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2 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: Pearson Education Limited 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 10: ISBN 10: ISBN 13: ISBN 13: British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Printed in the United States of America

3 GDP: A Measure of Total Production and Income TABLE A.1 Real GDP Calculation Step 1: Value Production in Adjacent Years at Prices of Both Years Step 1 is to value the production of adjacent years at the prices of both years. Here, we value the production of 2011 and 2012 at the prices of both 2011 and The value of 2011 production at 2011 prices, in part (a), is nominal GDP in The value of 2012 production at 2012 prices, in part (b), is nominal GDP in Part (c) calculates the value of 2012 production at 2011 prices, and part (d) calculates the value of 2011 production at 2012 prices. We use these numbers in Step 2. (a) In 2011 Expenditure (millions of units) (dollars per unit) (millions of dollars) C T-shirts I Computer chips G Security services Y Nominal GDP in (b) In 2012 C T-shirts I Computer chips G Security services Y Nominal GDP in (c) Quantities of 2012 valued at prices of 2011 C T-shirts I Computer chips G Security services Y 2012 production at 2011 prices 160 (d) Quantities of 2011 valued at prices of 2012 C T-shirts I Computer chips G Security services Y 2011 production at 2012 prices 158 Find the Average of Two Percentage Changes The second step is to find the percentage change in the value of production based on the prices in the two adjacent years. Table A.2 summarizes these calculations. Valued at the prices of 2011, production increased from $145 million in 2011 to $160 million in 2012, an increase of 10.3 percent. Valued at the prices of 2012, production increased from $158 million in 2011 to $172 million in 2012, an increase of 8.9 percent. The average of these two percentage changes in the value of production is 9.6. That is, ( ) By applying this percentage change to real GDP, we can find the value of real GDP in Because real GDP in 2011 is in 2011 dollars, real GDP in 2012 is also in 2011 dollars. GDP in 2011 is $145 million, so a 9.6 percent increase is $14 million. Real GDP in 2012, expressed in 2011 dollars, is $145 million plus $14 million, which equals $159 million. Although the real GDP of $159 million is expressed in 2011 dollars, the calculation uses the average of the relative prices of the final goods and services that make up GDP in 2011 and

4 GDP: A Measure of Total Production and Income TABLE A.2 Real GDP Calculation Step 2: Find Average of Two Percentage Changes Value of Production in Adjacent Years Millions of dollars 2011 production at 2011 prices production at 2011 prices 160 Percentage change in production at 2011 prices production at 2012 prices production at 2012 prices 172 Percentage change in production at 2012 prices 8.9 Average of two percentage changes in production 9.6 Using the numbers calculated in Step 1, we find the percentage change in production from 2011 to 2012 valued at 2011 prices, which is 10.3 percent. We also find the percentage change in production from 2011 to 2012 valued at 2012 prices, which is 8.9 percent. We then find the average of these two percentage changes, which is 9.6 percent. Link (Chain) to the Base Year The final step repeats the calculation that we ve just described to obtain the real GDP growth rate each year. In the base year, which currently is 2005, real GDP equals nominal GDP. By applying the calculated growth rates to each successive year, we obtain chained-dollar real GDP in 2005 dollars. Figure A.1 shows an example. In the base year, 2005, real GDP equals nominal GDP, which is $60 million. The figure shows the growth rate of real GDP for each year between 2002 and 2012, the final one of which is the 9.6 percent that we calculated in Table A.2 above. Starting with real GDP in the base year, we apply the calculated percentage changes to find real GDP in other years. For example, in 2006, the growth rate was 4.6 percent, so real GDP in 2006 was 4.6 percent higher than $60 million, which is $63 million. In 2005, the growth rate was 3.2 percent, so real GDP in 2005 was 3.2 percent higher than real GDP in 2004, which was $58 million. By repeating the calculations through to 2011, real GDP in 2011 was $84 million. In 2012, real GDP grew by 9.6 percent of $84 million, which is $8 million, so real GDP in 2012 was $92 million. FIGURE A.1 Real GDP Calculation Step 3: Link (Chain) to the Base Year MyEconLab Animation Year Growth Rate (percent per year) Chained-Dollar Real GDP (millions of 2005 dollars) The growth rate of real GDP from one year to the next is calculated for every pair of years and then linked to the base year. Suppose that real GDP was $60 million in the base year, By applying the growth rate between each pair of years, we find the chained-dollar real GDP for each year, expressed in terms of the value of the dollar in the base year. Here, the percentages for 2002 through to 2012 are assumed. By 2012, the chained-dollar real GDP has increased to $92 million in 2005 dollars. 139

5 GDP: A Measure of Total Production and Income MyEconLab You can work these problems in Chapter 5 Study Plan and get instant feedback. TABLE 1 (a) In 2010: Bananas 100 $10 Coconuts 50 $12 (b) In 2011: Bananas 110 $15 Coconuts 60 $10 APPENDIX CHECKPOINT Study Plan Problems An island economy produces only bananas and coconuts. Table 1 gives the quantities produced and prices in 2010 and in Calculate nominal GDP in 2010 and nominal GDP in Calculate the value of 2011 production in 2010 prices and the percentage increase in production when valued at 2010 prices. 3. Calculate the value of 2010 production in 2011 prices and the percentage increase in production when valued at 2011 prices. 4. The base year is Use the chained-dollar method to calculate real GDP in 2010 and In terms of what dollars is each of these two real GDPs 5. The base year is Using the chained-dollar method, compare the growth rates of nominal GDP and real GDP in The base year is Use the chained-dollar method to calculate real GDP in 2010 and In terms of what dollars is each of these two real GDPs 7. Compare the growth rates of nominal GDP and real GDP in 2011 dollars in Your instructor can assign these problems as homework, a quiz, or a test in MyEconLab. TABLE 2 (a) In 2010: Food 100 $2 Fun 50 $6 (b) In 2011: Food 75 $5 Fun 65 $10 Instructor Assignable Problems An economy produces only food and fun. Table 2 shows the quantities produced and prices in 2010 and Calculate nominal GDP in 2010 and nominal GDP in Calculate the value of 2011 production in 2010 prices and the percentage increase in production when valued at 2010 prices. 3. Calculate the value of 2010 production in 2011 prices and the percentage increase in production when valued at 2011 prices. 4. Using the chained-dollar method, calculate real GDP in 2010 and 2011 if the base year is In terms of what dollars is each of these two real GDPs 5. The base year is Using the chained-dollar method, compare the growth rates of nominal GDP and real GDP in The base year is Use the chained-dollar method to calculate real GDP in 2010 and In terms of what dollars is each of these two real GDPs 7. Compare the growth rates of nominal GDP and real GDP in 2010 dollars in

6 How long does it take to find a job? Jeff Greenberg/Alamy Jobs and Unemployment When you have completed your study of this chapter, you will be able to CHAPTER CHECKLIST 1 Define the unemployment rate and other labor market indicators. 2 Describe the trends and fluctuations in the indicators of labor market performance in the United States. 3 Describe the types of unemployment, define full employment, and explain the link between unemployment and real GDP. From Chapter 6 of Foundations of Macroeconmics, Sixth Edition. Robin Bade, Michael Parkin. Copyright 2013 by Pearson Education, Inc. Publishing as Addison-Wesley. All rights reserved. 141

7 Jobs and Unemployment 1 LABOR MARKET INDICATORS Every month, 1,600 field interviewers and supervisors working on a joint project between the Bureau of Labor Statistics (or BLS) and the Bureau of the Census survey 60,000 households and ask a series of questions about the age and labor market status of their members. This survey is called the Current Population Survey. Let s look at the types of data collected by this survey. Current Population Survey Working-age population The total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care or in the U.S. Armed Forces. Labor force The number of people employed plus the number unemployed. Figure 1 shows the categories into which the BLS divides the population. It also shows the relationships among the categories. The first category divides the population into two groups: the working-age civilian population and others. The working-age population is the total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care or in the U.S. Armed Forces. In August 2011, the estimated population of the United States was million, the working-age population was million, and 72.2 million people were under 16 years of age, in the military, or living in institutions. The second category divides the working-age population into two groups: those in the labor force and those not in the labor force. The labor force is the number of people employed plus the number unemployed. In August 2011, the U.S. labor force was million and 83 million people were not in the labor force. Most of those not in the labor force were in school full time or had retired from work. The third category divides the labor force into two groups: the employed and the unemployed. In August 2011 in the United States, million people were employed and 14.0 million people were unemployed. Population Survey Criteria 2010StockVS/Alamy The survey counts as employed all persons who, during the week before the survey, either 1. Worked at least 1 hour as paid employees or worked 15 hours or more as unpaid workers in their family business or 2. Were not working but had jobs or businesses from which they were temporarily absent. The survey counts as unemployed all persons who, during the week before the survey, 1. Had no employment, 2. Were available for work, and either To be counted as unemployed, a person must not only want a job but also have tried to find one. 1. Had made specific efforts to find employment during the previous four weeks or 2. Were waiting to be recalled to a job from which they had been laid off. People in the working-age population who by the above criteria are neither employed nor unemployed are classified as not in the labor force. 142