Measuring the Economy

Ch 13 Econ Alive

Questions
1. Why do economists measure things like GDP,
inflation and unemployment?
2. Do you want your countrys GDP to increase or
decrease? Why?
3. Does GDP measure every good or service (G/S) that
is produced?
4. If Sony (a Japanese company) manufacturers
headphones in Indiana, does that count in U.S. or
Japans GDP?
5. If Ford manufactured a Mustang in 2014 and didnt
sell it until 2015, would the value of the Mustang
count towards 2014 or 2015 GDP?

Measuring the Economy

GDP

Gross Domestic Product

(GDP)
Short: Measure of the total output of the economy
Longer: A measure of the total market value of all final
goods and services produced in a country in a year.
Market value: dollar amount for which something sells.
- allows us to compare relative values
(e.g. a car adds more to GDP than an apple) and
- add these different values together.
Final goods and services: prices sold to final consumer
- avoids double counting

Why measure GDP?

1. To see how big the economy is
2. To see whether the economy is
growing or not

U.S. GDP 1990-2015

 Q4 2014 U.S. GDP

GDP = C + I + G + NX (X-M)
C = household consumption
I= business investment
G=government purchases
NX= net exports (Exports-imports)
take the quantity of everything produced,
multiply it by the price at which each
product sold, and add up the total

(C):
Personal Consumption Expenditures

Spending by households on
goods and services
- e.g. cars, food, visits to the
dentist.

(I):
Gross Private Domestic Investment
Spending by businesses on capital
goods
(e.g. machinery, factories,
equipment, tools)
New construction
(residential and non-residential)
Changes in inventories

(G): Government
Consumption and Gross Investment
Government Purchases of goods and
services
Includes defense and
non-defense spending

Includes federal, state and local

spending

NX (X-M):
Net Exports of Goods and Services
Net exports = exports minus imports
Exports are added into US GDP
because they are goods and services
produced in the US and sold abroad.
Imports are subtracted from US GDP
because they are goods and services
produced abroad and sold in the US

Things not included in GDP:

-Intermediate goods and services

- Good and services not sold in the market place
- babysitting, barter
- Used goods/second-hand sales
- Illegal goods and services
- Purely financial transactions

Three ways to measure GDP

Nominal GDP

Real GDP

Measures GDP in
Measures GDP in
todays prices (current
constant dollars
dollars)
Does take into
Per
GDP
DoesCapita
NOT take
into
account inflation
inflation
-account
A nations
real GDP/population

- Acts as a measure of a societys

standard of living

Put these countries per capita GDP is

order from highest to lowest

New Zealand
Japan
South Korea
Saudi Arabia
Norway
Singapore
U.S.

U.S. GDP rank

Per
IMF
capit
a
U.S.
9
Total
GDP
U.S.
1

Worl C.I.A. U.N.

d
Bank
13
14
12

Per Capita GDP

rker color = higher p/capita G

Higher per capita GDP

Usually means
Higher literacy rates
Greater life expectancy
Lower infant mortality

Measuring the Economy

UNEMPLOYMENT

Questions
1. If you need to figure out how many
people were employed in the U.S.,
how would you go about doing this?
2. True or false? Included in
unemployment statistics
1.
2.
3.
4.

Under age 16
Active duty in military
In a nursing home
In prison

Measuring unemployment
Employed
Not in
labor
force

Unemploy
ed
Calculation
for
unemployme
nt

Unemployment rate =
# unemployed/# in labor force x 100

Do Now
1.
2.
3.
4.
5.

What does GDP stand for?

What is the definition of GDP?
Why do we measure GDP?
What is the formula for GDP?
Whats the difference between real
and nominal GDP?
6. Why is per capita GDP a good way
to compare countries GDP?

Types of unemployment
Frictional
Structural
Seasonal
Cyclical

Unemployment statistics do a poor

job of capturing data about
discouraged workers
Involuntary part-time workers
Underground economy

 Unemployment

Question
1. How are GDP and unemployment
rate related?
2. What is the current unemployment
rate?
3. What is the Feds unemployment
rate target?

Measuring the economy

INFLATION

How is inflation measured?

By tracking the changes in in cost of
living using the consumer price index
(CPI)

Causes of inflation
Increase in the money supply
Increase in overall demand for G/S
Increase in cost of factors of
production

Types of inflation
Creeping inflation
Hyperinflation
Zimbabwe

Deflation

U.S. inflation rate

Economic costs of inflation

Loss of purchasing power
Higher interest rates
Loss of economic efficiency

Videos

Economic Lowdown GDP

Types of unemployment
Fiscal policy
EconUSA - inflation