This document discusses key macroeconomic concepts including GDP, unemployment, and inflation. It defines GDP as the total market value of final goods and services produced within a country in a given period. GDP can be calculated using the expenditure approach (summing household spending, business investment, government spending, and net exports) or the income approach (summing various categories of incomes). The document also defines unemployment as people who are without jobs but actively seeking work, and inflation as a sustained increase in the overall price level over time.

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Measuring Economic
Activities
CHAPTER 1CHAPTER 1

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Gross Domestic Product
 Gross domestic product (GDP) is the total
market value of all final goods and services
produced within a given period by factors of
production located within a country.

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Final Goods and Services
 The term final goods and services in
GDP refers to goods and services
produced for final use.
 Intermediate goods are goods
produced by one firm for use in further
processing by another firm.

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Value Added
 Value added is the difference between the
value of goods as they leave a stage of
production and the cost of the goods as they
entered that stage.
 In calculating GDP, we can either sum up the
value added at each stage of production, or
we can take the value of final sales.

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Value Added
Value Added in the Production of a Gallon of Gasoline
STAGE OF PRODUCTION VALUE OF SALES VALUE ADDED
(1) Oil drilling $ .50 $ .50
(2) Refining .65 .15
(3) Shipping .80 .15
(4) Retail sale 1.00 .20
Total value added $1.00

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 GDP is the value of output produced by
factors of production located within a
country.
 GNP is the value of output produced by a
country’s citizens, regardless of where the
output is produced.
GDP and GNP

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GDP can be computed in two ways:
 The expenditure approach: A method of
computing GDP that measures the total
amount spent on all final goods during a
given period.
 The income approach: A method of
computing GDP that measures the income
—wages, rents, interest, and profits—
received by all factors of production in
producing final goods.

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The Expenditure Approach
Expenditure categories:
 Personal consumption expenditures (C)—
household spending on consumer goods.
• Gross private domestic
investment (I)—spending by firms
and households on new capital:
plant, equipment, inventory, and new
residential structures.

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The Expenditure Approach
 Government consumption and gross
investment (G)
Expenditure categories:
• Net exports (EX – IM)—net
spending by the rest of the world, or
exports (EX) minus imports (IM)

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The Expenditure Approach
 The expenditure approach calculates GDP by
adding together the four components of
spending. In equation form:
GDP = C + I + G + (EX-IM)

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Components of GDP, 2002: The Expenditure Approach
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
Personal consumption expenditures (C) 7303.7 69.9
Durable goods 871.9 8.3
Nondurable goods 2115.0 20.2
Services 4316.8 41.3
Gross private domestic investment (l) 1543.2 14.8
Nonresidential 1117.4 10.7
Residential 471.9 4.5
Change in business inventories 3.9 0
Government consumption and gross investment (G) 1972.9 18.9
Federal 693.7 6.6
State and local 1279.2 12.2
Net exports (EX – IM) − 423.6 − 4.1
Exports (EX) 1014.9 9.8
Imports (IM) 1438.5 13.8
Total gross domestic product (GDP) 10446.2 100.0
Note: Numbers may not add exactly because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
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The Income Approach
 The income approach to GDP breaks down
GDP into four components:
GDP = national income + depreciation + (indirect
taxes – subsidies) + net factor payments to the rest
of the world + other
National income is the total income earned by the
factors of production owned by a country’s citizens.

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The Income Approach
Components of GDP, 2002: The Income Approach
BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
National income 8,199.9 80.3
Compensation of employees 6,010.0 58.9
Proprietors’ income 943.5 7.3
Corporate profits 748.9 7.3
Net interest 554.8 5.4
Rental income 142.7 1.4
Depreciation 1,351.3 13.2
Indirect taxes minus subsidies 739.4 7.2
Net factor payments to the rest of the world 11.1 0.1
Other − 96.1 − 0.9
Gross domestic product 10,205.6 100.0

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From GDP to Disposable Personal
Income
GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002
DOLLARS
(BILLIONS)
GDP 10,205.6
Plus: receipts of factor income from the rest of the world + 342.1
Less: payments of factor income to the rest of the world − 353.2
Equals: GNP 10,194.5
Less: depreciation − 1,351.3
Equals: net national product (NNP) 8,843.2
Less: indirect taxes minus subsidies plus other − 643.3
Equals: national income 8,199.9
Less: corporate profits minus dividends − 332.6
Less: social insurance payments − 731.2
Plus: personal interest income received from the government and consumers + 439.1
Plus: transfer payments to persons +1,148.7
Equals: personal income 8,723.9
Less: personal taxes − 1,306.2
Equals: disposable personal income 7,417.7

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Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLIONS)
Disposable personal income 7,417.7
Less:
Personal consumption expenditures − 7063.5
Interest paid by consumers to business − 204.3
Personal transfer payments to foreigners − 31.3
Equals: personal saving 118.6
Personal savings as a percentage of disposable personal income: 1.6%

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Nominal Versus Real GDP
 Nominal GDP is GDP measured in current
dollars, or the current prices we pay for
things. Nominal GDP includes all the
components of GDP valued at their current
prices.
 Real GDP is GDP measured in constant
prices or base year prices.

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Calculating Nominal and Real GDP
A Three-Good Economy
(1) (2) (3) (4) (5) (6) (7) (8)
GDP IN GDP IN GDP IN GDP IN
YEAR 1 YEAR 2 YEAR 1 YEAR 2
IN IN IN IN
PRODUCTION PRICE PER UNIT YEAR 1 YEAR 1 YEAR 2 YEAR 2
YEAR 1 YEAR 2 YEAR 1 YEAR 2 PRICES PRICES PRICES PRICES
Q1 Q2 P1 P2 P1 x Q1 P1 x Q2 P2 x Q1 P2 X Q2
Good A 6 11 $.50 $ .40 $3.00 $5.50 $2.40 $4.40
Good B 7 4 .30 1.00 2.10 1.20 7.00 4.00
Good C 10 12 .70 .90 7.00 8.40 9.00 10.80
Total $12.10 $15.10 $18.40 $19.20
Nominal
GDP
in year 1
Nominal
GDP
in year 2

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UnemploymentUnemployment

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Defining and
Measuring Unemployment
 The most frequently discussed symptom of a
recession is unemployment.
 An employed person is any person 16 years old or
older:
1. who works for pay, either for someone else or in his or
her own business for 1 or more hours per week,
2. who works without pay for 15 or more hours per week
in a family enterprise, or
3. who has a job but has been temporarily absent, with or
without pay.

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Defining and
Measuring Unemployment
An unemployed person is a person 16 years old or older
who:
is not working,
is available for work, and
has made specific efforts to find work during the
previous 4 weeks.
A person who is not looking for work, either because he or
she does not want a job or has given up looking, is not in
the labor force.

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Defining and
Measuring Unemployment
u n e m p l o y m e n t r a t e =
u n e m p l o y e d
e m p l o y e d + u n e m p l o y e d
l a b o r f o r c e = e m p l o y e d + u n e m p l o y e d
p o p u l a t i o n = l a b o r f o r c e + n o t i n l a b o r f o r c e
l a b o r f o r c e p a r t i c i p a t i o n r a t e =
l a b o r f o r c e
p o p u l a t i o n

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InflationInflation

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Definition of Inflation
 Inflation is an increase in the overall
price level.
 Deflation is a decrease in the overall
price level.

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Price Index
 GDP Deflator
 Consumer Price Index
 Producer Price Index

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Price Index Formulas
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Inflation Rate
100
IndexPrice
IndexPrice-IndexPrice
(%)RateInflation
1-t
1-tt
t
×=
 Inflation Rate is the percentage change in
the price level.