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GEN 315 Week five chapter 17 ppt lecture
1.
Chapter 17 Measuring Economic
Activity: GDP and Unemployment © 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2.
© 2019 McGraw-Hill
Education. 2 Learning Objectives1 1. Explain how economists define an economy's output. 2. Apply the production, expenditure, and income methods for measuring GDP to analyze economic activity. 3. Define and compute nominal GDP and real GDP. 4. Discuss the relationship between real GDP and economic well-being. 5. Calculate the unemployment rate and the participation rate and discuss the costs of unemployment.
3.
© 2019 McGraw-Hill
Education. 3 Macroeconomics Data on output, employment, prices • Vital signs of the economy • Employment, unemployment, average work hours • Stock values and trends • Prices and inflation • Reported often in the news Systematic measurement of economic output developed during World War II • Common systems and measures used virtually worldwide
4.
© 2019 McGraw-Hill
Education. 4 Measuring Output
5.
© 2019 McGraw-Hill
Education. 5 Market Value Aggregate measure of quantities produced More expensive items receive a higher weighting • Willingness to pay is an indication of benefit received from the good Orchardia Apples Bananas Shoes Price $0.25 $0.50 $20.00 Quantity 4 6 3 GDP contribution $1.00 $3.00 $60.00 Orchardia's GDP is $64
6.
© 2019 McGraw-Hill
Education. 6 Some Non-Market Goods Included Government goods and services are not sold in the market • These goods have value • Increase overall output • Quantities are known • Prices cannot be established Government production is valued at cost • Overstates GDP if there is waste and inefficiency
7.
© 2019 McGraw-Hill
Education. 7 Final Goods and Services Final goods and services are consumed by the ultimate user • End products of production • Included in GDP Intermediate goods and services are used up in the production of final goods • Not included in GDP to avoid double counting A barber's assistant earns $2 per haircut for providing services such as shampooing and sweeping up • Barber charges $10 per haircut • Haircut's contribution to GDP is $10
8.
© 2019 McGraw-Hill
Education. 8 Goods Can Be Final and Intermediate Milk can be sold as a final product or used as an intermediate good • Gallons of milk in the store • Gallons of milk sold to restaurants • Count only the final goods A capital good is a long-lived good used in the production of other goods and services • Houses, apartments, and motels • Stoves in restaurants, cooking schools • Delivery vehicles and taxis Money is not a capital good
9.
© 2019 McGraw-Hill
Education. 9 Value Added Value added is the market value of the product minus the cost of inputs purchased from other firms • Count value added in the year it is produced • Hot'n'Fresh buys flour and other inputs to make bread that sells for $2.00 Company Revenues Cost of Purchased Inputs Value Added ABC Grain $0.50 $0.00 $0.50 General Flour $1.20 $0.50 $0.70 Hot'n'Fresh $2.00 $1.20 $0.80 Total $2.00
10.
© 2019 McGraw-Hill
Education. 10 Produced in a Country in a Period of Time "Domestic" in GDP means the activity is measured within a country's borders • Nationality of owners or company is not relevant Value must be produced in the year considered • Sell a 20-year old house for $200,000 • Pay $12,000 commission • Value added is $12,000 • House was not produced in the period of time studied • Count income generated from the sale of used goods
11.
© 2019 McGraw-Hill
Education. 11 Expenditure Method for Measuring GDP Four users of final goods • Households • Firms • Government • Foreigners All goods produced are purchased by one of these groups in a given year Amount spent = market value GDP can be measured two ways • Market value • Total spending for final goods less value of imports
12.
© 2019 McGraw-Hill
Education. 12 US GDP, 2016 (billions of dollars) Consumption $12,820.7 Durable Goods $1,411.0 Non-durable Goods 2,710.4 Services 8,699.3 Investment 3,057.2 Business Fixed Investment 2,316.3 Residential 705.9 Inventory 35.1 Net Exports −− 521.2 Exports 2,214.6 Imports 2,735.8 GDP $18,624.5
13.
© 2019 McGraw-Hill
Education. 13 Consumption Expenditure Consumption expenditure is spending by households for goods and services • Consumer durables are long-lived consumer goods • Cars • Furniture • Appliances • Consumer non-durable goods are shorter-lived goods • Clothing • Food • Bedding • Services are the largest component of consumer spending • Education • Taxi rides • Haircuts
14.
© 2019 McGraw-Hill
Education. 14 Investment Investment is spending by firms on final goods and services Business fixed investment is purchases of new capital goods • Plant • Property • Equipment Residential investment is construction of new homes and apartment buildings Inventory investment is the change in unsold goods to the company's inventory • These goods are produced but not yet sold • This entry can be positive or negative
15.
© 2019 McGraw-Hill
Education. 15 Economic Investment and Financial Investment Financial investment • Purchases of stocks, bonds, and other financial assets • Purchase generally transfers ownership of a portion of the firm's existing capital stock • Does not correspond to any increase in physical capital or production capacity, in most cases • New stock issues can be an exception Economic investment: the increase in the capital goods used to produce other goods • This value is based on the purchase price of the capital goods, not on stock value
16.
© 2019 McGraw-Hill
Education. 16 Government Purchases Government purchases are final goods and services bought by federal, state, and local governments ■ Fighter jets ■ Teaching ■ Office Supplies Excludes transfer payments • Transfer payments are made by government but the government receives no current goods or services ■ Social Security ■ Food Stamps • No purchases of final goods and services involved in transfer payments • Spending by recipients is included in GDP Excludes interest paid on government debt
17.
© 2019 McGraw-Hill
Education. 17 Net Exports Net exports equal exports minus imports • Exports are goods and services produced domestically and sold abroad • Exports reduce the amount available to the domestic economy • Imports are purchases in the US of goods and services produced abroad • Imports can be consumption, investment, or government spending • Imports increase the amount available to the domestic economy
18.
© 2019 McGraw-Hill
Education. 18 GDP Expenditures Equation Terminology Y Gross Domestic Product or output C Consumption Expenditure I Investment G Government Purchases NX Net Exports Expenditure approach to measuring GDP Y = C+I+G+NX
19.
© 2019 McGraw-Hill
Education. 19 GDP Example Total production is 1 million cars, $15,000 each Production value is 1 million times $15,000 = $15 billion Sector # Cars Purchased GDP Contribution Consumers 700,000 $10.500 billion Businesses 225,000 $3.375 billion Government 50,000 $0.750 billion Net exports 25,000 $0.375 billion Total 1,000,000 $15.000 billion • 25,000 cars are unsold • Investment in inventories increases by $0.375 billion
20.
© 2019 McGraw-Hill
Education. 20 Income Approach to GDP When a good is sold, its proceeds are distributed to workers or business owners GDP = labor income + capital income Labor income is wages, salaries, benefits, and incomes of the self-employed • About ⅔ of GDP Capital income pays for physical capital and intangibles • Profits for business owners • Rent for land • Interest for bond holders • Royalties • Measured before taxes
21.
© 2019 McGraw-Hill
Education. 21 The Three Faces of GDP Access the text alternative for these images
22.
© 2019 McGraw-Hill
Education. 22 Adjusting for Price Changes Compare GDP for different years to see how much output has changed GDP changes over time because • Prices change AND • Quantity of output changes To see how much output has grown, use only the changes in quantities • Hold prices constant
23.
© 2019 McGraw-Hill
Education. 23 The Pizza and Calzone Economy GDP in 2013 is $175; GDP in 2017 is $420 • GDP in 2017 is 2.4 times the GDP in 2013 Only twice as many pizzas and calzones were produced in 2017 • Market value of output grew faster than the physical volume of output Number of Pizzas Price of Pizza Number of Calzones Price of Calzones 2013 10 $10 15 $5 2017 20 $12 30 $6
24.
© 2019 McGraw-Hill
Education. 24 Real GDP and Nominal GDP Real GDP values output in the current year using the prices from the base year • The base year is a reference year that changes infrequently • Real GDP measures the physical volume of production Nominal GDP values output in the current year using prices from the current year • Nominal GDP is the current dollar value of production
25.
© 2019 McGraw-Hill
Education. 25 Calculating Real GDP for 2017 Use 2013 as the base year Nominal GDP for 2013 is $175 and for 2017, $420 Calculate real GDP using current year quantities and base year prices • Real GDP in 2017 is (20 pizzas) ($10) + (30 calzones) (5) = $350 • Real GDP doubled between 2013 and 2017 Number of Pizzas Price of Pizza Number of Calzones Price of Calzones 2013 10 $10 15 $5 2017 20 $12 30 $6
26.
© 2019 McGraw-Hill
Education. 26 Observations on Real and Nominal GDP Usually, nominal and real GDP increase each year Nominal GDP can go up and real GDP go down • Fewer goods and services produced AND • Prices increase faster than output decreased Nominal GDP will be smaller than real GDP if the prices in the current year are less than in the base year • Usually true for years before the base year Real GDP could rise and nominal GDP fall, but this is rare • Prices are falling faster than output is increasing
27.
© 2019 McGraw-Hill
Education. 27 Real GDP and Economic Well-Being Real GDP is a flawed measure of well- being • It values only market transactions • Omits illegal transactions, volunteer work, and household production Maximizing GDP will not necessarily maximize national well-being • Whether increases in output increase welfare is a case-by-case issue
28.
© 2019 McGraw-Hill
Education. 28 GDP Does Not Value Leisure Amount of leisure time has increased in the past 100 years • Work weeks are shorter • People enter the labor force at an older age • People retire earlier Leisure produces no goods for market • GDP places a value of zero on all leisure time • Opportunity cost of an hour of leisure is your hourly wage • Omission of the value of leisure time makes GDP seem smaller
29.
© 2019 McGraw-Hill
Education. 29 Nonmarket Economic Activities GDP omits services that are not traded in markets • Household production • Volunteer services Valuing these services would be difficult Nonmarket activities are important in poor countries • Self-sufficient households and bartered goods and services
30.
© 2019 McGraw-Hill
Education. 30 Underground Economy Underground economy is all unreported transactions, legal and illegal Casual labor is often paid in cash • Failure to report transaction reduces taxes • Includes baby sitters, lawn care, home repair, etc. Some underground activity is illegal • A service of value is provided • Drug dealers, bookies, fences, prostitution, etc Estimates suggest the underground economy is large regardless of national income level
31.
© 2019 McGraw-Hill
Education. 31 Environmental Quality Suppose a factory is built in your town • People are employed and output is produced • Productive activity is included in GDP Suppose further that the factory creates pollution • Your city hires a company to restore the environment to its initial condition • Clean-up activities are included in GDP • Gets environment back to its starting point, not better
32.
© 2019 McGraw-Hill
Education. 32 Resource Depletion No adjustment is made for the decline in resource availability when mining or other harvesting is done • One more barrel of oil on the market means one less barrel for future use Environmental quality and resource depletion are difficult to value • They have value and that value is omitted from GDP
33.
© 2019 McGraw-Hill
Education. 33 Other Quality of Life Considerations GDP does not account for intangibles people value • Crime rates • Traffic congestion • Civic organizations • Open space • Sense of community
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Education. 34 Poverty and Economic Inequality GDP does not capture the effects of income inequality • Most would prefer living in a relatively equal society to one with a few wealthy and many poor U.S. uses an absolute standard of poverty • In 2016, a family of four was poor if their income was less than $24,560 Inequality matters and it is increasing in the US • The case of the beat-up car
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Education. 35 GDP as a Welfare Measure GDP omits and undervalues some goods and services GDP per capita is positively associated with several measures of well-being • Material standard of living: more goods and services • Health and life expectancy • Residents of industrialized countries fare better than residents of developing countries in a range of health measures • Education • Literacy and school enrollment rates are higher in high-income countries
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Education. 36 Unemployment Bureau of Labor Statistics (BLS) estimates employment and unemployment monthly Labor force = employed + unemployed Unemployment rate = unemployed / labor force Participation rate = labor force / population 16+
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Education. 37 U.S. Employment Data U.S. Employment Data, July 2017 (in millions) Employed 153.51 million Unemployed 6.98 million Labor Force 160.49 million Not in the Labor Force 94.66 million Working-Age Population 255.15 million Unemployment Rate 4.3% Participation rate 62.9%
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Education. 38 U.S. Unemployment Rate, 1960 - 2016
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Education. 39 Costs of Unemployment Economic costs • Lost wages and production • Decreased taxes and increased transfers Psychological costs • Individual self-esteem • Family stress of decreased income and increased uncertainty Social costs • Potential increases in crimes and social problems • Social resources spent to address these
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Education. 40 Duration of Unemployment1 Costs of unemployment are directly related to the length of time a person has been unemployed • Unemployment spell is the period during which an individual is continuously unemployed • Duration of unemployment is the length of the unemployment spell The unemployed population: Duration (weeks) 5 or less 5 – 14 More than 14 % of unemployed (Apr 2011) 20% 22% 58% % of unemployed (Jul 2017) 31% 29% 40%
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Education. 41 Duration of Unemployment2 Long-term unemployed have been out of work for 6 months or longer Short-term unemployed have several possible outcomes • Find a permanent job after searching a few weeks • Economic costs are low • Leave the labor force • Short-term or temporary job that leads to unemployment again • These chronically unemployed have costs similar to the long-term unemployed
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Education. 42 Other Unemployment Issues Discouraged workers would like to have a job but they have not looked for work in the past four weeks because they believe they are no jobs available • Counted as out of the labor force • Could be counted as unemployed but they are not Involuntary part-time workers are people who like to work full-time but cannot find a full-time job • Counted as employed July 2017 unemployment rate was 4.3% • Including discouraged workers and involuntary part- time workers would make the rate 8.6%
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Education. 43 Spending, Income, and GDP
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Education. Accessibility Content: Text Alternatives for Images
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Education. 45 The Three Faces of GDP Text Alternative The first bar is Production and is one color and labeled Market value of final goods and services. The second bar, Expenditure, is divided into Net exports, Government purchases, Investment and Consumpution; Investment is more than half of the bar and Consumption is a small sliver. Income is divided into Labor income and Capital income, with two thirds of the bar being Labor income. Return to slide containing original image
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