (6 months), unemployment is increasing, inflation can fall • Trough = unemployment is very high • Expansion = real GDP is growing, unemployment decreasing, inflation is increasing • Global Business Cycle Map

UNEMPLOYMENT • There is always some level of unemployment on a national/international level • Labor Force = over 16 years old, willing and able to work, must be actively seeking work • Does not count: • Under 16 or unable to work (institutionalized people) • Potential workers who are not seeking work (homemakers, students, retirees) • Discouraged workers - no longer seeking work

3 TYPES OF UNEMPLOYMENT • Frictional = workers who are “between jobs” (laid off, fired, new workers, or voluntarily changing jobs) • Structural = workers whose skills are no longer in demand (must be re-trained in a new skill or move to a new location) • Cyclical = workers who lose jobs due to economic recessions

INFLATION • Inflation = a rise in the level of prices • Normal economic growth = 2 -3% change • Hyperinflation = price increases are out of control German children playing with stacks of cash as “blocks” German deutschmarks became nearly worthless after WWI

2 TYPES OF INFLATION • Demand/Pull Inflation = failure to produce more goods drives up the price • Cost/Push Inflation = increased cost in factors of production, so businesses raise prices to continue making profits

PHILLIPS CURVE • Short run = inflation and unemployment are inversely related • Long run = unemployment is unaffected by inflation