measuring economic activitya
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Measuring Economic Activity:
National Income ,GDP and Unemployment
Measuring Economic Activity:
National Income ,GDP and Unemployment
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).
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
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.
Gross Domestic Product: Measuring the Nation’s Output
Gross Domestic Product (GDP)The market value of the final goods and
services produced in a country during a given period
Gross Domestic Product: Measuring the Nation’s Output
Market ValueMarket value is used to aggregate the
quantities of different goods and services into one measurement
Gross Domestic Product: Measuring the Nation’s Output
Market ValueCalculating GDP for Orchardia
Total production = 4 apples, 6 bananas, and 3 pairs of shoes
o Price of apples = $0.25o Price of bananas = $0.50o Price of shoes = $20
Gross Domestic Product: Measuring the Nation’s Output
Market ValueCalculating GDP for Orchardia
GDPo (4 x $0.25) + (6 x $0.50) + (3 x $20) = $64
Gross Domestic Product: Measuring the Nation’s Output
Market ValueObservation
More expensive items receive a higher weight than cheaper items.
Orchardia’s production changes to 3 apples, 3 bananas , and 4 shoes
GDPo (3 x $0.25) + (3 x $0.50) + (4 x $20) = $82.25
Gross Domestic Product: Measuring the Nation’s Output
Final Goods or ServicesGoods or services consumed by the
ultimate user; because they are the end products of the production process, they are counted as part of GDP
Gross Domestic Product: Measuring the Nation’s Output
Intermediate Goods or ServicesGoods or services used up in the
production of final goods and services and therefore not counted as part of GDP
Gross Domestic Product: Measuring the Nation’s Output
Final Goods and ServicesBread Production
Milling Co. pays $0.50 for wheatBakery pays $1.20 for flourBakery sells bread for $2.00Contribution to GDP = $2.00
Gross Domestic Product: Measuring the Nation’s Output
Final Goods and ServicesGetting a haircut
Barber charges $10 for a haircutBarber pays his assistant $2Contribution to GDP = $10
Gross Domestic Product: Measuring the Nation’s Output
Capital GoodA long-lived good, which is itself
produced and used to produce other goods and services
Newly produced capital goods are classified as final goods.
Gross Domestic Product: Measuring the Nation’s Output
Value AddedFor any firm, the market value of its
product or service minus the cost of inputs purchased from other firms
Value Added in Bread Production
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
•The grain and flour are produced in 2005•Bread is produced in 2006•$1.20 is added to 2005 GDP•$0.80 is added to 2006 GDP
Gross Domestic Product: Measuring the Nation’s Output
Produced Within a Country During a Given PeriodDomestic
Only production that takes place within a country’s border
Exampleso Cars produced in the Pakistan by foreign owned
companies are counted.o Cars produced in Japan by Pakistani owned
companies are not counted.
Gross Domestic Product: Measuring the Nation’s Output
Produced Within a Country During a Given PeriodGiven Period
Counts only goods produced during the defined period such as a calendar year
Exampleso The sale of used goods is not counted.o Real estate commissions are counted.
The Expenditure Method for Measuring GDP
Consumption Expenditure, or simply ConsumptionSpending by households on goods and
services, such as food, clothing, and entertainment
Consumer durablesConsumer nondurablesServices
The Expenditure Method for Measuring GDP
InvestmentSpending by firms on final goods and
services, primarily capital goods and housing
Business fixed investmentResidential investmentInventory investment
The Expenditure Method for Measuring GDP
Government PurchasesPurchases by federal, Provencial, and local
governments of final goods and servicesDoes not include transfer paymentsDoes not include interest paid on
government debt
The Expenditure Method for Measuring GDP
Net ExportsExports minus imports
The Expenditure Method for Measuring GDP
Y = gross domestic product, or output
C = consumption expenditure
I = investment
G = government purchases
NX = net exports
GDP
NXGICY
The Expenditure Method for Measuring GDP
The Expenditure Method for Measuring GDP
ExampleAn economy produces 1 million cars
valued at $15,000 each.
The Expenditure Method for Measuring GDP
ProductionGDP = 1 million x $15,000 = $15 billion
The Expenditure Method for Measuring GDP
Expenditure700,000 sold to consumers
C = 700,000 x $15,000 = $10.5 billion
200,000 sold to businessesI = 200,000 x $15,000 = $3.0 billion
50,000 sold to governmentG = 50,000 x $15,000 = $.75 billion
25,000 exported (no imports)NX = 25,000 x $15,000 = $.375 billion
The Expenditure Method for Measuring GDP
Expenditure975,000 sold25,000 inventory
I = 25,000 x $15,000 = $.375 billion
GDP = C + I + G + NX$10.5 + (3.0 +.375) + .75 + .375 = $15.0
billion
GDP and the Incomes of Capital and Labor
GDP = Labor Income + Capital IncomeLabor income
Equals 2/3 of GDPIncludes:
oWagesoSalariesoIncome of the self-employed
GDP and the Incomes of Capital and Labor
GDP = Labor Income + Capital IncomeCapital income
Equals 1/3 of GDPIncludes:
oProfitsoRentoInterestoRoyalties
The Three Faces of GDP
= =
Market Market value of value of
final final goods goods
and and servicesservices
Production Expenditure Income
InvestmentInvestment
ConsumptionConsumption
GovernmentGovernment
purchasespurchases
Net exportsNet exports
Capital Capital IncomeIncome
Labor IncomeLabor Income
Nominal GDP versus Real GDP
Real GDPA measure of GDP in which the quantities
produced are valued at the prices in a base year rather than at current prices
Real GDP measures the actual physical volume of production
Nominal GDP versus Real GDP
Nominal GDPA measure of GDP in which the quantities
produced are valued at current-year pricesNominal GDP measures the current rupee
value of production
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”
Nonmarket Economic Activities
Household productionVolunteer servicesNonmarket activities are more important in
poor countriesUnderground economy
Environmental Quality and Resource Depletion
Benefits of environment quality are not measured.
GDP is not adjusted for resource depletion.
Poverty and Economic InequalityGDP does not capture the effects of
income inequality
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
Measuring UnemploymentThose 18 years and over are placed in one
of three categories:Employed : People with jobs
Unemployed : People who are jobless, looking for jobs, and available for work are unemployed.
Out of the labor force : People who are neither employed nor unemployed are not in the labor force.
The Bureau of Statistics estimates how many people in the Pakistan fit into each category.
The Unemployment Rate
Labor ForceThe total number of employed and
unemployed people in the economy
Unemployment RateThe number of unemployed people divided
by the labor force
The Unemployment Rate
Measuring UnemploymentLabor force = employed + unemployed
force labor
unemployed rate ntUnemployme
The Unemployment Rate
The Cost of UnemploymentEconomicPsychologicalSocial
The Duration of UnemploymentThe impact of unemployment is influenced
by how long individuals have been unemployed.
Terminologies
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.