GDP

What is GDP?

• Gross Domestic Product (Duh)• Output of final goods and service• Income from the sale of final goods and

services

Y= C+G+I+(EX-IM)

• Y = Output (GDP)• C = Consumption• G= Government Spending• I = Investment Spending• EX-IM = Exports-Imports – Net Exports (NX)

As of 2014Q3

• Y= 17.60 Trillion• C= 12.00 Trillion• G=3.20 Trillion• I= 2.90 Trillion• NX = -.52 Trillion– EX =2.37 Trillion– IM =2.88 Trillion

Consumption

• C = 68% of GDP• Goods (4.01 Trillion)– Durable Goods– Nondurable Goods

• Services (7.99 Trillion)• As you can see about 45% of our economy is

services

I=Investment Spending

• 16.4% of GDP• Investment spending is not the same as “making an

investment”• I is spending on final goods and services by firms and

confusingly: households:– Fixed Investment

• Nonresidential ($2.24 tril)– Structures– Software and Equipment

• Residential ($0.57 tril)Buying a house means buying the services of the house into the future (i.e. an investment)

– InventoriesProduced but not sold. Future Sales = Investment

G =Government

• As of 2011Q4 G=18% of GDP– With Transfers G= 31% of GDP

• We get lazy and thing of G =Federal Gov.– However G = State, Local and Federal Government– State and Local Spending = 11% of GDP

• T = Taxes• TR = (Net)Transfers (Transfer Spending-Transfer

Taxes)– Social Security, Medicare/Medicaid Insurance, Foods

Stamps, Foreign Aid etc.

Government Budgets

• G+TR>T 0> T-(G+TR)– Government Deficit

• G+TR<(T) 0< T-(G+TR)• Government Surplus• Government Saving (ignoring TR):• T-G=Sg

• Sg = Government Savings – Sg < 0 (Deficit) or Sg > 0 (Surplus)

EX and IM

• NX = -2.9% of GDP• Total EX + IM = 32% of GDP• EX = Goods produced (income earned) but sold to

foreigners. It is output above what is consumed (C+G+I) in the US

• IM = Goods consumed (C+G+I) in the US but produced (income earned) by foreigners.

• EX-IM = Trade Balance• EX >IM (EX-IM >0) Trade Surplus • EX <IM (EX-IM <0) Trade Deficit

Savings/Investment Identity

• This is an important concept– Savers = People with money sitting around– Investors (really investment spenders) = People who have a

use for that money.• No Gov; No Trade:• Y= Income = C+S – S = Savings

• Y= Purchases/Output= C + I• Y = C + S = C + I• S = I

Savings/Investment Identity (cont)

Adding Government (No Transfers) and Trade• Y = Income = C + S + T

Disposable Income = Y – T• Y = Purchase/Product = C + G + I + (NX)• Y = C + S + T = C + G + I + NX• Do some math:• I = (T-G) + (-NX) + S• I = Sg + SF + Sp

• I = Government Savings + Foreign Savings + Private Savings

The (–NX) term

• The inverse of Net Exports.o -NX = -(EX-IM) = IM-EX

• How do you pay for imports?– Export something in exchange, kind of like barter– Offer an IOU or an Asset in exchange

• (-NX) is the same as the “capital account” (KA)

The Capital Account

• KA = KI - KO• KI = Capital Inflow– Foreign Purchase of domestic assets.

• KO = Capital Outflow– Domestic Purchase of foreign assets.

• Capital Flows = FDI + Paper Assets + Loans + Reserve Assets

• Punchline: NX + KA = 0– Imports must be paid for by either an offsetting export

or asset transfer.

UNEMPLOYMENT

Unemployment

• Employed + Unemployed = Labor Force• Unemployed has a specific definition:– Looked for work within the last month.

Other kinds of not unemployed but without a job:

• Marginally attached Workers– Has looked for a job in the last year– Wants to work, can’t find a job

• Discouraged workers• Given up looking for work because they feel there are

no job opportunities

• Involuntary Part Time Workers– Working part time for “economic reasons”

Other Ways of Thinking about Unemployment

• Employment/Population Ratio.• U3 = Standard Definition of Unemployment• U6 Includes Marginally Attached and Part

Time Workers.• Current Employment Survey• Duration of Unemployment.

• Historically:– Rising unemployment in the 1960s and 1970s– Decline in unemployment in the 1980s– Possibly explained by the baby boom

Textbook page 180

Different Kinds of Unemployment

• The natural rate of unemployment– Rate that would prevail if the economy were in

neither a boom nor a bust• Cyclical unemployment– The difference between the actual rate and the

natural rate– Associated with short-run fluctuations in

output

• The natural rate of unemployment includes two components:– Frictional unemployment• workers being between jobs in the dynamic

economy– Structural unemployment• labor market failing to match up workers and

firms in the market

• Actual unemployment is the sum of frictional, structural, and cyclical unemployment.