GDP
And Unemployment and Inflation
NATIONAL INCOME ACCOUNTING
• Measures the economy’s overall performance
• Assesses the economy at regular intervals
• Tracks the long-run (years)
• Has it grown, been constant, or stayed the
same?
• The Bureau of Economic Analysis can then make
policies that can fix economic problems
• A major tool used is the Gross Domestic Product
GROSS DOMESTIC PRODUCT
• The total output of goods and services (the aggregate output)
• The aggregate output of the economy is called the Gross
Domestic Product (GDP)
• The total market value of all final goods and services
produced in a given year
• Includes all domestic goods and services produced in a
nation REGARDLESS OF OWNERSHIP
• Ex: American-owned Ford factories here in the U.S.A.
and a Japanese-owned Honda factory in Ohio
WHAT IS IT?
• It is a monetary measure of comparing the relative values of all
goods and services produced here
• It DOES NOT include intermediate goods (goods not finished
being made/sold or goods that are purchased for resale)
• GDP only counts final goods
• Aggregate output goods and services are counted ONCE AND
ONLY ONCE
Final Good 
Intermediate
Good 
VIDEOS!
• GDP Video
NOT INCLUDED
• GDP does not include:
• Intermediate Goods
• Public Transfer Payments (Welfare payments)
• Private Transfer Payments (Cash gifts, babysitting money)
• Stock Market Transactions (Stocks and Bonds)
• Secondhand Sales (used books, cars, homes)
• Black Market
HOW?
• There are two ways to calculate the GDP (Expenditure Method &
Income Method)
• The Expenditure Method counts all new goods and services that are
purchased by consumers, businesses, government, and net exports
(output approach)
• The Income Method counts all earnings received by those who
produce goods and services (earnings approach)
• Expenditure = Income
(MUST EQUAL EACH OTHER)
EXPENDITURE METHOD
• The Expenditure Method = C + Ig + G + Xn
• C = Personal Consumption Expenditures (cars, refrigerators,
toothpaste, food, services like a lawyer or doctor)
• Ig = Gross Private Domestic Investment (purchases of machinery and
tools by a business, all construction, and changes in inventories)
• G = Government Purchases (Expenditures)
• Xn = Net Exports
• Calculate Xn:
• X – M = Xn
X = exports
M = imports
EXAMPLE
INCOME METHOD
• The Income Method = W + R + I + P
• W = Employee Compensation
• R = Rent Received for Use of Property
• I = Interest Received for Use of Money
• P = Profits Received by Proprietors and Corporation Owners
• All adds up to National Income
WHAT HAPPENS IF THEY DON’T EQUAL?
• This is why the government uses accountants to make
accounting adjustments so that the balance ends up equaling
NET FOREIGN FACTOR INCOME
• We have to “adjust” our GDP with income earned abroad
• Net Foreign Factor Income = Foreign-owned earnings here in U.S.
minus American-owned earnings abroad
• National Income = the total income of Americans, earned here in the
U.S. and/or abroad
• +
• Net Foreign Factor Income
• =
• GDP
2 MORE ACCOUNTS
• Using the GDP, we can adjust it to find out two more account
information
• Net Domestic Product = GDP – consumption of fixed capital
(depreciation)
• National Income = W.R.I.P. earned by Americans
National Domestic Product – Net Foreign Factor Income – Indirect
Business Taxes = National Income
NOMINAL GDP VS. REAL GDP……HUH???
• Money value constantly changes
• Nominal GDP = unadjusted GDP
• Real GDP = prices adjusted for inflation/adjusted GDP
COMPARING GDP’S ACROSS THE WORLD
BUSINESS CYCLE
• We want our economy to grow
• We measure “growth” by either real GDP increases or GDP per
capita increases
• How does it grow?
• Increase in resources or increased productivity (higher
education, more training, motivation, health of workers)
BUSINESS CYCLE GRAPH
EXPLAIN, PLEASE!
• Peak = maximum production level is reached temporarily (full
employment)
• Recession/Contraction = period of decline in business activity
for 6 months or longer
• Depression = long, severe period of economic decline
• Trough = the lowest point of a recession/depression
• Expansion = the recovery of economic activity leading to
improved conditions
EXPLAIN MORE, PLEASE!
• Peak = top of the cycle, real GDP is at the maximum,
unemployment is low, inflation may be high
• Recession/Contraction = real GDP is falling for two
consecutive quarters (6 months), unemployment is increasing,
inflation can fall
• Trough = unemployment is very high
• Expansion = real GDP is growing, unemployment decreasing,
inflation is increasing
• Global Business Cycle Map
UNEMPLOYMENT 
• There is always some level of unemployment on a
national/international level
• Labor Force = over 16 years old, willing and able to work, must
be actively seeking work
• Does not count:
• Under 16 or unable to work (institutionalized people)
• Potential workers who are not seeking work (homemakers,
students, retirees)
• Discouraged workers - no longer seeking work
3 TYPES OF UNEMPLOYMENT
• Frictional = workers who are “between jobs” (laid off, fired, new
workers, or voluntarily changing jobs)
• Structural = workers whose skills are no longer in demand
(must be re-trained in a new skill or move to a new location)
• Cyclical = workers who lose jobs due to economic recessions
INFLATION
• Inflation = a rise in the level of prices
• Normal economic growth = 2-3% change
• Hyperinflation = price increases are out of control
German children playing with
stacks of cash as “blocks”
German deutschmarks became
nearly worthless after WWI
2 TYPES OF INFLATION
• Demand/Pull Inflation = failure to produce more goods drives
up the price
• Cost/Push Inflation = increased cost in factors of production,
so businesses raise prices to continue making profits
PHILLIPS CURVE
• Short run = inflation
and unemployment
are inversely related
• Long run =
unemployment is
unaffected by
inflation