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.