Measuring GDP &Economic Growth 1/14/2013 4:42:00 PM
GDP or gross domestic product is the market value of the final goods and
services produced within a specific country in a given time period.
The definition has 4 parts:
Market value- the prices at which items are traded in markets
Final goods and services- an item bought by its final user.
Produced within a country
In a given time period
An intermediate good is a good that is produced by one firm, bought by another,
and used as a component of a final good or service.
Financial assets such as stocks and bonds are neither intermediate or final goods.
So are existing homes and used items.
GDP measures not only the value of total production but also total income and
Our standard of livings rise as our incomes rise and we can afford more goods and
Aggregate income= total income. Aggregate income is equal to the amount paid
for the services of the factors of production used to produce final goods and
services-wages, interest, rent, and profit.
Firm’s retained earnings: profits that are not distributed to households are part of
the household’s sector’s income.
GDP and the Circular Flow of Expenditure and Income
Households and Firms: Households sell and firms buy the services of labour,
capital, and land in factor markets. Firms sell and households buy consumer
goods and services such as haircuts in the goods market. Governments: Government Expenditure is the expenditure of goods and
services by the government. Government expenditure is financed using taxes
but taxes are not part of the circular flow, they are seen as financial transfers.
Rest of the World: Net exports is the value of exports minus the value of
imports. If net exports are positive, the net flow of goods is from Canadian
firms to the rest of the world.
GDP Equals Expenditure Equals Income: GDP can be measured by the total
expenditure on goods and services or by the total income earned producing
goods and services.
Y = C + I + G + (X – M)
Aggregate Income= consumption expenditure+ investments+ government
expenditure+ (exports- imports)
Labour earns wages
Land earns rent
Capital earns interest
Entrepreneurship earns profit
Investments are purchases of new plant, equipment, and buildings and the
additions to inventories.
Consumption Expenditure is the expenditure by households on goods and
services produced in that country and in the rest of the world.
WHY IS DOMESTIC PRODUCT GROSS?
Because Gross investment and gross profit is used to calculate it.
“Gross” means before subtracting the depreciation of capital.
Gross investment is the total amount spent both on buying new capital and
replacing depreciated capital. The amount buy which total capital increases is
called net investment. Net Investment= gross investment- depreciation
Depreciation is the decrease in the value of a firm’s capital that results from wear
and tear and obsolesce.
The two ways to measure GDP are:
1. The expenditure approach- measures GDP as the sum of consumption
expenditure, investment, government expenditure and net exports. In this
approach new homes are counted as investments and not expenditures.
2. The income approach- measures GDP by summing the incomes that firms pay
households for the factors of production they hire. The incomes are divided into
i. Wages, salaries and supplementary labour income- gross wages& pensions etc.
ii. Other factor incomes- corporate profits, farmer’s income etc. mixture of
interest, rent and profit.
Indirect tax is paid by consumers when they buy something.
Direct tax is a tax on income.
To get from factor cost to market price, we add indirect taxes and subtract
subsidies. To get from market price to factor cost, we subtract indirect taxes and
To get from net income to gross income, we must add depreciation.
Nominal GDP is the value of final goods and services produced in a given year at
the prices of that year.
Real GDP is the value of final goods and services produced in a given year when
valued at the prices of a reference base year.
THE USES AND LIMITATION OF REAL GDP
1. The standard of living over time
Real GDP per person is real GDP divided by the population. Potential GDP is the maximum level of real GDP that can be produced while
avoiding shortages of capital, land, and entrepreneurship that would bring rising
inflation. It grows at a steady pace.
Potential GDP per person doesn’t grow at a constant pace.
Lucas wedge is the dollar value of the accumulated gap that real GDP per person
would have been if the growth rate had persisted and what real GDP per person
turned out to be.
The fluctuation in the pace of expansion of real GDP is the business cycle. It is the
periodic but irregular up-and-down movement of total production and other
measures of economic activity.
Every cycle has two phases: Expansion, Recession
And two turning points: Peak, Trough
2. The standard of living across countries
Currency must be converted
Must be valued at the same price
Some of the factors that influence the standard of living and that are not part of
Underground economic activity
Health and life expectancy
Political freedom and social justice
KEY WORDS: Business cycle
Chained-dollar real GDP
Gross Domestic Product
Real GDP per person
Time Series Graph
Trend Monitoring Jobs & Inflation 1/14/2013 4:42:00 PM
Unemployment is a serious personal and social economic problem for two main
reasons. It results in
Lost income and production
Lost human capital
Unemployment benefits create a safety net, but they don’t fully replace lost
Prolonged unemployment permanently damages a person’s job prospects by
destroying human capital, which lowers the living standard in both the present and
Labour Force Survey
The population divides into two broad categories:
The working-age population and others who are too young to work or who live in
institutions and aren’t able to work.
The working-age population is the total number of people aged 15 years and
over. The working age population is also divided into two groups: those in the
labour force and those that are not.
The labour force is the sum of the employed and the unemployed.
In order to be counted as unemployed, a person must be available for work and
must be in one of the three categories:
1. Without work but has made specific efforts to find a job within the previous
2. Laid off from a job and be waiting to be called back to work
3. Waiting to start a new job within four weeks
Four Labour Market Indicators
Four indicators of the labour market are the:
Involuntary part-time rate
Labour force participation rate
Employment-to-population ratio The unemployment rate is the percentage of the people in the labour force who are
unemployed. That is,
Number of people unemployed
Unemployment rate= Labour Force x100
The involuntary part-time rate is the percentage of the people in the labour force
who work part-time but want to work full time jobs.
Involuntary part time rate= Number of involuntary part-time workers
Labour force x100
The labour force participation rate is the percentage of the working age population
who are members of the labour force. That is,
Labour force Labour force
participation rate = Working-age population x100
The Employment-to-population ratio is the percentage of people of working age
who have jobs. That is,
Employment-to- Number of people employed
Population ratio = Working-age population x100
The unemployment rate increases as a recession deepens, reaches its peak after
a recession ends, and decreases after recovery gets going.
The number of people in the labour force is an indicator of the willingness of
people of working age to take jobs.
The number of people of the working age who have jobs is an indicator of both
the availability of jobs and the degree of match between people’s skills and
The employment-to-population ratio fluctuates with the business cycle: It falls
in a recession and rises in an expansion. Economic part-time workers are recognized as Statistics Canada as those
individuals who want to work full time but cant find them so they work part
Other Definitions of unemployment
A marginally attached worker is a person who is currently neither working nor
looking for work but has indicated that he or she wants a job and is available and
has looked for work sometime in the past.
A discouraged worker is a marginally attached worker who has stopped looking
for work because of repeated failure to find one.
Most Costly Unemployment
Short term unemployment last 1-13 weeks.
Long term unemployment lasts 14 weeks or more.
Frictional unemployment is unemployment which arises from normal labour
turnover- from people entering and leaving the labour force and from the creation
and destruction of jobs.
Structural Unemployment is the unemployment that arises when changes in
technology or international competition change the skills needed to perform jobs or
change the locations of jobs. It lasts longer than frictional employment.
Cyclical Unemployment is the higher than normal unemployment at a business
cycle trough and the lower than normal unemployment at a business cycle peak.
“Natural unemployment” is the unemployment that arises from frictions and
structural change when there is no cyclical unemployment. It is all frictional and
Natural unemployment expressed as a percentage of the labour force is called the
natural unemployment rate.
Full employment is defined as a situation in which the unemployment rate equals
the natural unemployment rate.
The natural unemployment rate is influenced/determined by many factors but the
most important ones are: The age distribution of the population
The scale of structural change
The real wage rate
An efficiency wage is a wage set above the going market wage to enable firms to
attract the most productive workers, get them to work hard, and discourage them
Unemployment benefits lower the natural unemployment rate by lowering the
opportunity cost of job search. The higher the unemployment benefits, the higher
the natural unemployment.
Real GDP And Unemployment Over The Cycle
The quality of real GDP at full employment is potential GDP.
The gap between real GDP and potential GDP is called the output gap.
As the output gap fluctuates around the business cycle, the un