MACRO ECONOMIC TERMS CH. 7,8, + 9 - GDP, UNEMPLOYMENT, INFLATION AND GROWTH.
MBMC Measuring Economic Activity: GDP and Unemployment.
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Transcript of MBMC Measuring Economic Activity: GDP and Unemployment.
MB MC
Measuring Economic Activity: GDP and
Unemployment
Measuring Economic Activity: GDP and
Unemployment
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 2
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Introduction
“Real GDP, the value of goods and services produced in the U.S., grew at an annual rate of 1 percent in the fourth quarter….”
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 3
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Introduction
“The unemployment rate last month rose to 6.1 percent, its highest level since….”
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 4
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Introduction
“Inflation appears subdued as the consumer price index registered an increase of only 0.2 percent last month…”
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 5
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 6
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 7
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 8
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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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 9
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 10
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Percentages of American Men and Women over Age 16 Working Outside the Home, 1960 - 2001.
• Increase in female labor force participation increases the demand for housekeeping and child care.
• Unpaid household work is not counted in GDP.• Paid household work is counted in GDP.• The increase in female labor force participation has overstated GDP growth.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 11
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Gross Domestic Product: Measuring the Nation’s Output
Economic NaturalistWhy has female participation in the labor
market increased by so much?What explains the trends illustrated in the
previous figure?Hint: The concept of comparative advantage
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 12
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 13
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 14
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 15
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 16
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Gross Domestic Product: Measuring the Nation’s Output
Example: A good that can be either intermediate or final:Capital Good
A long-lived good, which is itself produced and used to produce other goods and services
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 17
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Gross Domestic Product: Measuring the Nation’s Output
Example: A good that can be either intermediate or final:Capital Good
Newly produced capital goods are classified as final goods.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 18
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 19
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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 2002•Bread is produced in 2003•$1.20 is added to 2002 GDP•$0.80 is added to 2003 GDP
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 20
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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 U.S. by foreign owned
companies are counted.o Car produced in Mexico by U.S. owned companies
are not counted.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 21
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 22
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Expenditure Components of U.S. GDP, 2001 (billions of dollars)
Consumption 6,987.0
Durable goods 835.9
Nondurable goods 2,041.3
Services 4,109.9
Investment 1,586.0
Business fixed investment 1,201.6
Residential investment 444.8
Inventory investment -60.3
Government purchases 1,858.0
Net exports -348.9
Exports 1,034.1
Imports 1,383.0
Total: Gross domestic product 10,082.2
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 23
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 24
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Expenditure Method for Measuring GDP
InvestmentSpending by firms on final goods and
services, primarily capital goods and housing
Business fixed investmentResidential investmentInventory investment
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 25
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Expenditure Method for Measuring GDP
Government PurchasesPurchases by federal, state, and local
governments of final goods and servicesDoes not include transfer paymentsDoes not include interest paid on
government debt
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 26
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Expenditure Method for Measuring GDP
Net ExportsExports minus imports
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 27
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Expenditure Method for Measuring GDP
Y = gross domestic product, or output
C = consumption expenditure
I = investment
G = government purchases
NX = net exports
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 28
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
GDP
NXGICY
The Expenditure Method for Measuring GDP
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 29
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‘Twin Deficit’ Accounting
(Y -C -T) + (T-G) - I = NX (Net Exports)S(priv) + S(gov) – Investment
≡ Net Nat’l Saving
Y = C + I + G + NX
Net Nat’l Savings = Net Exports
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 30
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Expenditure Method for Measuring GDP
ExampleAn economy produces 1 million cars
valued at $15,000 each.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 31
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Expenditure Method for Measuring GDP
ProductionGDP = 1 million x $15,000 = $15 billion
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 32
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 33
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 34
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
GDP and the Incomes of Capital and Labor
GDP = Labor Income + Capital IncomeLabor income
Equals 75% of GDPIncludes:
o Wageso Salarieso Income of the self-employed
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 35
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
GDP and the Incomes of Capital and Labor
GDP = Labor Income + Capital IncomeCapital income
Equals 25% of GDPIncludes:
o Profitso Rento Interesto Royalties
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 36
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 37
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Prices and Quantities in 2000 and 2004
Quantity of pizzas
2000 10 $10 15 $5
2004 20 $12 30 $6
Price of pizzas
Quantity of calzones
Price of calzones
GDP•2000 = (10)($10) + (15)($5) = $175•2004 = (20)($12) + (30)($6) = $420
Observations•Output doubled•GDP increased by 2.4 times•Prices also rose•GDP overstates economic growth
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 38
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 39
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
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 dollar
value of production
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 40
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Prices and Quantities in 2000 and 2004
Quantity of pizzas
2000 10 $10 15 $5
2004 20 $12 30 $6
Price of pizzas
Quantity of calzones
Price of calzones
•2000 = base year•2004 Real GDP = (20)($10) + (30)($5) = $350•2000 Real GDP = (10)($10) + (15)($5) = $175
Real GDP = Nominal GDP in the base year
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 41
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Real GDP is not the Same as Economic Well-Being
Leisure TimeShorter work weekStart working laterRetire earlier
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 42
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Real GDP is not the Same as Economic Well-Being
Economic NaturalistWhy do people work fewer hours today
than their great-grandparents did?Hint: Use the concept of opportunity cost
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 43
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Real GDP is not the Same as Economic Well-Being
Nonmarket Economic ActivitiesHousehold productionVolunteer servicesNonmarket activities are more important in
poor countriesUnderground economy
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 44
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Real GDP is not the Same as Economic Well-Being
Environmental Quality and Resource DepletionBenefits of environment quality are not
measured.GDP is not adjusted for resource depletion.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 45
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Real GDP is not the Same as Economic Well-Being
Quality of LifeCrime ratesTraffic congestionCivic organizationsOpen space
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 46
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
Real GDP is not the Same as Economic Well-Being
Poverty and Economic InequalityGDP does not capture the effects of
income inequality
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 47
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
GDP & Basic Indicators of Well-Being
IndicatorAll developing
countries
GDP per person 3,530 1,170 25,860(U.S. dollars)
Life expectancy at 64.5 51.7 78.0birth (years)
Infant mortality rate 61 100 6(per 1,000 live births)
Under-5 mortality rate 89 159 6(per 1,000 live births)
Doctors 78 30 252(per 100,000 people)
Incidence of HIV/Aids 1.3 4.3 0.3(% in 15-49 age group)
Undernourished 18 38 Negligiblepeople (%)
Primary enrollment 85.7 60.4 99.9rate (as % of age group)
Secondary enrollment 60.4 31.2 96.2rate (as % of age group)
Adult literacy rate (%) 72.9 51.7 98.6
Least developed countries
Industrialized countries
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 48
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
But GDP is Related to Economic Well-Being
Economic NaturalistWhy do far fewer children complete high
school in poor countries than in rich countries?
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 49
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Unemployment Rate
Measuring UnemploymentThe Bureau of Labor Statistics (BLS)
surveys 60,000 randomly selected households each month
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 50
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Unemployment Rate
Measuring UnemploymentThose 16 years and over are placed in one
of three categories:EmployedUnemployedOut of the labor force
The BLS estimates how many people in the U.S. fit into each category.
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 51
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Unemployment Rate
Measuring UnemploymentLabor force = employed + unemployed
force labor
unemployed rate ntUnemployme
over and 16 population
force labor rate ionParticipat
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 52
MB MC
Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
U.S. Employment Data, July 2002 (in millions)
Employed 134.04
Plus:
Unemployed 8.35
Equals: Labor force 142.39
Plus:
Not in labor force 71.63
Equals:
Working-age (over 16) population 214.02
Unemployment rate = unemployed/labor force = 8.35/142.39 = 5.9%
Participation rate = labor force/working-age population = 142.39/214.02 = 66.5%
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 53
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The U.S. UnemploymentRate since 1960
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 54
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The Unemployment Rate
The Cost of UnemploymentEconomicPsychologicalSocial
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 55
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The Unemployment Rate
The Duration of UnemploymentThe impact of unemployment is influenced
by how long individuals have been unemployed.
The unemployment spellThe duration of unemploymentLong-term unemployedChronically unemployed
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 56
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Unemployment Rate
Unemployment SpellA period during which an individual is
continuously unemployed
DurationThe length of an unemployment spell
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 57
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Unemployment Rate
The Duration of UnemploymentDiscouraged workersInvoluntary part-time workersIn July 2002:
Official unemployment rate = 5.9%Including discouraged workers and involuntary
part-time worker = 9.4%
Chapter 5: Measuring Economic Activity: GDP and Unemployment Slide 58
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Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.
The Unemployment Rate
Discouraged WorkersPeople who say they would like to have a
job but have not made an effort to find one in the last four weeks
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End ofChapterEnd of
Chapter