Macroeconomic Measures: GDP and Unemployment

1. Macroeconomic Measures: GDP and Unemployment Macroeconomics

2. How do we measure the macro economy? • The macro economy includes all buying and selling, all production and consumption; everything that goes on in every market in the economy • economic indicators are statistics that measure one or more aspects of the macro economy

3. Economic Indicators Include: • measures of aggregate production, like GDP • measures of employment and unemployment, and measures of inflation, like the percent change in the Consumer Price Index • the “Misery Index”—the sum of the inflation and unemployment rates as a measure of how bad (i.e., miserable) the economy is

4. Gross Domestic Product (GDP) Gross domestic product (GDP) is the value of all final goods and services produced within a country in a given year. The GDP of an economy can be measured by: • the total dollar value of what is purchased in the economy or • the total dollar value of what is produced Since every market transaction must have both a buyer and a seller, GDP must be the same whether measured by what is demanded or by what is produced

5. GDP Measured by Components of Demand Who buys all of this production? This demand can be divided into four main parts: • consumer spending (consumption) • business spending (investment which is defined as the purchase of new capital goods, such as new commercial real estate and equipment, residential housing construction, and inventories) • government spending on goods and services • spending on net exports

6. Trade Balance and GDP The net export component of GDP is equal to the dollar value of exports (X) minus the dollar value of imports (M), (X – M). The gap between exports and imports is called the trade balance. If a country’s exports are larger than its imports, then a country is said to have a trade surplus.

7. Percentage of Components of U.S. GDP on the Demand Side

8. Calculating GDP Based on these four components of demand, GDP can be measured as: • GDP = Consumption + Investment + Government + Trade balance • GDP = C + I + G + (X – M)

9. Percentage of Components of GDP on the Production Side

10. What counts in GDP? Not counted Counted Consumption Business investment Government spending on goods and services Net exports • Intermediate goods • Transfer payment and non-market activities • Used goods • Illegal goods

11. Gross National Product GNP includes what is produced by domestic businesses and labor abroad, and subtracts out any payments sent home to other countries by foreign labor and businesses located in the United States. In other words, GNP is based more on the production of citizens and firms of a country, wherever they are located GDP + net income received from abroad by residents of a nation = GNP

12. Net National Product Net national product (NNP) is calculated by taking GNP and then subtracting the value of how much physical capital is worn out, or reduced in value because of aging, over the course of a year. The process by which capital ages and loses value is called depreciation The NNP can be further subdivided into: • national income includes all income to businesses and individuals • personal income includes only income to people

13. Unemployment The opportunity cost of unemployment is the output that could have been produced by the unemployed workers

14. Which adults are included in the labor force? Labor Force Out of the labor force Out of paid work and not actively looking for a job retired people Students without jobs People who do unpaid care work (ie. taking care of young children or elderly parents) • Employed: currently working for pay • Unemployed: Out of work and actively looking for a job

15. Employed, Unemployed, and Out of the Labor Force Distribution of Adults age 16 and older in 2012 

16. How is the Unemployment Rate Calculated? Unemployment rate=×100

17. Hidden Unemployment • People with part time or temporary jobs and who are looking for full time and permanent employment • Underemployed peopleare trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills • Discouraged workers have stopped looking for employment • People who would like to work but find that childcare or eldercare costs make working too expensive

18. What is the difference between CPS and EPS? • The Current Population Survey (CPS) conducted by the United States Census Bureau measures the percentage of the labor force that is unemployed • The establishment payroll survey (EPS) by the Bureau of Labor Statistics is a payroll survey that measures the net change in jobs created for the month

19. Unemployment Early in an Expansion • When firms expand output, they first extend the hours of employees previously reduced to part-time work or by asking full-time personnel to work overtime • An economic expansion may make discouraged workers more optimistic about job prospects, and they may resume their job searches Thus, an economic expansion may have little effect initially on employment and may even increase unemployment

20. Natural Unemployment • When the labor market is in equilibrium, employment is at the natural level and the unemployment rate equals the natural rate of unemployment

21. Types of Unemployment Even if employment is at the natural level, the economy will experience frictional and structural unemployment • The structurally unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have, or because they never learned any skills • Frictional unemployment occurs when people are between jobs since it takes time to match those looking for employment with the correct job openings for which they are best suited

22. Cyclical Unemployment • Cyclical unemployment is unemployment in excess of that associated with the natural level of employment • rises during a recession and falls during an economic expansion

23. Patterns of Unemployment

24. Unemployment Decreases with Education Level

25. Practice Question You are advising a policy maker on the health of the economy. The unemployment rate rose rapidly 6 months ago and had begun to fall the last two months. Everyone had wanted to see a third month of decline in unemployment. Instead this month the unemployment rate rose slightly. What information do you need to assess how the economy is doing?

26. Quick Review • What is an economic indicator? • What is GDP? What is counted and what is left out? • What is the relationships among GDP, net domestic product, national income, personal income, and disposable income? • How is the unemployment rate calculated? • What are the different types between the different types of unemployment?