Week 14 - GDP and Unemployment Flashcards
1
Q
A
2
Q
What are vital signs of the economy?
A
Data on output, employment, prices:
- Employment, unemployment, average work hours
- Stock values and trends
- Prices and inflation
3
Q
When was the systematic measurement of economic output developed?
A
during WW2
this includes metrics like Gross Domestic Product (GDP), which quantifies the total value of goods and services produced in a country.
4
Q
Why are common systems and measures useful?
A
Global economic systems, such as the use of GDP and other economic indicators, are widely adopted to assess and compare the health of economies.
These standardised measures make it easier to analyse economic performance across different countries and regions.
5
Q
How do economists measure the state of the economy?
A
GDP
6
Q
What is GDP?
A
the market value of final goods and services produced within a country during a specific period (typically measured annually or quarterly).
Economists aggregate the output of many different goods and services into a single figure (they do so by adding up the market values of the different
goods and services that the economy produces.)
7
Q
What are criticisms of GDP?
A
GDP does not accurately reflect factors such as distribution of income and the effect of economic growth on the environment.
8
Q
What is the GDP broken down?
A
Market Value: GDP is measured in terms of the market value of goods and services, meaning it reflects the prices at which goods and services are bought and sold in the market.
Final Goods and Services: Only the value of final goods and services is counted, not intermediate goods, to avoid double-counting. For example, if a car is made using steel, only the car itself (the final good) is counted in GDP, not the steel used to make the car.
Produced in a Country: GDP measures the economic output within a country’s borders, regardless of whether the producers are domestic or foreign companies.
Given Period of Time: GDP is typically measured annually or quarterly, which allows economists to track economic performance over time.
9
Q
Why do more expensive items receive a higher weighting?
A
because they are assigned a higher market value
The idea is that the higher price reflects the greater value of the good or service in the economy, which, in turn, indicates a higher contribution to the economy’s total output.
10
Q
Why does the higher the price reflect the willingness of the consumer?
A
The higher price reflects the willingness of consumers to pay more, signalling that the luxury car provides more utility (or benefits) to the buyer. This willingness to pay is often seen as a measure of the benefit the buyer receives from the good.
11
Q
What do market values make convenient?
A
Market values provide a convenient way to aggregate the many different good and services produced in a modern
economy.
However, not all economically valuable goods and services are bought and sold in markets.
12
Q
Example of market value
A
Mary is a single mother who does not work. Mary spends a lot of time looking after her children, but this is unpaid work and is not counted as part of GDP.
Suppose Mary finds a job that pays €500 a week. Mary then pays a childminder €200 a week to look after the children.
This adds €700 to GDP.
13
Q
What goods dont have a market price?
A
public goods
Since these services are not sold in markets, they don’t have a market price
14
Q
Example of societal benefits that dont have a price
A
Provide societal benefits
Eg infrastructure, parks, street lighting, basic research, communications
15
Q
Even though government goods and services aren’t sold in markets.
How do they impact economic output?
A
Stimulate Demand and Economic Activity:
Government spending, through its purchases and investments, helps drive demand for goods and services. For example, when the government builds infrastructure (roads, bridges, schools), it directly stimulates demand for construction materials, labor, and other resources.
Inject Money into the Economy:
Government spending injects money into the economy, supporting jobs and income generation. For example, public employees and contractors working on government projects contribute to GDP through their income and spending.
Increase Production Capacities:
Investments in things like infrastructure, research, or public services can increase a country’s productive capacity in the long term, enabling more efficient future production and better societal well-being.
16
Q
What are challenges in properly valuing public goods for GDP calculation?
A
Quantities Are Known, But Prices Are Not:
Unlike private goods, we don’t have a market price to rely on when measuring government goods and services.
We use the cost of production (how much the government spends on providing the good or service) to estimate its contribution to GDP. For example, the cost to build a road or the salary of public workers is used to calculate GDP.
Resource Allocation Determined by Budgets and Policy:
Government production is driven by political decisions and budgets, not by market forces like supply and demand. Governments decide how to allocate resources, which can sometimes lead to inefficient outcomes.
17
Q
What are the social welfare considerations of public goods?
A
The way government goods and services are priced for GDP purposes doesn’t always reflect the true social value of these goods:
Market Prices vs. Social Value:
The value of government goods (like education, healthcare, or public safety) may not be fully captured by their costs. For instance, the social benefits of building a new school or funding public healthcare might outweigh the direct costs involved in their provision.
Public Goods and Market Failure:
Public goods are typically non-excludable (you can’t prevent someone from using them) and non-rivalrous (one person’s use doesn’t reduce availability for others). Because private markets struggle to supply these goods efficiently, governments step in to provide them. Without government intervention, these goods might be under provided, leading to market failure.
18
Q
What are GDP measurement issues?
A
Valued at Cost:
Since there’s no market price, government production is measured by its cost (the expenditure for providing the service). This may not reflect the true value of the service to society.
Potential Overstatement of GDP:
Because government goods are valued based on their cost, the real economic value of some public services could be overstated. If the government spends a large sum on a project that is inefficient or wasteful, this could artificially inflate GDP.
Examples include spending on projects that don’t provide significant benefits (due to corruption, inefficiency, or poor management), which doesn’t add meaningful value to the economy but still contributes to GDP.
Resource Misallocation Risks:
Inefficient or politically motivated public projects may lead to misallocation of resources. For instance, public funds might be spent on a project due to political motivations rather than economic need, leading to deadweight loss.
Deadweight loss occurs when the cost of production exceeds the societal benefits. For example, if a government-funded project is unnecessary or inefficiently executed, the resources spent may not provide a corresponding benefit to society.
19
Q
What are final goods and services?
A
Final goods and services are those that are produced and consumed by the ultimate user.
These are the end products of production that don’t require any further processing.
For example, a car bought by a consumer, or a meal at a restaurant, are both final goods.
20
Q
Are final goods included in GDP?
A
Final goods are included in GDP because they represent the value of goods and services available for consumption or investment.
21
Q
What are intermediate goods and services?
A
Intermediate goods and services are used in the production of final goods
For example, flour used to make bread is an intermediate good.
22
Q
Are intermediate goods included in GDP?
A
These goods are not included in GDP directly to avoid double counting. Double counting would occur if both the intermediate and final goods were included in GDP, inflating the total value.
For example, flour used to make bread is an intermediate good. The flour itself is not counted in GDP. Instead, the value of the final product (the bread) is counted.
23
Q
Example of final goods/ services
A
Barber’s Assistant: The assistant provides services like shampooing and sweeping for $2 per haircut. This amount represents an intermediate service. The assistant’s services are used in the production of the final service (the haircut).
Barber’s Charges: The barber charges $10 per haircut. This represents the final good or service—the haircut that the customer buys.
Contribution to GDP: The total value of the haircut, which is $10, is included in GDP. This is because the haircut itself is a final service consumed by the ultimate user (the customer). The $2 earned by the assistant is not counted separately because it’s part of the value embedded in the final service. The $10 is the final price that reflects the entire value of the service, including the assistant’s contribution.
24
Q
What are capital goods?
A
Capital goods are long-lived goods that are used to produce other goods and services. They are often used in the production process over a period of time.
Can be either intermediate or final
25
What are examples of capital goods?
Buildings & Infrastructure – Houses,
apartments, motels
Equipment & Machinery – Restaurant stoves, tools in cooking schools
Vehicles for Business Use – Delivery trucks, taxis
These goods help increase the capacity to produce other goods but are not immediately consumed in the process.
26
Example GDP: A farmer produces €100 worth of milk. €40 worth of milk is sold to his neighbours, with the rest used to feed his pigs, which he sells at the local market for €120. What is the farmer’s contribution to GDP?
Final Goods:
The €40 worth of milk sold to the neighbors is counted as a final good, as it is directly consumed.
The €120 from the pigs is also a final good, as it is the finished product sold to consumers.
Intermediate Goods:
The €60 worth of milk used to feed the pigs is not counted directly in GDP. It is an intermediate good because it is part of the process of creating the pigs, which are eventually sold.
The total contribution to GDP comes from the final goods, which are:
€40 worth of milk + €120 worth of pigs = €160 contribution to GDP
27
Why is money not considered a capital good?
While money is essential for facilitating transactions in an economy, it does not directly contribute to the production of goods and services.
Capital goods must have productive value, meaning they are used in the production process. Money, on the other hand, is simply a medium of exchange and does not itself produce goods or services.
28
What is value added?
the market value of a product minus the cost of the inputs purchased from other firms to make that product.
Essentially, it represents the additional value created at each stage of production.
29
Why is value added an important concept?
Value added is an important concept because it avoids double-counting in GDP. Instead of counting the entire value of a product multiple times (at each stage of production), we count only the value added at each stage.
30
What does the term 'domestic' in GDP mean?
means that the activity being measured takes place within a country's borders, regardless of the nationality of the company or the ownership of the business.
31
What needs to be considered for GDP to reflect a value?
For GDP to reflect the value of output during a specific time period, the goods and services counted must be produced in that year.
Used goods do not count as part of GDP because they were produced in previous years.
32
Example: Value added
Selling a Used House:
Suppose you sell a 20-year-old house for $200,000.
Even though the house is sold for a large amount, the production of the house occurred 20 years ago.
The house itself is not counted in GDP for the current year because it was not produced in the year being measured.
Commission on the Sale:
However, the $12,000 commission paid to the realtor is included in GDP because it represents a service produced in the current year.
The value added in this case is the realtor's service, not the house itself.
So, for this transaction, the value added to GDP is $12,000 (the commission), as it reflects the services that were produced during the current year.
33
What is the expenditure method for measuring GDP?
It focuses on the total spending on final goods and services within a country in a given year.
34
What 4 major categories do economic statisticians classify the users of final goods and services?
1. Households
2. Firms
3. Government
4. Foreign sector
35
What is consumption C (households)?
Spending by individuals and families on goods and services.
60% of overall GDP in the economy
Includes durable goods (cars, appliances), non-durable goods (food, clothing), and services (healthcare, education).
Example: Buying groceries, going to a restaurant, or paying for a Netflix subscription.
36
What is investment I (firms)?
is spending by firms on final goods
and services. Aimed at increasing the
production capacity of the economy.
20% of overall GDP in the economy
Includes spending on new machinery, buildings, tools, and technology.
Example: A company purchasing new factory equipment or building a new office.
37
What is government spending G?
Spending by the government on public goods and services.
20% of overall GDP in the economy
Includes expenditures on infrastructure, public schools, defence, healthcare, etc.
Example: A government building new highways or funding education programs.
38
What is Net Exports - Net imports (Foreign sector)?
The difference between a country’s exports (goods/services sold abroad) and imports (goods/services bought from other countries).
10% of overall GDP in the economy
Example: If a country exports cars but imports electronics, the net contribution to GDP is Exports - Imports.
39
What do economists assume about these 4 groups?
Economists assume that all final goods and services that are produced in
a country in a given year will be purchased and used by members of one or more of the four groups
40
What are 2 ways of measuring GDP?
1. By Adding Up the Market Value of All Final Goods and Services:
This method directly sums the value of all final goods and services produced domestically in a given year.
This ensures no double counting (e.g., intermediate goods like raw materials are not included separately).
2. By Adding Up Total Spending by Each Sector (Expenditure Method):
This method calculates GDP by summing up the total expenditures by households, firms, the government, and the foreign sector.
Imports are subtracted because they are not produced domestically.
41
What is consumption expenditure?
is spending by households for goods and services
42
What are consumer durables?
are long-lived consumer goods
Eg cars, furniture, appliances
43
What are consumer non-durable goods?
short lived goods
Eg Clothing, food, bedding
44
What part of consumer spending are services?
largest component of consumer spending
Eg Education, taxi rides, hairdressers
45
What is business fixed investment?
purchases of new capital goods (assets that help in production)
Includes:
Plant (factories, production facilities)
Property (land, commercial buildings)
Equipment (machinery, tools, vehicles)
46
What is residential investment?
Spending on new construction of homes and apartment buildings.
This is considered an investment because housing contributes to future consumption.
Example: A construction company builds a new apartment complex.
47
What is inventory investment?
The change in unsold goods that a company holds in stock.
These are goods that have been produced but not yet sold.
Inventory investment can be:
Positive - If businesses add more unsold goods to their inventory.
Negative - If businesses sell off previously stored goods without restocking.
Example: A car dealership produces 100 cars but sells only 90; the remaining 10 cars are counted as inventory investment.
48
What is financial investment?
Refers to buying financial assets like stocks, bonds, mutual funds, or real estate for the purpose of earning a return (profit).
Typically, it does not increase the economy’s productive capacity or physical capital.
It usually transfers ownership of an existing asset, rather than creating new capital goods.
Example:
Buying shares in Apple doesn’t directly increase the number of factories Apple owns.
Purchasing government bonds helps finance government spending, but it doesn’t necessarily create new production.
49
What is an exception of financial investment since it isnt included in GDP?
If a company issues new stock and uses the money to build a factory or buy new machinery, then it can be considered economic investment.
50
What is economic investment?
Refers to increase spending on physical capital (goods used for production), such as:
Machinery
Factories
Equipment
Infrastructure
Increases the economy’s productive capacity and future output.
Example:
A company buys new manufacturing robots to improve production.
A government builds a new highway to support transportation.
51
What are government purchases?
spending on final goods and services by federal, state, and local governments.
This spending directly contributes to GDP because it involves the purchase of goods and services that increase production.
52
What is included in government purchases?
Public Sector Spending on Goods and Services:
Examples:
Military equipment (e.g., fighter jets)
Public sector salaries (e.g., teachers, firefighters, police)
Infrastructure projects (e.g., roads, bridges, schools)
Office supplies for government agencies
Government-funded Services:
Services provided directly by the government, such as:
Public education
Public healthcare
Law enforcement
53
What two things are not included in government purchases?
1. transfer payments (redistribution programs)
2. interest on government debt
54
What are transfer payments (redistribution)?
Payments made by the government without receiving goods or services in return.
Examples:
Social Security payments to retirees
Unemployment benefits
Food stamps (SNAP)
Welfare programs
Why Excluded?
These payments do not represent new production—only the spending by recipients counts toward GDP when they use the money to buy goods/services.
55
Why is interest on government debt not included in GDP?
Payments made by the government to bondholders (e.g., interest on Treasury bonds) are also excluded from GDP.
Why? Interest payments do not directly lead to the production of new goods and services.
56
What is the net export calculation?
Net exports (NX) represent the difference between a country's exports (X) and imports (M)
NX = X - M
57
What are exports?
Produced domestically but sold internationally.
Increase GDP because they represent goods/services produced within the country.
When a country sells goods abroad, it generates income and stimulates domestic production
Examples:
U.S. companies selling aircraft to Europe
A software company in India providing IT services to foreign clients
French wine sold to customers in Japan
58
What are imports?
Produced abroad but consumed domestically.
Decrease GDP because they do not contribute to domestic production (they are counted in consumption, investment, or government spending but subtracted from GDP).
Imports increase the amount available to the domestic economy
Examples:
Americans buying cars from Japan (Toyota, Honda, etc.)
U.K. businesses purchasing computers made in China
A restaurant in Germany importing coffee beans from Brazil
59
What is a trade surplus?
Positive net exports
exports>imports
increase GDP
60
What is a trade deficit?
Negative net exports
exports
61
What is the GDP expenditures equation?
Y = C + I + G + NX
Y - Gross Domestic Product or output
C - Consumption Expenditure
I - Investment
G - Government Purchases
NX - Net Exports
expenditure approach to measuring GDP
62
What is the income approach to GDP?
calculates GDP by summing all income earned from production in an economy. Since every dollar spent on goods and services becomes income for someone, this method should equal the expenditure approach.
63
What is the formula of the income approach?
GDP = labour income + capital income
64
How much is labour income of GDP?
about 2/3 of GDP
65
What is included in labour income?
Wages and Salaries – Payments to employees for work.
Employee Benefits – Health insurance, retirement contributions.
Self-Employed Earnings – Income earned by freelancers or small business owners.
Most economic activity involves workers producing goods and services.
Businesses pay wages as compensation for labor.
66
How much is capital income of GDP?
about 1/3 of GDP
67
What is capital income?
Capital income pays for physical capital and intangibles.
Profits – Earnings kept by business owners after expenses.
Interest – Income earned by bondholders from loans.
Rent – Payments for the use of land or buildings.
Royalties – Payments for intellectual property (e.g., patents, copyrights).
Capital (factories, machines, technology) helps produce goods/services.
Investors and business owners receive income for providing capital.
68
How is the income approach different to the expenditure approach specifically?
The income approach is measured before taxes
GDP represents total income generated by production, before any deductions like taxes or subsidies.
Labor income (wages, salaries, benefits) and capital income (profits, rent, interest) are measured before income taxes, corporate taxes, and other deductions.
This ensures that GDP reflects the total economic output without government adjustments.
69
What are the 3 faces of GDP?
three different approaches used to calculate GDP
1. Production (output) approach
adding up the value added at each stage of production. The idea is to sum the market value of all final goods and services produced within a country over a specific period.
GDP = final goods and services - value of intermediate goods
focuses on measuring the output of goods and services in the economy
2. Expenditure approach
focusing on total spending on the country's final goods and services. The formula adds up all the spending from the different sectors of the economy:
GDP = C + I + G + NX
focuses on the demand side of the economy
3. Income approach
summing all the income earned by individuals and businesses in the production of goods and services. This method looks at the distribution of income generated by production.
GDP = Labour income + Capital income
focuses on the supply side of the economy
70
What is the circular flow diagram?
how money moves through the economy
Firms -> goods and services from firms -> Households
Households -> resources from households -> Firms
Firms -> income received by households for resources -> Households
Households -> spending on good and services from firms -> Firms
71
What is nominal GDP?
measures the total value of all goods and services produced in a country within a given year, but it is calculated at current prices.
It reflects both the quantity of output and price changes.
Nominal GDP is affected by changes in the prices of goods and services, which makes it difficult to assess how much actual output has increased.
72
What is real GDP?
adjusts for price changes over time by using constant prices from a base year.
It measures the physical volume of production, allowing economists to see how much actual output (quantity of goods and services) has grown, without the effect of price changes.
Real GDP reflects only the change in the quantity of goods and services produced, making it a better measure for comparing economic output across different years.
73
Why do we adjust for price changes?
to compare GDP for different years to see how much output has changed
GDP changes over time because
– Prices change and quantity of output changes
To see how much output has grown,
use only the changes in quantities
– Hold prices constant
74
Why do nominal and real GDP increase each year?
In general, both nominal GDP and real GDP tend to increase over time due to economic growth, where both the production of goods and services and prices rise. Nominal GDP increases because of higher prices and higher production, while real GDP increases mainly due to higher quantities produced, adjusted for price changes.
75
Why can nominal GDP go up and real GDP go down?
Fewer goods and services are produced: The economy might be producing less, leading to a decline in real GDP.
Prices increase faster than the decline in output: If prices rise significantly while the production of goods and services decreases, the nominal GDP might rise even though real output (real GDP) falls.
For example, if the inflation rate is high enough, it can cause nominal GDP to increase even when fewer goods and services are being produced, which leads to a decrease in real GDP.
76
Why will nominal GDP be smaller than real GDP if the prices in the current year are less than in the base year?
If the prices in the current year are lower than those in the base year (for example, due to deflation), then nominal GDP will be smaller than real GDP.
This usually happens in years before the base year, as real GDP uses base year prices to calculate the value of production, while nominal GDP uses current year prices.
This situation is rare, but it can occur during periods of deflation, where the overall price level is decreasing.
77
Why could real GDP rise and nominal GDP fall
While it is rare, real GDP could rise while nominal GDP falls if prices fall significantly enough to outweigh the increase in production.
This situation typically happens during periods of severe deflation, when prices decrease more quickly than the increase in output. While output increases (increasing real GDP), the fall in prices (decreasing nominal GDP) is so steep that nominal GDP might decline even as more goods and services are being produced.
78
Is GDP good at capturing economic wellbeing?
GDP is an essential tool for measuring a country's economic activity, it does not fully capture the overall well-being or quality of life of its people
79
What are 5 limitations of GDP?
1. GDP only captures market transactions
2. Leisure isnt included
3. GDP may underestimate economic wellbeing
4. Maximising GDP doesnt guarantee maximising well being
5. GDP measures our ability to obtain things
80
What non-market transactions does GDP not account for?
GDP includes only goods and services that are priced and sold in markets.
It does not account for non-market activities that contribute to well-being, such as:
Volunteer work: Services provided for free that contribute to societal welfare.
Household production: Work done at home (e.g., cooking, cleaning, child care) that is not paid for or sold in markets.
Illegal transactions: Goods and services produced in the underground economy (e.g., black market activities).
Because of this, GDP might understate a country's true economic well-being, especially in societies where unpaid or informal work plays a large role.
81
Why is leisure not included in GDP?
GDP does not account for leisure or free time, even though it is a significant part of well-being.
For example, people with higher incomes might prefer to work less and enjoy more leisure time, but this is not reflected in GDP.
While GDP increases with more work and production, it doesn't recognise the value of free time or the trade-off between work and leisure.
Leisure contributes to a higher quality of life, but because it’s not sold in the market, it’s excluded from GDP calculations.
82
Why does maximising GDP not necessarily maximise national well being?
Even though GDP measures the total economic output, increasing GDP does not necessarily mean that individual welfare is improving.
For example, environmental damage (such as pollution or resource depletion) might increase GDP in the short run (e.g., through industries generating economic activity), but this can harm well-being in the long run.
Maximising GDP might involve trade-offs, like:
Work-life balance (where more hours worked might lead to higher GDP but decrease personal well-being).
Health and environmental costs that are not reflected in GDP.
83
Why may GDP underestimate economic wellbeing?
Real GDP may fail to reflect significant changes in the quality of life.
For instance, health improvements, environmental quality, or social factors that contribute to well-being are not measured by GDP.
Real GDP focuses on quantity rather than quality, which can give an incomplete picture of what people experience in their daily lives.
84
How does GDP only measure our ability to obtain things?
GDP measures the economic resources available for people to use to improve their lives.
While it doesn't directly measure things like happiness, life satisfaction, or mental well-being, it reflects the capacity of a society to produce goods that contribute to well-being (e.g., healthcare, education, leisure activities).
85
How has leisure time increased in the past 100 years?
Work weeks are shorter
People enter the labour force at an older age
People retire earlier
86
Why does leisure produce no goods for a market?
GDP places a value of zero on all leisure time.
Opportunity cost of an hour of leisure is your hourly wage.
Omission of the value of leisure time makes GDP seem
smaller.
The loss from reduced leisure would offset the gain from
producing and consuming a greater quantity of goods and
services (trade off)
87
What are 2 types of non-market activities not included in GDP?
1. Household production
2. Volunteer services
valuing these services would be difficult
88
What is included in household production?
Cooking, cleaning, childcare, and other tasks people perform at home are essential to well-being but are not paid for and not included in GDP.
If you take care of your children or clean your house, those are valuable activities, but GDP ignores their economic value.
89
Why are non market activities important in poor countries?
In poorer or developing economies, non market activities are often much more prevalent due to:
Self-sufficient households: In rural or less developed areas, households often grow their own food, build their homes, and provide other essential goods and services within the family unit.
Bartering: People may exchange goods and services without using money in systems like barter economies. For instance, someone might exchange a basket of vegetables for a repair service, which isn't counted in GDP.
These non market activities are important for survival and daily life, but because they are not formally part of the economy, they are excluded from GDP.
90
What is an underground economy?
includes all economic activities that are not reported to the authorities, including both legal and illegal transactions
91
What are legal underground activities?
These are transactions for legal goods and services that simply go unreported to avoid taxes or regulatory oversight.
Examples:
Casual labor paid in cash (e.g., home repairs, babysitting, or tutoring).
Freelance work that is not declared to tax authorities.
Barter transactions, where goods are exchanged without money.
92
What is illegal underground activity?
These involve activities that are illegal but still provide a service of value.
Examples:
Drug dealing.
Bookmaking or gambling operations.
Prostitution or other illicit services.
Smuggling, trafficking, and other forms of illegal trade.
93
What is the size of an underground economy?
The size of the underground economy varies by country, being generally larger in poorer or less regulated economies.
94
Example:
The factory employs people and produces goods, which increases economic activity.
The production is counted in GDP because it adds to the total market value of final goods and services.
Pollution Generated:
However, this factory might create pollution (e.g., air or water contamination).
The pollution harms the environment and the health of the local population, but this harm is not directly reflected in GDP.
How does pollution then increase GDP?
Government Intervention:
The city might hire a company to restore the environment and clean up the pollution caused by the factory.
The cleanup activity will add to GDP because it is an economic transaction: the company providing cleanup services is paid for its work, and this payment is counted in GDP.
Effect on Environmental Quality:
The clean-up activities return the environment to its original condition, not a better one.
The damage caused by the pollution could still outweigh the economic benefits of the increased production.
95
Scenario resource depletion:
Resource Extraction:
Suppose a mining company extracts coal from a deposit or an oil company drills new barrels of oil.
The extraction process adds to the GDP because it represents an economic transaction—the value of the coal or oil produced is counted as part of the economy's output.
Depletion of Resources:
The act of extracting these resources means they are no longer available for future generations. For example, if one more barrel of oil is extracted and sold, it is one less barrel available for use in the future.
GDP does not reflect this depletion. The economic value of the resource is counted as part of GDP, but the long-term cost of reduced resources and future scarcity is not included in the calculation.
96
What other quality of life considerations and limitations of GDP
Crime rates (High levels of crime can negatively impact quality of life)
Traffic congestion (GDP does not account for the negative impact of time lost in traffic, pollution created by more cars on the road, or quality of life reductions from crowded or polluted cities)
Civic organisations (These activities may not be reflected in GDP since they often don't involve market transactions (e.g., unpaid volunteer work).)
Open space (Parks, natural reserves, and green spaces contribute to a better living environment and can significantly improve physical and mental health. They are an important part of quality of life but aren't measured by GDP)
Sense of community (While GDP measures economic transactions, it fails to capture the social connections that improve well-being and contribute to a thriving society)
97
How does GDP not capture the effects of income inequality?
1. No Measure of Distribution:
GDP calculates the total market value of goods and services produced, but it does not reflect how that wealth is shared among individuals. A country could have a high GDP but still suffer from severe inequality, where a small proportion of the population controls most of the wealth.
For example, the GDP of two countries could be the same, but one might have a highly unequal distribution of income, with a few wealthy individuals and many people living in poverty, while the other could have a much more equal distribution.
2. Rising Inequality:
In many countries, including the U.S., economic inequality has been rising in recent decades. The wealthiest individuals are seeing their incomes grow at a much faster rate than those of the average worker, contributing to a widening wealth gap.
While GDP growth may show overall economic improvement, it masks the growing disparity between rich and poor, leading to social unrest and polarisation.
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Overall GDP limitations
GDP tells us about aggregate consumption, but it does not tell us about personal well-being.
GDP tells us about production, but not about the pollution that comes with it, or the depletion of natural resources it requires.
GDP tells us about government expenditure and private investments, but not about the quality of life they generate.
As global annual GDP peaked, our ecological footprint did so
too, leading to an ecological deficit.
Forests were cut to make way for agriculture and industry,
oceans were depleted of their fish stocks, and fossil fuels were burned and polluted the air, leading to climate change.
In the short-term that lead to growth, in the long-term it
damaged our health, wealth and well-being.
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What 3 measures of well being is GDP per capita positively associated with?
1. Material standard of living
2. Health and life expectancy
3. Education
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Where have higher material standard of living ?
Higher GDP usually correlates with more goods and services available to people. This suggests that in countries with higher GDP per capita, residents have better access to material wealth—things like food, shelter, clothing, and technology.
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Where has higher health and expectancy?
Higher income countries tend to have better healthcare systems, more access to medical services, and higher standards of living, which contribute to longer life expectancies and better health outcomes. As GDP rises, there are often improvements in the quality of healthcare and access to medical treatments, which directly impact life expectancy.
Example: People in industrialised nations often have access to better medical care and healthier lifestyles, which explains why life expectancy and health outcomes are generally better in wealthier countries.
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Where has higher education?
Higher GDP is associated with greater investments in education. Wealthier countries tend to have higher literacy rates, better school enrollment rates, and more developed educational systems. This is because more resources are available for schooling and training, which contributes to higher levels of human capital.
Example: Countries with higher GDP per capita typically have better-funded schools, more access to educational resources, and a higher percentage of the population completing higher education.
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GDP and Economic wellbeing summary
GDP is related to economic well-being:
1. Availability of goods and services.
2. Health and education.
3. Countries with high real GDP per head of
population tend to have higher life expectancy,
lower infant mortality, better nutrition and
healthcare, etc.
4. Real GDP per capita is still the best measure we
have despite its limitations presented above.
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What do the bureau of labour statistics (BLS) estimate?
estimates employment and unemployment every month by categorising the working-age population (16+) into key groups
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What are 3 labour force categories?
1. Employed
2. Unemployed
3. Not in the Labor Force
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What is the formula of the labour force?
labour force = employed + unemployed
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How do you calculate the unemployment rate?
unemployment rate = unemployed/ labour force
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How do you calculate the participation rate?
participation rate = labour force/ population 16+
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What are 4 ways to measure unemployment?
1. Employed
2. Unemployed
3. Out of labour force
4. Labour force
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What is employment?
A person is employed if he/she works full-time or part-time, or is on vacation or sick leave from a regular job.
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What is unemployment?
A person is unemployed if he or she is not employed but is actively seeking employment.
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What is the labour force?
The total number of people employed and unemployed in the economy
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What considers being out of the labour force?
A person is considered to be out of the labour force if he or she is not employed or actively seeking employment.
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What is the unemployment rate?
The percentage of the labour force
classified as unemployed.
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What is the participation rate?
The percentage of the working population in the labour force.
The participation rate is calculated by
dividing the labour force by the working
age population
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What are 3 types of unemployment?
1. Frictional unemployment
2. Structural unemployment
3. Seasonal / Cyclical unemployment
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What is structural unemployment?
Long-term and chronic unemployment that persists even when the economy is at full employment
Arises due to mismatches between workers' skills and available jobs.
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What are causes of structural unemployment?
1. Skill Gaps – Jobs require skills that unemployed workers do not possess.
2. Technological Changes – Automation, AI, and robotics replace certain jobs.
3. Geographic Mismatch – Jobs may exist in one region, but workers live elsewhere.
4. Language Barriers – Immigrants may struggle to find jobs due to language differences.
5. Discrimination – Biases in hiring may exclude certain groups from employment
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Why is structural unemployment an issue?
Higher costs than frictional unemployment
Causes:
Loss of Income – Workers remain unemployed for extended periods, reducing their earnings.
Loss of Output – Firms cannot fill open positions, leading to lower economic production.
Social Consequences – Long-term unemployment can increase poverty, inequality, and social unrest.
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What is frictional unemployment?
Short-term unemployment that occurs as workers search for new jobs or transition between jobs.
The process of matching workers with jobs takes time; this time is considered frictional unemployment as it is short-term.
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What are causes of frictional unemployment?
1. Job Searching – Workers take time to find jobs that match their skills and preferences.
2. Career Transitions – People quit jobs to find better opportunities or switch industries.
3. Graduates Entering the Workforce – New graduates take time to secure employment.
4. Relocation – Workers move to different cities or countries, delaying employment.
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What is cyclical unemployment?
Unemployment caused by economic downturns (recessions).
Happens when demand for goods and services falls, leading to lower production and job losses.
Increases during recessions and decreases when the economy recovers.
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What are the causes of cyclical unemployment?
1. Economic Recessions – Businesses cut costs by laying off workers.
2. Decline in Consumer Demand – People spend less, leading to lower production.
3. Business Failures – More companies close down, reducing available jobs.
4. Financial Crises – Banks lend less money, making it harder for businesses to expand.
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Do the 3 types of unemployment add up to the total rate of unemployment?
In principle, structural, frictional, and cyclical unemployment add up
to the total unemployment rate
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What are the 3 costs of unemployment?
1. Economic costs
2. Psychological costs
3. Social costs
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What is an economic cost?
Also known as opportunity cost, economic cost is the value you give up when you choose one economic activity over the next best economic activity
127
What are 3 economic costs of unemployment?
1. Lost Wages & Production – Fewer workers means less output, slowing economic growth.
2. Decreased Tax Revenue – Governments collect less income tax while still providing public services.
3. Increased Government Spending – More people rely on unemployment benefits, welfare programs, and subsidies.
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What is a psychological cost?
social costs that specifically represent the costs of added stress or losses to quality of life
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What are 3 psychological costs of unemployment?
1. Lower Self-Esteem – Losing a job can lead to feelings of failure and hopelessness.
2. Family Stress – Financial struggles can increase tension and conflicts at home.
3. Mental Health Issues – Long-term unemployment is linked to higher rates of depression and anxiety.
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What are social costs?
total cost of an economic activity to society, including both private costs and external costs (negative effects on third parties)
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What are the 3 social costs of unemployment?
1. Higher Crime Rates – Studies show a link between unemployment and crime, as financial hardship can push people towards illegal activities.
2. Increased Social Problems – Homelessness, drug abuse, and domestic violence may rise in high-unemployment areas.
3. Strain on Social Services – More unemployed individuals may seek healthcare, housing assistance, and food aid.
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What are 2 key concepts of the duration of unemployment?
1. Unemployment spell
2. Duration of unemployment
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What is the unemployment spell?
The period during which an individual remains continuously unemployed
134
What is the duration of unemployment?
The total length of an unemployment spell.
Measured from the time a person loses a job until they find new employment
135
What are the costs of unemployment directly related to?
directly related to the length of time a person has been unemployed
136
What counts as long term unemployment?
Individuals who have been out of work for 6 months or longer.
Often face structural unemployment (mismatch of skills or geographic location).
The economic, social, and psychological costs are much higher due to prolonged joblessness.
137
What counts as short term unemployment?
Typically find a job quickly (within weeks) after job loss.
Economic costs are low because:
- Minimal income loss
- Quick reintegration into the labor force.
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What are 3 outcomes of short term unemployment?
1. Find a permanent job after a short job search
- Low economic costs
- Unemployment period ends quickly.
2. Leave the labor force
- May become discouraged workers or stay-at-home.
- No longer counted as part of the unemployment rate.
3. Take a temporary or short-term job
- Might return to unemployment soon.
- Increases cyclical or frictional unemployment rates temporarily.
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What are 2 other unemployment issues?
1. Discouraged workers
2. Involuntary part-time workers
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What are discouraged workers?
would like to have a job but they
have not looked for work in the past four weeks because they believe they are no jobs available
Status: Out of the labor force, not counted as unemployed.
Impact: Their exclusion can make the unemployment rate appear lower than it actually is, as they are not included in the official count.
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What are involuntary part-time workers?
individuals who would prefer full-time work but are unable to find full-time jobs, so they work part-time instead.
Status: Counted as employed in official unemployment statistics.
Impact: Their situation can lead to underemployment (working fewer hours than desired) and lower income compared to a full-time job.
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Overall what 5 things are included in GDP?
1. Production method
2. Expenditure method
3. Income method
4. Real and nominal values
5. GDP and wellbeing
143
Overall what are 4 thing included in GDP?
1. Costs
2. Duration
3. Employed/ unemployed
4. Out of the labour force
144
What is capitalism?
an economic system where private ownership of productive assets (like factories, land, and capital) is key.
The primary goal is profit maximisation, and economic activity is coordinated by market mechanisms (supply and demand), with minimal interference from the government
145
What is Laissez-faire capitalism?
This form of capitalism relies heavily on the market to coordinate economic activity.
The government plays a minimal role in regulation or intervention. Private individuals and businesses operate freely in the market.
tend to encourage competition and entrepreneurial freedom but can sometimes result in higher inequality and less social safety
146
What countries use laissez faire capitalism?
UK and US
147
What is administrative capitalism?
the government plays an active role in economic regulation and coordination, often intervening to correct market failures or provide public goods
relies on a mix of market forces and government planning and administration
may prioritise social stability, income redistribution, and public services, but they often involve higher taxes and more government regulation
148
What countries use administrative capitalism?
Germany, Italy, France, Australia, and Japan
149
What is socialism?
an economic and political system where the means of production (factories, resources, etc.) are owned or regulated by the state or the community rather than by private individuals. The aim is to distribute wealth more evenly and reduce economic inequality.
150
What is administrative socialism?
State ownership dominates all or most of the economy.
Economic activity is primarily coordinated by public administration (government), with little reliance on market forces.
151
What countries use administrative socialism?
Soviet Union, North Korea
152
What is market socialism (state capitalism)?
State ownership still predominates, but economic activity is coordinated through market mechanisms (such as supply and demand).
The government may still own large sectors of the economy, but businesses operate more like private enterprises within a market framework
153
What countries use market socialism?
China and Vietnam
154
What is welfare state?
a concept of governance where the state (government) plays an active role in promoting the economic and social well-being of its citizens
the state plays a role in the
protection of its citizens
155
What are the main characteristics of welfare state?
Economic and Social Protection:
The state provides financial assistance and social services (e.g., health insurance, unemployment benefits, pensions) to individuals, especially those who are vulnerable or disadvantaged.
The aim is to reduce poverty, inequality, and social unrest, ensuring that all citizens have a basic standard of living.
Promotion of Well-being:
The welfare state emphasise healthcare, education, housing, and income security as fundamental rights, making sure that citizens have the necessary means to live healthy, productive lives.
The state may also regulate certain sectors (e.g., healthcare, housing, or pensions) to ensure that these services are accessible to all.
Balance of Collectivism and
Capitalism:
The welfare state is a mix of collectivism (public action to address social and economic inequalities) and capitalism (market-driven economy, where private ownership plays a role in production).
It combines elements of social welfare policy, where the government ensures citizens' well-being, with capitalist economic structures, where businesses and markets operate freely.
Democracy:
A welfare state is typically associated with democratic systems, where the citizens have the power to elect their leaders and influence policies that govern their welfare.
The welfare state ensures that policies are created and administered in a way that reflects the needs of the majority, aiming for equality and fairness in access to resources.
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What do the economic and political right argue?
for a laissez-faire approach to the economy on the part of government - governments job is to ensure free and competitive markets
The right argue that free markets are the most efficient (least wasteful) way to achieve economic prosperity
157
What do the economic and political centre/ left argue?
argue that disequilibria can persist for long periods of time (markets
don't work!) and that therefore (e.g.) government intervention to boost
aggregate demand is necessary to bring the economy towards full employment
The centre and the left also argue that government intervention is needed in order to achieve certain social goals such as:
* Full employment
* poverty reduction,
* reduced inequality,
* environmental protection etc.
158
What is neoliberalism?
primarily concerned with economic freedom and individual liberty in the marketplace. Unlike classical liberalism, which can incorporate social justice and equality issues, neoliberalism focuses specifically on the freedom to engage in voluntary exchanges within markets, with minimal government interference
159
Who is responsible for consequences of their own choices in neoliberalism?
the individual is seen as responsible for the consequences of their own choices. There is little emphasis on collective responsibility or government support for those who may be disadvantaged.
The state is viewed as having no role in ensuring social welfare or redistributing wealth; instead, it is assumed that individuals should be responsible for their own economic outcomes.
160
Is there government intervention in neoliberalism?
State intervention in the economy is seen as undesirable, as it is believed to lead to inefficiencies and ultimately to totalitarianism. The only role for the state is to enforce the rule of law (via courts, police, and military) to protect property rights and maintain order.
Markets are seen as the most efficient way to allocate resources, and the role of the state should be limited to creating an institutional framework that supports private property rights and the proper functioning of markets
161
What approach is within neoliberalism?
Laissez-faire capitalism is a cornerstone of neoliberal thought. Neoliberals advocate for the removal of barriers to trade, privatisation of state-owned enterprises, and deregulation to allow market forces to operate freely without government intervention.
162
Who has better information in neoliberalism?
Neoliberalism assumes that individuals possess better information than the state about their own needs and preferences. Therefore, individuals should be free to make their own economic choices without state interference.
163
Who is Friedrich Hayek?
A key proponent of neoliberal thought, Hayek argued that the freedom to choose in the market is essential for individual liberty and economic prosperity. He believed that central planning by the government would inevitably lead to totalitarianism, as it would require the government to control too many aspects of life.
164
Who is Milton Friedman?
Friedman argued that free markets and free trade are the optimal way to organize the exchange of goods and services. He famously stated that "states don't have enough information" to effectively manage economic activity and that markets, left to their own devices, are far more efficient in allocating resources
165
What is neoliberal agenda?
an economic and political philosophy focused on maximising individual freedom and limiting the role of the state in the economy
166
What does Thatchers quote 'no such thing as society' suggest?
epitomises the neoliberal belief in individualism over collective welfare. It emphasises the role of individuals in driving their own success and personal responsibility, rather than relying on collective or governmental support.
One of the core tenets of neoliberalism is the idea that individuals and private commercial interests should take precedence over collective societal needs
167
What are 5 key policies on the neoliberal agenda?
1. Free trade (removal of trade barriers)
2. Privatisation (private companies)
3. Shrinking of the state (role of the government should be reduced)
4. Large tax cuts (argue for reducing taxes)
5. Balanced budgets or 'austerity' (focus on reducing national debt)
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What regimes is neoliberalism consistent with?
It can be consistent with autocratic regimes (where economic freedom is emphasised, but political freedoms may be restricted) as well as democratic regimes (where political freedoms are more prominent).
The philosophy emphasises economic freedom over social or participative freedom.
169
What is economic freedom?
refers to the freedom of individuals and corporations to engage in market activities without excessive government interference
170
Is neoliberalism just an economic theory?
not just an economic theory—it is deeply rooted in political ideology
considered more of an ideological agenda aimed at reshaping the economy and society in favour of market-driven principles
171
What are the 4 benefits of neoliberalism?
1. Economic Efficiency - By reducing the role of government, markets are able to weed out the inefficient companies, whilst allowing those that produce a good at a reasonable price, to succeed.
2. Cheaper Goods – Free markets and free trade between nations increases level of competition and puts pressure on firms to reduce price and increase efficiency.
3. Lower Taxes – Reduce influence and role of government, which reduces the need for high level of taxes. Individuals then have the freedom to choose where they would like to spend their income – greater level of happiness and enjoyment.
4. Higher Levels of Investment - Incentives for businesses to improve on their efficiency and invest in new and more productive equipment.
172
What are 4 costs of neoliberalism?
1. rising inequality
2. political backlash and nationalism
3. environmental consequences
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Why is rising inequality a cost of neoliberalism?
Economic Disparity: Neoliberal policies like deregulation, tax cuts, privatisation, and shrinking trade unions have contributed to growing income inequality.
Fastest Income Growth at the Top: Since the 1980s, countries that have fully embraced neoliberalism have seen incomes grow most rapidly at the top of the income distribution, with the wealthiest individuals benefitting disproportionately
Stagnation at the Bottom: Meanwhile, those in the lower half of the income distribution have faced relative income stagnation. Despite overall economic growth, the benefits have not been evenly shared, leading to a widening wealth gap.
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What political backlash and nationalism is there from neoliberalism?
Globalization and Alienation: Rising inequality, particularly in the aftermath of neoliberal policies, has fueled backlash against globalization. Many people in regions or communities that have not benefitted from the global economy (e.g., the rust belts in industrialized countries) feel alienated and left behind, leading to a rise in nationalist sentiments and protectionist policies.
Undermining Democracy: The concentration of wealth and power in the hands of a few individuals or corporations has led to lobbying and influence over policymakers. The "winners" of the neoliberal system often use their resources to shape the rules in their favor, further entrenching inequality and potentially undermining democratic systems.
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What are environmental consequences of neoliberalism?
Climate Change: Neoliberalism's emphasis on minimal regulation and profit-seeking has exacerbated environmental degradation. By prioritizing economic growth without considering the long-term sustainability of natural resources, neoliberal policies have intensified climate chaos and environmental destruction.
Skepticism on Climate Change: Neoliberals, especially those with a deep commitment to free market principles, often express skepticism about climate change. They argue that addressing it would require regulation and government intervention, which they see as an infringement on individual freedoms and a threat to their economic model.
