Bernanke -- Problems -- Chapter 6 -- Measuring Economic Activity

Bernanke -- Problems -- Chapter 6 -- Measuring Economic Activity

  1. George, Al and GDP in clamshells.

    Good Output Price Market Value
    Fish 300 1 300 clamshells
    Boars 5 10 50 clamshells
    Bananas 200 5 1000 clamshells

    Adding up the market values this far, we get 1350 clamshells .

    What should we do with digging bait? Services are part of GDP, but these are intermediate services; adding them would be like adding wages to GDP (certainly wages are important, but they are paid out of receipts from selling GDP).

    What should we do with the 5 banana trees that Al sold to George for 30 clamshells each? They are not intermediate goods in the sense the term is used in for national income accounts, but they are "second-hand" goods -- they already existed, and were not "produced" in the current year. Their sale is a transfer of an asset that does not add anything to GDP.

  2. Impact of federal government spending on GDP.

  3. Value added and GDP.
    The process of production is as follows: If we add up the value added at each of the above stages, we obtain:
    $ 25,000 + $ 50,000 + $20,000 = $100,000

    which is (as it should be) the value of the final sale.

  4. Cars and your mother-in-law

  5. Calculating GDP
    Problem: Given the following data, compute GDP:

    Note that some items will not count towards GDP:

    The other item that is best computed before turning to the GDP formula is investment:

    GPDI = residental fixed + non-residental fixed + change in inventories

    so in this case

    GPDI = 100 + 100 + 25 = 225

    Now we can compute GDP easily, using the following notation

    GDP = PCE + GPDI + NX + GOVT

    GDP = 600 + 225 + 25 + 200 = 1050

  6. Calculating Nominal and Real GDP
    Nominal GDP is found by simply multiplying prices and quantities and adding them up. The problem with nominal GDP as a measure of welfare is that, due to inflation, prices do not stay constant.

    To have a firm basis for comparison, we must have a common measure;
    in calculating real GDP we take prices in the base year as the measure of prices.

    In the example, nominal GDP is found simply by multiplying the given prices and quantities for each year:

    Nominal GDP in 2000 = 100 (5) + 300 (20) + 100 (20) = 8500
    Nominal GDP in 2005 = 125 (7) + 250 (20) + 110 (25) = 8625
    Nominal GDP has increased over the period; but it is not clear whether welfare has increased. We can note that there are more hockey pucks and back rubs, but there are fewer cases of root beer. Is the net result an increase or decrease in welfare? This question, since it depends on your preference for root beer versus hockey pucks, is hard to answer for any individual, but we can say that
    real GDP has decreased , since:

    Real GDP in 2000 = 100 (5) + 300 (20) + 100 (20) = 8500
    Real GDP in 2005 = 125 (5) + 250 (20) + 110 (20) = 7825

    Note that in the base year, real and nominal GDP are the same;
    in any other year, they differ since we are using base year prices.

  7. Real GDP and welfare
    Real GDP as measured will almost certainly go down if anti-pollution devices are required or if pollution taxes are levied. There will be no offsetting addition to GDP from the cleaner air, since air does not have a market value.
    This of course does not mean that the anti-pollution measures are necessarily a bad idea, simply that GDP is an imperfect measure of welfare.

  8. Measuring unemployment
    Given an economy in which there are 65 individuals interviewed, we know

    The unemployment rate is the number unemployed divided by the number in the labor force.
    In this problem, there are 65 people interviewed, but many are not in the labor force: children, the retired, and those not actively looking for jobs.
    Here, this means we must exclude:

    1. 10 children under 16

    2. 10 retired

    3. 5 full-time homemakers

    4. 5 full-time students

    5. 2 disabled

    6. 1 who would "like a job" but is not actively searching

    The labor force in this example is 65 - 33 = 32.
    Of these, 30 have jobs (25 full time, 5 part time) and are counted as employed.
    Two do not have jobs despite an active search and are counted as unemployed. Hence the unemployment rate in this group is 2 / 32 = .0625 or 6.25 percent

  9. Measuring unemployment (2)
    Given the following information: Find:

  10. Duration of unemployment
    We are given data on two towns, each with a labor force of 1,200:

    1. Sawyer: 100 unemployed for the entire year.
      The unemployment rate in Sawyer is 100 / 1200 = .0833 = 8.33 percent ; the average duration of unemployment is one year (maybe longer).

    2. Thatcher: Every worker unemployed for 1 month out of 12.
      Assuming that unemployment spells are randomly distributed over the year, in any given month 1/12 of the labor force will be unemployed, or the unemployment rate will be: 1 / 12 = .0833 = 8.33 percent.

    Note that the unemployment rate in the two towns is identical.
    However, in Thatcher, the average duration of unemployment is just one month; no single worker faces permanent unemployment.
    The social cost of unemployment is much higher in Sawyer, where some workers face total unemployment, that in Thatcher, where every worker faces only a relatively brief spell.

    The moral of the problem is that a single unemployment statistic does not tell you everything.