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Measuring Economic Activity Gross domestic product (GDP).

Measuring Economic Activity Gross domestic product (GDP). The market value of goods and services produced by labor and property in the United States, regardless of nationality; GDP replaced gross national product (GNP ) as the primary measure of U.S. production in 1991. National income.

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Measuring Economic Activity Gross domestic product (GDP).

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  1. Measuring Economic Activity Gross domestic product (GDP). The market value of goods and services produced by labor and property in the United States, regardless of nationality; GDP replaced gross national product (GNP) as the primary measure of U.S. production in 1991.

  2. National income • A broader national level economic measure than is personal income. National income includes payments to individuals (income from wages and salaries, and other income), plus payments to government (taxes), plus retained income from the corporate sector (depreciation, undistributed profits), less adjustments (subsidies, government and consumer interest, and statistical discrepancy).

  3. Personal income Measures national level income to persons and nonprofit corporations. Personal income includes payments to individuals (income from wages and salaries, and other income), plus transfer payments from government, less employee social insurance contributions

  4. Disposable personal income • Measures the after-tax income of persons and nonprofit corporations. It is calculated by subtracting personal tax and nontax payments from personal income.

  5. Issues • GDP excludes non-market economic activity. (Washing your car vs going to the car wash.) • GDP excludes illegal activity • GDP doesn’t count “externalities”

  6. Measuring Unemployment • People with jobs are employed. • People who are jobless, looking for jobs, and available for work are unemployed. • People who are neither employed nor unemployed are not in the labor force.

  7. Issues • Who is counted as employed • All persons who did any work for pay or profit during the survey reference week. • All persons who did at least 15 hours of unpaid work in a family-operated enterprise. • All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons.What about the underemployed?

  8. Who Is Unemployed? • All persons who were not classified as employed during the survey reference week, made specific active efforts to find a job during the prior 4 weeks, and were available for work. • All persons who were not working and were waiting to be called back to a job from which they had been temporarily laid off • What about discouraged workers?

  9. Is Unemployment Bad? • Almost everyone is unemployed at some point. It takes time to match workers and employers. Frictional unemployment is a term used to describe those who are seeking work but who haven’t yet found the right match. • Structural unemployment describes those who are unlikely to find work because of some flaw in the economy. • These are not precise terms and it can be hard to distinguish

  10. Price Indices • A price index such as the consumer price index (cpi) compares the price of bundle of goods today with the price of the same bundle in a base year. As a matter of convention, the base year price is always expressed as 100. • The inflation rate is the percentage change in the index.

  11. Real v Nominal • The Nominal value of some variable is simply the actual dollar amount (e.g., GDP was about $12.5 trillion.) • The Real value of a variable is the nominal value adjusted for inflation. That is • Real = nominal/price index

  12. Issues • How do you compare a standard bundle of goods from one time with another? (e.g., computers today and computers in 1980). • How do you deal with long lived assets (houses are a huge problem). • How do you deal with the fact that people change their consumption in response to changes in prices?

  13. Cool Web Site • http://data.bls.gov/cgi-bin/cpicalc.pl

  14. Is Inflation Bad? • Does it matter if a clock is 10 minutes fast or slow? • Inflation can do two bad things • Reduce the value of monetary assets. (But this can accomodated by various kinds of indexing) • Distort the “information” contained in prices • This all means that we should distinguish anticpated and unanticipated inflation.

  15. The Simplest (and maybe most misleading) Macro Model

  16. Definitions • Y = total gross domestic product • C = Consumption • G= Government Expenditures • T= Tax • I= Investment Expenditure

  17. Assumptions • C = a + b(Y-T) (b is the “marginal propensity to consume”) • Y = C+I+G (no international trade—we’ll fix that latter).

  18. Conclusion and Implications • Y = [a+I+G-bT]/(1-b) • Multipliers (change in Y per unit change in G, I, or T) • Investment and G = 1/(1-b) • Tax = -b/(1-b)

  19. Complication • I is almost certainly determined by a number of factors, including the level of interest rates. • Thus, we need to think about how the actions of the central bank influence the level of interest (and also prices).

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