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 Nations 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 Nations Output

Market Value
Market

value is used to aggregate the quantities of different goods and services into one measurement

Gross Domestic Product: Measuring the Nations Output

Market Value
Calculating
Total

GDP for Orchardia

production = 4 apples, 6 bananas, and 3 pairs of shoes

o Price of apples = $0.25 o Price of bananas = $0.50 o Price of shoes = $20

Market Value
Calculating
GDP

Gross Domestic Product: Measuring the Nations Output

GDP for Orchardia

o (4 x $0.25) + (6 x $0.50) + (3 x $20) = $64

Gross Domestic Product: Measuring the Nations Output

Market Value
Observation
More

expensive items receive a higher weight than cheaper items.

Orchardias
GDP

production changes to 3 apples, 3 bananas , and 4 shoes

o (3 x $0.25) + (3 x $0.50) + (4 x $20) = $82.25

Gross Domestic Product: Measuring the Nations Output

Final Goods or Services

Goods

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 Nations Output

Intermediate Goods or Services

Goods

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 Nations Output

Final Goods and Services

Bread

Production

Milling

Co. pays $0.50 for wheat Bakery pays $1.20 for flour Bakery sells bread for $2.00 Contribution to GDP = $2.00

Gross Domestic Product: Measuring the Nations Output

Final Goods and Services

Getting

a haircut

Barber

charges $10 for a haircut Barber pays his assistant $2 Contribution to GDP = $10

Gross Domestic Product: Measuring the Nations Output

Capital

Good A 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 Nations Output

Value Added
For

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 General Flour HotnFresh Total

$0.50 $1.20 $2.00

$0.00 $0.50 $1.20

$0.50 $0.70 $0.80 $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 Nations Output

Produced Within a Country During a Given Period

Domestic
Only

production that takes place within a countrys border Examples

o 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 Nations Output

Produced Within a Country During a Given Period

Given

Period

Counts

only goods produced during the defined period such as a calendar year Examples
o The sale of used goods is not counted. o Real estate commissions are counted.

The Expenditure Method for Measuring GDP

Consumption Expenditure, or simply Consumption

Spending

by households on goods and services, such as food, clothing, and entertainment

Consumer

durables Consumer nondurables Services

The Expenditure Method for Measuring GDP

Investment
Spending

by firms on final goods and services, primarily capital goods and housing
Business

fixed investment Residential investment Inventory investment

The Expenditure Method for Measuring GDP

Government Purchases
Purchases

by federal, Provencial, and local governments of final goods and services Does not include transfer payments Does not include interest paid on government debt

The Expenditure Method for Measuring GDP

Net Exports
Exports

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

The Expenditure Method for Measuring GDP

GDP

Y = C + I + G + NX

The Expenditure Method for Measuring GDP

Example
An

economy produces 1 million cars valued at $15,000 each.

The Expenditure Method for Measuring GDP

Production
GDP

= 1 million x $15,000 = $15 billion

The Expenditure Method for Measuring GDP

Expenditure
700,000
C

sold to consumers sold to businesses

= 700,000 x $15,000 = $10.5 billion

200,000
I

= 200,000 x $15,000 = $3.0 billion

50,000
G

sold to government exported (no imports)

= 50,000 x $15,000 = $.75 billion = 25,000 x $15,000 = $.375 billion

25,000
NX

The Expenditure Method for Measuring GDP

Expenditure
975,000
I

sold 25,000 inventory

= 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 Income Labor income

Equals

2/3 of GDP Includes: o Wages o Salaries o Income of the self-employed

GDP and the Incomes of Capital and Labor

GDP = Labor Income + Capital Income Capital income

Equals

1/3 of GDP Includes: o Profits o Rent o Interest o Royalties

The Three Faces of GDP

Production Expenditure Income

Market value of final goods and services

Consumption Labor Income

=
Investment Government purchases Net exports

Capital Income

Nominal GDP versus Real GDP

Real GDP
A

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 GDP
A

measure of GDP in which the quantities produced are valued at current-year prices Nominal 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 doesnt count externalities

Nonmarket Economic Activities

Household

production Volunteer services Nonmarket activities are more important in poor countries Underground economy

Environmental Quality and Resource Depletion

Benefits

of environment quality are not measured. GDP is not adjusted for resource depletion.

Poverty and Economic Inequality

GDP

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 Unemployment
Those

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. of the labor force : People who are neither employed nor unemployed are not in the labor force.

Out

The Bureau of Statistics estimates how many people in the Pakistan fit into each category.

The Unemployment Rate

Labor Force
The

total number of employed and unemployed people in the economy number of unemployed people divided by the labor force

Unemployment Rate
The

The Unemployment Rate

Measuring Unemployment
Labor

force = employed + unemployed

unemployed Unemployme nt rate = labor force

The Unemployment Rate

The Cost of Unemployment

Economic Psychological Social

The Duration of Unemployment

The

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 havent yet found the right match.

Structural unemployment describes

those who are unlikely to find work because of some flaw in the economy.