notes on GDP

Macroeconomics is different from microeconomics in that it is full of disputes, disagreements, controversy.

Three important macroeconomic goals: * rapid economic growth * full employment * stable prices

Business cycle means: expansion and a peak, then recession (contraction) and a trough.

Business cycle... boom and bust. A severe bust is a depression.

Economists often argue that the state of the macroeconomy is an important factor in determining the outcome of national elections. Some believe that the misery index can be used to predict the fate of the incumbent.

Misery index = inflation rate + unemployment rate What is it used for? Look at the misery indexes of the years when the incumbents could not secure the second term.

That is, if the misery index is high or increasing, the incumbent will face trouble; if it is low or decreasing, the incumbent stands a good chance of reelection.

Taking care of your children, washing your car, mowing your lawn, walking your dog... if you do these for yourself, these services will not be in GDP.

GDP includes all final goods and services that are produced for the marketplace, that is, with the intention of being sold. When you clean your home, it is not counted in GDP, because you did it for yourself, not for the marketplace.

GDP excludes the value of land, financial assets, used goods. But if a fee is involved in the transaction, this fee is included in GDP.

US service sector 31% of total output (GDP) in 1931, 53% in 1996, 80% in 2017!

C, does not include new homes bought by the households. New home construction is private investment and therefore in I.

You pay rent for the house you live in now. Is it counted in GDP?

I, private investment spending, is capital formation (increase in capital stock). capital good: provides useful service in future years ∑ capital goods = capital stock

Are consumer durables in C or I? Consumer durables can be considered capital goods, but they are in C because most economists consider them to be consumption goods.

Capital formation ignores human capital, the skills and training of the labor force.

Investment in economics means capital formation. In everyday language?

Payments to owners of resources are called 'factor payments' because resources are also called factors of production.

GDP = ∑ factor payments of all firms

= ∑ (wages + rent + interest + profit) of all households

total output = total income

GDP nominal: current dollars, GDP real: purchasing power. Don't track your child's height using a ruler whose length changes each year.

Real GDP must increase by 2.5% annually to just prevent the unemployment rate from rising.

Inaccuracies of GDP: quality changes, underground economy, illegal activities, economic 'bads'. Nonmarket activities are already out of GDP.

GDP = ∑ (wages + rent + interest + profit) of all households Labor earns wages. Land earns rent. Capital earns interest. Entrepreneur makes profit.

GDP does include the impact of quality changes for many products such as automobiles and computers, but it still has more inaccuracies in the long run than in the short run.

Short-term changes in GDP are fairly accurate reflections of the state of the economy: Quality of products, underground economy, illegal activities, nonmarket productions do not change rapidly.

microeconomic unemployment *frictional: btw jobs, just entering or reentering the labor market *seasonal: obvious (reason for seasonal adjustment) *structural: mismatch (mostly due to old-new sectors)

structural unemployment: structural change in the economy, stubborn, long-term problem, lasts several years e.g. less cashiers, more motorcycle couriers: you have to learn to ride a motorcycle (new skill needed)

macroeconomic unemployment: cyclical unemployment, needs macro solutions full employment = zero cyclical unemployment (there may and will be micro unemployment)

GDP is your choice! The average workweek in manufacturing is more than 40 hours in the US, but around 30 hours in Germany. In addition, the typical American worker takes two weeks of vacation each year, while the typical German worker takes five weeks.

from Hall & Lieberman