measuring economic activity: gdp and unemployment principles of macroeconomics dr. gabriel x....

Measuring Economic Activity: GDP and

Unemployment

Measuring Economic Activity: GDP and

Unemployment

Principles of Macroeconomics

Dr. Gabriel X. Martinez

Ave Maria University

Chapter 18: Measuring Economic Chapter 18: Measuring Economic Activity: GDP and UnemploymentActivity: GDP and Unemployment

22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.

IntroductionIntroduction

• ““Real GDP, the value of goods and Real GDP, the value of goods and services produced in the U.S., grew at an services produced in the U.S., grew at an annual rate of 1 percent in the fourth annual rate of 1 percent in the fourth quarter….”quarter….”

• ““The unemployment rate last month rose The unemployment rate last month rose to 6.1 percent, its highest level since….”to 6.1 percent, its highest level since….”

• ““Inflation appears subdued as the Inflation appears subdued as the consumer price index registered an consumer price index registered an increase of only 0.2 percent last month…”increase of only 0.2 percent last month…”



Gross Domestic Product: Gross Domestic Product: Measuring the Nation’s Measuring the Nation’s OutputOutput

• Measuring economic variables is Measuring economic variables is essential.essential.

– You are a tenth-century doctor.You are a tenth-century doctor.– Your best guess at human anatomy is Your best guess at human anatomy is

pig’s anatomy.pig’s anatomy.– Your best guess at a good cure is leeches.Your best guess at a good cure is leeches.




• Measuring economic variables is Measuring economic variables is essential.essential.– We cannot understand the economy without We cannot understand the economy without

precise measurement of economic activity.precise measurement of economic activity.– Governments cannot use economic policy if Governments cannot use economic policy if

they don’t know what is happening.they don’t know what is happening.– Firms and individuals need precise Firms and individuals need precise

information.information.



The Three Faces of The Three Faces of GDPGDP

= =

Market Market value of value of all final all final goods goods and and

services services produceproduce

d in a d in a country country during a during a

given given periodperiod

Production Expenditure Income

InvestmentInvestment

ConsumptionConsumption

GovernmentGovernment

purchasespurchases

Net exportsNet exports

Capital Capital IncomeIncome

Labor IncomeLabor Income

The Production Approach The Production Approach to GDPto GDP



agricultureminingutilitiesconstruction

manufacturing

wholesale

retailtransportation and warehousinginformation

finance and insurance

real estate, rental and leasing

professional services

management of companies

administrative and waste services

education

health care

arts and entertainment

hotel and foodother servicesgovernment




• Gross Domestic Product (GDP)Gross Domestic Product (GDP)– The market value of the final goods and The market value of the final goods and

services produced in a country during a services produced in a country during a given period.given period.

– We’ll examine each part of this We’ll examine each part of this definition in detail.definition in detail.




• The Market Value …The Market Value …– Market value is used to aggregate the Market value is used to aggregate the

quantities of different goods and quantities of different goods and services into one measurement.services into one measurement.

– We use prices, at current levels, for We use prices, at current levels, for aggregation.aggregation.•E.g., we could use today’s prices to measure E.g., we could use today’s prices to measure

today’s GDP.today’s GDP.



Market Value and GDPMarket Value and GDP

QuantitQuantityy

Unit Unit PricePrice

Market Market Value Value

P x QP x Q

ApplesApples 44 $0.25$0.25 $1.00$1.00

BananaBananass

66 $0.50$0.50 $3.00$3.00

ShoesShoes 33 $20.00$20.00 $60.00$60.00

TotalTotal $64.00$64.00




• Market ValueMarket Value– More expensive items receive a higher More expensive items receive a higher

weight than cheaper items.weight than cheaper items.

– Suppose production of cheap items falls Suppose production of cheap items falls but production of expensive items rises: but production of expensive items rises: GDP will often rise.GDP will often rise.



Market Value and GDPMarket Value and GDPQuantitQuantit

yyUnit Unit PricePrice


P x QP x Q

QuantitQuantityy

Unit Unit PricePrice


P x QP x Q

ApplesApples 44 $0.25$0.25 $1.00$1.00 33 $0.25$0.25 $0.75$0.75

BananBananasas 66 $0.50$0.50 $3.00$3.00 33 $0.50$0.50 $1.50$1.50

ShoesShoes 33 $20.00$20.00 $60.00$60.00 44 $20.00$20.00 $80.00$80.00

TotalTotal $64.00$64.00 $82.25$82.25




• Market ValueMarket Value– Many goods and services that do not Many goods and services that do not

have market value are not counted in have market value are not counted in GDP.GDP.•That is, goods and services that cannot be That is, goods and services that cannot be

bought and sold (such as care of one’s own bought and sold (such as care of one’s own children and homemaking) do not count.children and homemaking) do not count.

• If I pay someone to take care of my children, If I pay someone to take care of my children, the quality of child care may decline, but GDP the quality of child care may decline, but GDP will rise.will rise.



Percentages of American Men and Women Percentages of American Men and Women over Age 16 Working Outside the Home, over Age 16 Working Outside the Home, 1960 - 2001.1960 - 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.




• Market ValueMarket Value– Goods and services provided by the Goods and services provided by the

Government do not have market value, Government do not have market value, but they are counted in GDP.but they are counted in GDP.•But they do have dollar figures attached to But they do have dollar figures attached to

them.them.

•One could imagine that these goods and One could imagine that these goods and services services couldcould be bought and sold, even if be bought and sold, even if they often are not.they often are not.



See Excel Handout

“Calculating Nominal GDP”




• … … of Final Goods or Services …of Final Goods or Services …– Not Not allall goods and services that can be goods and services that can be

bought and sold are counted.bought and sold are counted.– Intermediate goods (non-durable goods Intermediate goods (non-durable goods

used to produce other goods) are used to produce other goods) are not not counted.counted.




• Final Goods or ServicesFinal Goods or Services– Goods or services consumed by the Goods or services consumed by the

ultimate user; because they are the ultimate user; because they are the end end productsproducts of the production process, they of the production process, they are counted as part of GDP.are counted as part of GDP.

• Intermediate Goods or ServicesIntermediate Goods or Services– Goods or services Goods or services used upused up in the in the

production of final goods and services production of final goods and services and therefore not counted as part of GDP.and therefore not counted as part of GDP.




• Final Goods and Services: ExampleFinal Goods and Services: Example•Milling Co. pays $0.50 for wheat to make flour.Milling Co. pays $0.50 for wheat to make flour.

•Bakery pays $1.20 for flour to make bread.Bakery pays $1.20 for flour to make bread.

•Bakery sells bread for $2.00Bakery sells bread for $2.00

•Contribution to GDP = $2.00Contribution to GDP = $2.00




• Value AddedValue Added– For any firm, For any firm,

Market Value of Good or Service

Cost of Inputs bought from other firms

Value Adde

d



Value Added in Bread Value Added in Bread ProductionProduction

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




• Final Goods and ServicesFinal Goods and Services– Getting a haircutGetting a haircut

•Barber charges $10 for a haircutBarber charges $10 for a haircut

•Barber pays his assistant $2Barber pays his assistant $2

•Contribution to GDP = $10Contribution to GDP = $10

– The contribution of the assistant is The contribution of the assistant is includedincluded in the in the finalfinal market value of market value of the haircut.the haircut.




• Example:Example:– Capital GoodCapital Good

•A long-lived good, which is itself A long-lived good, which is itself produced produced and used to produceand used to produce other goods and other goods and services.services.

– Tools.Tools.– Buildings.Buildings.– Factories.Factories.– Machines.Machines.– Software.Software.

•Newly produced capital goods are classified Newly produced capital goods are classified as final goods.as final goods.




• … … Produced Within a Country …Produced Within a Country …– DomesticDomestic

•Only production that takes place Only production that takes place within a within a country’s border.country’s border.

•ExamplesExamples– Cars produced in the U.S. by foreign owned Cars produced in the U.S. by foreign owned

companies are counted.companies are counted.– Car produced in Mexico by U.S. owned companies Car produced in Mexico by U.S. owned companies

are not counted.are not counted.




• … … During a Given PeriodDuring a Given Period– Given PeriodGiven Period

•Counts only goods produced during the Counts only goods produced during the defined period such as a calendar year.defined period such as a calendar year.

•ExamplesExamples– The sale of The sale of usedused goods is not counted. goods is not counted.– Real estate commissions, earned this year, on a Real estate commissions, earned this year, on a

house produced 3 years ago, house produced 3 years ago, areare counted (but the counted (but the sale of the house is not).sale of the house is not).

The Expenditure Approach The Expenditure Approach to GDPto GDP



The Expenditure Method The Expenditure Method for Measuring GDPfor Measuring GDP

• Every good that is produced must be Every good that is produced must be purchased.purchased.– If it is a consumer good, by consumers.If it is a consumer good, by consumers.– If it is a capital good, by firms.If it is a capital good, by firms.– If it is a government good, by If it is a government good, by

governments.governments.

• So measuring the market value of So measuring the market value of production is identical to measuring production is identical to measuring the dollar value of expenditures.the dollar value of expenditures.



Expenditure Components of Expenditure Components of U.S. GDP, 2001 (billions of U.S. GDP, 2001 (billions of dollars)dollars)

Consumption 6,987.0 69.30%

Durable goods 835.9

Nondurable goods 2,041.3

Services 4,109.9

Investment 1,586.0 15.73%

Business fixed investment 1,201.6

Residential investment 444.8

Inventory investment -60.3

Government purchases 1,858.0 18.43%

Net exports -348.9 -3.46%

Exports 1,034.1

Imports -1,383.0

Total: Gross domestic product 10,082.2 100.00%




• Consumption Expenditure, or simply Consumption Expenditure, or simply ConsumptionConsumption– Spending by households on goods and Spending by households on goods and

services, such as food, clothing, and services, such as food, clothing, and entertainment.entertainment.•Consumer durablesConsumer durables

•Consumer nondurablesConsumer nondurables

•ServicesServices




• InvestmentInvestment– Spending by firms on final goods and Spending by firms on final goods and

services, primarily capital goods and services, primarily capital goods and housing.housing.•Business fixed investmentBusiness fixed investment

– Increases the country’s capacity to produce.Increases the country’s capacity to produce.

•Residential investmentResidential investment

• Inventory investmentInventory investment– Inventories accumulate if sales are less than production.Inventories accumulate if sales are less than production.– Inventory is treated as “bought” by firms.Inventory is treated as “bought” by firms.




• InvestmentInvestment– Purchases of new capital (durable goods Purchases of new capital (durable goods

used to produce other goods).used to produce other goods).

• Financial investmentFinancial investment– Purchases of stocks (and so), which Purchases of stocks (and so), which

involve buying involve buying existingexisting capital. capital.– This is This is notnot investment in our sense. investment in our sense.




• Government PurchasesGovernment Purchases– Purchases by federal, state, and local Purchases by federal, state, and local

governments of final goods and governments of final goods and services.services.•Does not include transfer payments.Does not include transfer payments.

•Does not include interest paid on Does not include interest paid on government debt.government debt.




• Net ExportsNet Exports– Exports minus importsExports minus imports

• ExportsExports– Goods and services produced Goods and services produced

domestically but sold abroad.domestically but sold abroad.

• ImportsImports– Goods and services produced abroad Goods and services produced abroad

but bought domestically.but bought domestically.




• YY = gross domestic product, or = gross domestic product, or outputoutput

• CC = consumption expenditure = consumption expenditure

• II = investment = investment

• GG = government purchases = government purchases

• NX = NX = net exportsnet exports



• The Expenditure Method for The Expenditure Method for Measuring GDPMeasuring GDP

NXGICY





• ExampleExample– An economy produces 1 million cars An economy produces 1 million cars

valued at $15,000 each.valued at $15,000 each.

• From the production side, this is …From the production side, this is …– GDP = 1 million x $15,000 = $15 billionGDP = 1 million x $15,000 = $15 billion




• From the Expenditure side …From the Expenditure side …– 700,000 sold to consumers700,000 sold to consumers

•C =C = 700,000 x $15,000 = $10.5 billion 700,000 x $15,000 = $10.5 billion

– 200,000 sold to businesses200,000 sold to businesses• II = 200,000 x $15,000 = $3.0 billion = 200,000 x $15,000 = $3.0 billion

– 50,000 sold to government50,000 sold to government•GG = 50,000 x $15,000 = $.75 billion = 50,000 x $15,000 = $.75 billion

– 30,000 exported – 5,000 imported30,000 exported – 5,000 imported•NXNX = 25,000 x $15,000 = $.375 billion = 25,000 x $15,000 = $.375 billion




• From the Expenditure side (cont.)…From the Expenditure side (cont.)…– 975,000 sold975,000 sold– 25,000 inventory25,000 inventory

•Additional Additional II = 25,000 x $15,000 = $0.375 = 25,000 x $15,000 = $0.375 billionbillion

• GDP = GDP = C + I + G + NXC + I + G + NX– $10.5 + (3.0 +0.375) + .75 + .375 = $10.5 + (3.0 +0.375) + .75 + .375 =

$15.0 billion$15.0 billion

The Income Approach to The Income Approach to GDPGDP



The Income Method for The Income Method for Measuring GDPMeasuring GDP

• Every purchase means someone earns Every purchase means someone earns income:income:– If I buy a pen, the bookstore If I buy a pen, the bookstore earnsearns $0.60. $0.60.– If Ford buys a factory, the builder If Ford buys a factory, the builder earnsearns

$60 million.$60 million.– If the government buys a highway, the If the government buys a highway, the

contractor contractor earnsearns $600 million. $600 million.– If Americans buy French computers, the If Americans buy French computers, the

French French earnearn $50,000. $50,000.



GDP and the Incomes of GDP and the Incomes of Capital and LaborCapital and Labor

• GDP = Labor Income + Capital GDP = Labor Income + Capital IncomeIncome– Labor incomeLabor income

•Equals 75% of GDPEquals 75% of GDP

• Includes:Includes:– WagesWages– SalariesSalaries– Income of the self-employedIncome of the self-employed



GDP and the Incomes of GDP and the Incomes of Capital and LaborCapital and Labor

• GDP = Labor Income + Capital GDP = Labor Income + Capital IncomeIncome– Capital incomeCapital income

•Equals 25% of GDPEquals 25% of GDP

• Includes:Includes:– ProfitsProfits– RentRent– InterestInterest– RoyaltiesRoyalties



Percentage of Aggregate Income Received by Income Quintiles, 2001

QuintilesQuintiles

LowestLowest 22ndnd 33rdrd 44thth HighesHighestt

Perfect Perfect EqualitEqualityy

2020 2020 2020 2020 2020

A “Quintile” is a fifth of the population. So the poorest 20% of all Americans is the “lowest quintile”; the next-poorest 20% is the “second quintile,” and so on. The richest 20% is the “highest quintile.”

IncomIncomee

3.53.5 8.88.8 14.514.5 23.123.1 50.150.1

Source: US Census Bureau, Current Population Survey, 2002 Annual Demographic Source: US Census Bureau, Current Population Survey, 2002 Annual Demographic SupplementSupplement



The Three Faces of The Three Faces of GDPGDP

= =

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 Nominal GDP versus Real GDPGDP



Prices and Quantities in Prices and Quantities in 2000 and 20042000 and 2004

Quantity of pizzas

2000 (10 x $10) + (15 x $5) = $175

2004 (20 x $12) + (30 x $6) = $420

Price of pizzas

Quantity of calzones

Price of calzones

Observations•Physical production of each good doubled•GDP increased by 2.4 times•Aha!! Prices also rose•Market-Value GDP overstates economic growth

GDP



Nominal GDP versus Nominal GDP versus Real GDPReal GDP

• Nominal GDPNominal GDP– A measure of GDP in which the A measure of GDP in which the

quantities produced are quantities produced are valued at valued at current-year pricescurrent-year prices..

– Nominal GDP measures the Nominal GDP measures the current current dollar valuedollar value of production. of production.



Nominal GDP versus Nominal GDP versus Real GDPReal GDP

• Real GDPReal GDP– Real GDP measures the actual Real GDP measures the actual physical physical

volumevolume of production. of production.– To do this, we must eliminate the effect To do this, we must eliminate the effect

of changing prices. How?of changing prices. How?– The quantities produced are valued at The quantities produced are valued at

the prices in a the prices in a basebase year rather than at year rather than at current prices. This is Real GDP.current prices. This is Real GDP.



Prices and Quantities in Prices and Quantities in 2000 and 20042000 and 2004

Quantity of pizzas

2000 (10 x $10) + (15 x $5) = $175

2004 (20 x $12) + (30 x $6) = $420

Price of pizzas

Quantity of calzones

Price of calzones

Observations•Physical production of each good doubled•Real GDP also doubles.•We use the prices of the year 2000.

GDP

X X(20 x $10) +

(30 x $5) = $350

X



See Excel Handout

“Real versus Nominal GDP”



Nominal GDP, Real GDP, and Nominal GDP, Real GDP, and InflationInflation

Real GDP Growth Rate

Nominal GDP Growth Rate – Inflation Rate



-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

Jan

-48

Jan

-50

Jan

-52

Jan

-54

Jan

-56

Jan

-58

Jan

-60

Jan

-62

Jan

-64

Jan

-66

Jan

-68

Jan

-70

Jan

-72

Jan

-74

Jan

-76

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Real GDP growth rate Nominal GDP growth rate Inflation Rate

GDP and Well-BeingGDP and Well-Being



Real GDP is not the Real GDP is not the Same as Economic Same as Economic Well-BeingWell-Being

• GDP doesn’t take into accountGDP doesn’t take into account– The increase in Leisure Time.The increase in Leisure Time.– Nonmarket Economic Activities.Nonmarket Economic Activities.– Environmental Quality and Resource Environmental Quality and Resource

Depletion.Depletion.– Increases or decreases in the Quality of Increases or decreases in the Quality of

LifeLife– Poverty and Economic InequalityPoverty and Economic Inequality



Real GDP is related to Real GDP is related to Economic Well-BeingEconomic Well-Being

• Higher GDP often leads to moreHigher GDP often leads to more– Life expectancy at birthLife expectancy at birth– Doctors per personDoctors per person– School enrollmentsSchool enrollments– LiteracyLiteracy

• Higher GDP also leads to lessHigher GDP also leads to less– Infant mortalityInfant mortality– Incidence of AIDSIncidence of AIDS– UndernourishmentUndernourishment

UnemploymentUnemployment



The Unemployment RateThe Unemployment Rate• Measuring UnemploymentMeasuring Unemployment

– The Bureau of Labor Statistics (BLS) The Bureau of Labor Statistics (BLS) surveys 60,000 randomly selected surveys 60,000 randomly selected households each month.households each month.

– Those 16 years and over are placed in Those 16 years and over are placed in one of three categories:one of three categories:•EmployedEmployed•UnemployedUnemployed•Out of the labor forceOut of the labor force

– The BLS estimates how many people in The BLS estimates how many people in the U.S. fit into each category.the U.S. fit into each category.



The Unemployment RateThe Unemployment Rate

• Measuring UnemploymentMeasuring Unemployment– Labor force = employed + unemployedLabor force = employed + unemployed

force labor

unemployed rate ntUnemployme

over and 16 population

force labor rate ionParticipat



Ages

0 -

15

Hom

em

ake

rs,

Reti

red P

eople

, D

isable

d,

Dis

coura

ged W

ork

ers

, Stu

dents

Unem

plo

yed

Em

plo

yed

Labor Force

Cyclical

Frictional

Working-Age Population

Structural



U.S. Employment Data, U.S. Employment Data, July 2002 (in millions)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%



The U.S. The U.S. UnemploymentUnemploymentRate since 1960Rate since 1960




• The Cost of UnemploymentThe Cost of Unemployment– EconomicEconomic

•People don’t receive income. Resources are People don’t receive income. Resources are not utilized.not utilized.

– PsychologicalPsychological•Loss of self-esteem, depression, suicide.Loss of self-esteem, depression, suicide.

– SocialSocial• Increases in crime, drug use, etc.Increases in crime, drug use, etc.




• The Duration of UnemploymentThe Duration of Unemployment– The impact of unemployment is influenced The impact of unemployment is influenced

by how long individuals have been by how long individuals have been unemployed.unemployed.•The unemployment spell: time without The unemployment spell: time without

employment while in the labor force.employment while in the labor force.

•The duration of unemployment: length of spell.The duration of unemployment: length of spell.

•Long-term unemployed: 6 mths or moreLong-term unemployed: 6 mths or more

•Chronically unemployed: in and out of work, in Chronically unemployed: in and out of work, in and out of the labor force.and out of the labor force.




• In July 2002:In July 2002:– Official unemployment rate = 5.9%Official unemployment rate = 5.9%– Including discouraged workers and Including discouraged workers and

involuntary part-time worker = 9.4%involuntary part-time worker = 9.4%

• Discouraged WorkersDiscouraged Workers– People who say they would like to have People who say they would like to have

a job but have not made an effort to find a job but have not made an effort to find one in the last four weeksone in the last four weeks

Workers, Wages, and Unemployment in the

Modern Economy

Workers, Wages, and Unemployment in the

Modern Economy

UnemploymeUnemployment: Types, nt: Types, Causes, and Causes, and CostsCosts



Types of Unemployment and Types of Unemployment and Their CostsTheir Costs

• Three kinds of unemploymentThree kinds of unemployment– Frictional UnemploymentFrictional Unemployment

•Due to minor problemsDue to minor problems

– Structural UnemploymentStructural Unemployment•Due to lack of skills, etc.Due to lack of skills, etc.

– Cyclical UnemploymentCyclical Unemployment•Due to recessionsDue to recessions




• Frictional UnemploymentFrictional Unemployment– The short-term unemployment The short-term unemployment

associated with the process of matching associated with the process of matching workers with jobsworkers with jobs




• Characteristics of Frictional Characteristics of Frictional UnemploymentUnemployment– Short-termShort-term– May lead to a better match between the May lead to a better match between the

worker and jobworker and job– Necessary in a dynamic economyNecessary in a dynamic economy




• Structural UnemploymentStructural Unemployment– Long-term and chronic unemployment Long-term and chronic unemployment

that exists even with the economy is that exists even with the economy is producing at a normal rateproducing at a normal rate




• Causes of Structural UnemploymentCauses of Structural Unemployment– Lack of skills, language barrier, Lack of skills, language barrier,

discriminationdiscrimination– Long-term mismatchLong-term mismatch– Structural features of the labor market, Structural features of the labor market,

such as technological change.such as technological change.




• Cost of Structural UnemploymentCost of Structural Unemployment– Loss in economic outputLoss in economic output– May not develop new skillsMay not develop new skills– Psychological damagePsychological damage




• Cyclical UnemploymentCyclical Unemployment– The extra unemployment that occurs The extra unemployment that occurs

during periods of recessionduring periods of recession

– May lead to discouraged workersMay lead to discouraged workers– But it may be an occasion for far-But it may be an occasion for far-

reaching change and re-training.reaching change and re-training.



Impediments to Full Impediments to Full EmploymentEmployment

• Labor UnionsLabor Unions– BenefitsBenefits

•Reduced worker exploitationReduced worker exploitation

•Support progressive labor legislationSupport progressive labor legislation

• Increase productivityIncrease productivity

•Promote democracy in the workplacePromote democracy in the workplace




• Labor UnionsLabor Unions– CostsCosts

•Unions cause otherwise competitive labor Unions cause otherwise competitive labor markets to function inefficiently.markets to function inefficiently.

•Unions may prevent companies from Unions may prevent companies from competing in the global economy.competing in the global economy.




• Unemployment Insurance:Unemployment Insurance:– Helps to reduce the costs of Helps to reduce the costs of

unemployment.unemployment.– May give the unemployed an incentive May give the unemployed an incentive

to search longer and less intensely.to search longer and less intensely.– Unemployment benefits must balance Unemployment benefits must balance

the benefit of providing support to the the benefit of providing support to the worker with the cost of reducing the worker with the cost of reducing the incentive to work.incentive to work.



UnemploymentUnemployment

• Economic NaturalistEconomic Naturalist– Why are unemployment rates so high in Why are unemployment rates so high in

western Europe?western Europe?– Europe has significant Structural RigiditiesEurope has significant Structural Rigidities

•Regulated labor marketsRegulated labor markets– It’s difficult to fire or hire people.It’s difficult to fire or hire people.

•High minimum wagesHigh minimum wages

•Generous unemployment benefitsGenerous unemployment benefits

•Powerful labor unionsPowerful labor unions



Unemployment Rates in Unemployment Rates in Western Europe, 1980 - 2001Western Europe, 1980 - 2001



What You’ve Learned TodayWhat You’ve Learned Today

• The meaning and measurement of The meaning and measurement of GDP.GDP.

• The meaning of: market value, final The meaning of: market value, final good, capital good, and domestic.good, capital good, and domestic.

• The components of aggregate The components of aggregate expenditure.expenditure.

• Basics of income distribution.Basics of income distribution.• The difference between real and The difference between real and

nominal GDP.nominal GDP.



What You’ve Learned TodayWhat You’ve Learned Today

• The difference between GDP and The difference between GDP and welfare.welfare.

• The meaning and measurement of The meaning and measurement of unemployment.unemployment.

• The types, causes, and costs of The types, causes, and costs of unemployment.unemployment.

measuring economic activity: gdp and unemployment principles of macroeconomics dr. gabriel x....

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