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Exploring Key Economic Concepts: GDP, Unemployment, and Inflation

In this chapter, we recap essential concepts from ECO 2302 and introduce core economic indicators such as Gross Domestic Product (GDP), unemployment, and inflation. We examine three approaches to calculate GDP: the expenditure approach, income approach, and value-added approach. Additionally, we discuss the relevance of GDP per capita in assessing living standards and differentiate between nominal and real GDP. The chapter also covers unemployment metrics and the relationship between inflation and economic growth, setting the stage for our analysis of macroeconomic models in upcoming chapters.

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Exploring Key Economic Concepts: GDP, Unemployment, and Inflation

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  1. Chapter 2 – A Tour of the book • Small recap of the concepts learned in ECO 2302 • Concepts we will cover in the next chapters

  2. GDP – Output – Aggregate Income/Production • Gross Domestic Product: Market value of all final goods & services produced in a period in a country

  3. GDP – Output – Aggregate Income/Production • Three approaches to calculate GDP: • Expenditure approach: GDP = C + I + G + Ex – Im • Income approach: Since expenditure of one side is the income of the other side, we can also use this approach • Value added approach: Add value added at each production stage

  4. GDP – Output – Aggregate Income/Production • Does GDP really tell us anything about the standard of living? • Look at GDP per capita for standard of living • US GDP (2012): $15.685 trillion • Population: 316,384,000 • GDP per capita: $15.685 trillion/316,384,000 ≈ $50,000 • Ethiopia (2012): $40.5 billion • Population: 91,195,675 • GDP per capita: $40.5 billion /91,195,675 ≈ $500

  5. GDP – Output – Aggregate Income/Production Real vs. Nominal GDP Nominal GDP uses current prices: Real GDP fixes prices and uses a base year

  6. UNEMPLOYMENT • Unemployed: 16 or older, not institutionalized, does not have a job but is actively looking for one. • Unemployment rate = U/LF • Labor Force Participation Rate = LF/Pop. • Real numbers (in thousands - July 2013): • UR = 11514/155798 = 0.074 = 7.4% • LFPR = 155798 /245756 =0.63 = 63%

  7. INFLATION • Inflation: a sustained increase in the price level • We consider two price levels: • GDP Deflator = 100*Nom. GDP/R.GDP • CPI = Consumer Price Index • How to calculate inflation? • Pt: Price level in year t • Inflation = (Pt – Pt-1)/Pt-1

  8. INFLATION (CPI vs. Deflator)

  9. Okun’s Law Higher output growth decreases unemployment  For the US, output growth of about 3% is needed to keep the unemployment rate in check

  10. Phillips curve There is a trade-off between unemployment and inflation  Below 6% of unemployment, the economy “heats up” and inflation increases whereas above, inflation decreases.

  11. Next chapters • Analyze the macroeconomy within three intervals: • Short run: IS-LM model • Medium run: AS-AD model • Long run: Solow model and economic growth

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