Ch005 - Chapter 5 Measuring Economic Activity GDP and...

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Chapter 5 Measuring Economic Activity: GDP and Unemployment Overview This chapter looks in detail at how economists measure two of the three major macroeconomic variables: gross domestic product (GDP) and the unemployment rate. The third measure (the price level) and the rate of inflation are covered in the next chapter. In addition, this chapter looks at shortcomings of the two measures. It highlights the strengths and limitations of these two important macroeconomic measures. C ore Principles Principle of Comparative Advantage (page 502) – in a world governed by economic principles homemaking tasks would be subject to the principle of comparative advantage; that is, they would be done by those with the lowest opportunity costs in those tasks. Reality may be moving closer to this as customs and social restrictions change and more women work outside the home…leaving the traditional tasks to be done by paid specialists. Cost-Benefit Principle (page 516) - the cost-benefit principle should be used as a way to determine the whether or not regulations should be enacted. For example, are the benefits of cleaner air worth more to people than the costs the regulations impose in terms of lost output and lost jobs? If so, then the regulation should be enacted; otherwise it should not. Important Concepts Covered Gross domestic product (GDP) Consumption, Investment, Government purchases, Net exports Real versus nominal GDP Unemployment Labor force Discouraged workers Teaching Objectives After completing this chapter, you want your students to be able to: Define GDP Identify and apply the three methods of calculating GDP 37
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Define and calculate nominal and real GDP Explain the relationship between GDP and economic well-being Explain how unemployment and participation rates are calculated Calculate unemployment and participation rates Discuss the costs of unemployment an how they relate to its duration Discuss the criticisms of the measurement of the unemployment rate and GDP Answers to Text Questions and Problems Answers to Review Questions 1. Using market values permits economists to add together different goods and services to get a measure of total output. For example, we can’t add together apples, bananas, and shoes, but we can add together their market values. Using market values to aggregate gives a higher weight to high-value items. For example, a $20,000 automobile counts for 5,000 times as much in GDP as a $4 double cheeseburger. This makes economic sense, as the market price of each item is a measure of the value that its purchasers place on it. 2. Food that is consumed by its producers does not pass through markets and thus does not get assigned a market price. To measure GDP properly in this case requires estimating the value of food consumed by producers, a difficult task. To the extent that the value of food produced by subsistence farmers is ignored or underestimated by the statisticians, the country’s official GDP will understate the true GDP. 3.
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Ch005 - Chapter 5 Measuring Economic Activity GDP and...

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