# GROSS DOMESTIC PRODUCT - GDP

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```					MEASURING THE ECONOMY
   GROSS DOMESTIC PRODUCT - GDP
   The ﬁnal market value of all goods and services
produced annually

   REAL V NOMINAL GDP-

   Real factors out inﬂation, it holds the value of the
dollar constant. Nominal includes inﬂation

   PER CAPITA GDP-

   GDP divided by population
EXAMPLES

Ifnominal GDP grew 7% and
inﬂation ran at 5%, what is
REAL GDP growth?
IfReal GDP is 10 Trillion and
the population is 250 million,
what is per capita GDP?
HOW GDP IS CALCULATED
C + I + G + ( X - M ) = G D P

   C -   consumption goods
   I-   investment goods
   G-    government goods
   (X-M) -   Net exports
EXAMPLES
C = 7.7 trillion
I = 2 trillion
G = 1.7 trillion
X-M = -492 billion
What is GDP?
LIMITS OF USING GDP
   EXCLUDES NON PAID
SERVICES
   Charity works
   Parenting
   Volunteer work
   DOES NOT INCLUDE OTHER
FACTORS
   Access to Health Care
   Clean environment
THE CONSUMER PRICE INDEX

 T he CP I is a way to   me asure inf lation
 Take a “marke t baske t” of goods and
se rvi ce s in a base y e ar, f ind the ave rage
pri c e of the baske t and se t it = to 10 0

 T he ne xt y e ar, f ind the av e rage p ric e for
the same marke t b aske t and de te r mine th e
% c hange

 M ul tipl y th e % ch ange by 100 t o f ind th e
inf l ation rate
WHY IS MEASURING INFLATION
IMPORTANT?
Inﬂation affects
people’s standard of
living

Inﬂation determines
“real” incomes

Inﬂation determines
“purchasing power”
THE FORMULA FOR CALCULATING
RATES OF INFLATION

Re c ent ye a r-Ea rl ier ye a r/e a rl ier
ye a r X 100
 If the CPI in year 1 is 100 and in year 2 is
105, how much have prices changed?

 In 1980 the CPI was 246.8, in 1981 it was
272.4. What was the rate of inflation?
UNEMPLOYMENT
•   Deﬁned -UR= # of unemployed
people/# of people in the
civilian labor force
• Problems
• Does not count those who
never ﬁled a claim
• Cannot account for Cash
economy
MEASURING UNEMPLOYMENT
FRICTIONAL UNEMPLOYMENT

 Due to changes in demand; people   have
transferrable skills

STRUCTURAL UNEMPLOYMENT

 Due to changes in demand; people do   not
have transferrable skills
UNEMPLOYMENT CONTINUED
   NATURAL RATE OF UNEMPLOYMENT
    The total of frictional and structural
unemployment

   CYCLICAL UNEMPLOYMENT
    The difference between the natural rate
and the announced rate. This is caused by
the business cycle. This typically leads to
monetary or fiscal policies to counteract it
THE BUSINESS CYCLE
The periodic changes in real GDP
If real GDP has negative or 0 growth for 6
months, it is called a RECESSION
CAUSES OF THE BUSINESS CYCLE
•   Changes in world
•   Wars, Embargoes, Boycotts
•   Erratic monetary and ﬁscal policies
•   Time lags change output
•   Political problems
•   Major changes in demand
•   The bubble of 2000, overproduction of an
item leads to surplus and fall in prices and
employment
ANOTHER WAY TO LOOK AT THE
MACROECONOMY

•    AGGREGATE DEMAND
• Total demand in an economy
• Everybody’s demand for everything
•AGGREGATE SUPPLY
• Total supply in an economy
• Everybody’s supply of everything
P

AS
P
PRICE
LEVEL   P
AD
AD

Q
Q    Q
LEVEL OF EMPLOYMENT
P

AS
AS
PRICE
LEVEL   P
P

AD

Q
Q     Q
LEVEL OF EMPLOYMENT
OTHER MEASURES OF WEALTH
THE HUMAN DEVELOPMENT INDEX

ThUN Human Development Index (HDI) is a
comparative measure of poverty, literacy,
education, life expectancy, childbirth, and other
factors for countries worldwide. It is a standard
means of measuring well-being, especially child
welfare. The index was developed in 1990 by the
Pakistani economist Mahbub ul Haq, and has
been used since 1993 by the United Nations
Development Programme in its annual report.

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