GDP, Inflation, and Unemployment

Why is the average income high in some countries while it is low in others?

Why do prices rise rapidly in some periods of time while they are stable in others?

Why do production and employment expand in some years and contract in others?

What, if anything, can the government do to promote rapid growth in incomes, low inflation, and stable employment?

measures total income of a nationincome = expenditure

most closely watched econ stat

“the market value of all final goods and services produced within a country in a given period of time”

1. “the market value” = market prices2. “of all” = all items produced in the economy

and sold legallya) no illegal goods (drugs)b) no items that never enter market (home-

grown veggies)3. “final” = no intermediate goods

a) Yes: Hallmark cardb) No: paper sold to Hallmark to make card

4. “goods and services” = cars + haircuts

5. “produced” = current productiona) Yes: new car b) No: used car

6. “within a country” a) Canadian citizen works in US US GDPb) US citizen has factory in South Africa

SA GDP7. “in a given period of time”

a) quarter (3 mos.) or 1 yearb) seasonal adjustment for quarters

Y = C + I + G + NXY = C + I + G + NX

Y Y = GDP= GDPC C = consumption= consumptionI I = investment= investment

G G = government purchases= government purchasesNX NX = net exports (exports – = net exports (exports –

imports)imports)

Total (in billions)

Per Person Percent of Total

GDP (Y) $8,511 $31,522 100%

Consumption (C) 5,808 21,511 68

Investment (I) 1,367 5,063 16

Gov’t. purchases (G)

1,487 5,507 18

Net exports (NX) -151 -559 -2

real GDP = the production of goods and services at constant pricesest. base year for pricereflects in Δ in amts. producedbetter measure / used most often

nominal GDP = the production of goods and services at current pricesreflects in Δ in amts. produced and Δ in price

Prices and Quantities

Year P of Hot Dogs Q of Hot Dogs P of Hamburgers

Q of Hamburgers

2001 $1 100 $2 50

2002 2 150 3 100

2003 3 200 4 150

Year Calculating Nominal GDP

2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200

2002 ($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $600

2003 ($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) = $1,200

Year Calculating Real GDP (base year 2001)

2001 ($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200

2002 ($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $600

2003 ($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $1,200

“[GDP] does not allow for the health of our children, the quality of their education, or the joy of their play. It odes not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.”

- Senator Robert Kennedy, 1968

Country GDP per capita (2007 est.)

Luxembourg $79,400

United States $45,800

Australia $37,300

China $5,400

Nicaragua $2,800

Zimbabwe $200Source: CIA World Factbook

Country Real GDP per capita, 1997

Life Expectancy

Adult Literacy

United States

$29,010 77 years 99%

Japan 24,070 80 99

Germany 21,260 77 99

Mexico 8,370 72 90

Brazil 6,480 67 84

Russia 4,370 67 99

Indonesia 3,490 65 85

India 1,670 63 53

Bangladesh 1,050 58 39

Nigeria 920 50 59

Source: Human Development Report 1999, United Nations.

What GDP leaves out:leisurevalue of goods/services produced at homevolunteer workquality of environmentincome distribution

GDP (purchasing power parity)value of all goods/services produced in the

country valued at U.S. pricesGDP (official exchange rate)

value of all goods/services, with price calculated in US$ according to official exchange rate

GDP per capitaaverage GDP per person

Gross National Product (GNP)includes income our citizens earn abroad and

excludes income foreigners earn here

increase in the overall level of prices in the economy

Post-WWI Germany had hyperinflation:

Year Cost of Bread1918 ½ mark1922 160 marks1923 2 bil. marks!!!

3 categories:1. employed2. unemployed3. not in the labor force

labor force = # employed + # unemployedunemployment rate = # unemployed

labor forcex 100