Chapter 5 - National Income Accounting, GDP.
1. Explain why GDP is considered to be a poor measure of social well-being (or the quality of life). Why is this a problem?
2. Explain how the GDP mismeasures the economic value of non-market activities (e.g household production).
Explain why the GDP should include the economic value of non-market activities (e.g household production).
Give an example.
3. Explain how the GDP mismeasures the economic value of unreported income.
Explain why the GDP should include the economic value of unreported income.
Give an example.
4. Summarize the measurement errors in the GDP.
5. Explain how unemployment affects certain groups more than others. Be sure to include a discussion of the concentration of the human costs of unemployment, the frequency of unemployment, and the duration of unemployment.
6. Explain why the concentration of unemployment is a problem?
7. Explain why high rates of inflation or unpredictable inflation can create economic problems.
8. How does inflation create uncertainty and why is uncertainty a problem?
9. How does inflation create speculation and why is speculation a problem?
Gross Domestic Product - GDPKnow the definition
4 ways to total GDP:
1. Total dollar value of all final goods and services
(this is also known as the “Product Account”)
2. Total of all value added from each step of production.
3. Income Account: GDP = Y = w + i + r + p
4. Expenditure Account: GDP = C + I + G + (X - IM)
Nominal GDP vs. Real GDP (definitions)
Price level in base year
Real GDP = Nominal GDP x _____________________
Price level in current year
Other Income Account definitions: Depreciation, Disposable Income. See text for more detail.
Be familiar with the Income- Expenditure Circular Flow model ( the Mickey Mouse Diagram from lecture).
Measurement Problems of GDP
GDP and Social Welfare
GDP is good measure of size or volume of the economy.It is not designed to be and is a bad measure of society’s well-being.
1. GDP tells us nothing about any distribution nor equity issues.
2. GDP does not count non-market activities - e.g.
- household production (laundry, cleaning, cooking, maintenance & repairs, gardeningy)
- family care (childcare, senior care, primary healthcare)
- in-kind-trades,...3. GDP does not count the unreported income - e.g.
- unreported cash transactions
- underground economy (illegal activities)
Unemployment Definitions & Concepts
Labor force (who are not included in the labor force)
Labor force participation rate (the U.S. rate)
Unemployment rate
Types of Unemployment
frictional UN, structural UN, seasonal UN, cyclical UN, discouraged workers, underemployment
Definitions & Measurment of Full Employment
Full employment as low frictional UN (no cyclical, nor structural UN)
Full employment and price stability, the Non-accelerating inflation rate of unemployment (NAIRU),
the "natural rate of UN"
Economic Costs of UN.
Unequal Burdens by occupation, age, race, gender, region, duration.
Lowered output. Producing within the production possibilities frontier; below potential full output.
Non-economic (Social) Costs:
crime, substance abuse, family violence, divorces, suicides, homicides, mental illness,
political unrest all increase with UN
International comparisons: see text
Inflation: Definition, Relative prices vs. average prices
Measuring the Price Level (inflation)
Price Indexes: CPI (Consumer Price Index, Producer Price Index, GDP Deflator)
CPI: what it is, how it is collected (i.e. total dollar value of a market basket of goods weighted by the percent of income spent on each good by the “average” household)
Computing a Price Index (see text)
(current CPI - base CPI)
Inflation rate = __________________________ x 100 = %
base CPI
Measurement Problems of CPI
CPI does not account for: Changes in Spending Patterns, New Products, Quality Improvements, & Discount Shopping
Policy goal: stable prices
Causes of inflation
Demand-side: Demand-Pull Inflation
Supply-side: Cost-Push Inflation e.g. wage-push, supply-shock
Problems of Inflation
Redistirbutive effects of inflation:
inflation affects people differently based upon their spending patterns, sources of income, and the assets they own: price effect, income effect, wealth effecterosion of consumer spending power
1) Social Impact (mostly associated with creeping inflation):
Distribution Effects: Unequal Impact: not everyone suffers the same.2) Economic Impact (Macro Consequences) - mostly affects financial markets, Bankers, major institutional investors:
Inflation affects people differently depending upon individual patterns of
consumption, income and wealth.
Uncertainty/Unpredictability: drop in investment, shortened time horizons, speculation, money illusion
Protective Mechanisms: COLA s, ARMs