Tuesday, June 07, 2005

Introductory econ lecture #9 

I have been developing the information here into a webpage for my students which will sit on my academic site. I'll put the last lecture there tomorrow, and then we'll have a complete set. The first nine are up here.

Here's the basic definition of GDP: Gross Domestic Product (GDP) is the total market value of all the goods and services produced within the borders of a nation for final use during a specified period. Let's unpack it:

We looked at the circular flow. (Or use this one.) We came to a fundamental identity in GDP accounting:

Total output = Total income = Total expenditures = Total value
added at all stages of production

We then turned to employment and unemployment. I used a simpler chart like that below (source), but readers might wish to view this information from the Bureau of Labor Statistics on how the civilian population is divided into the labor force and not the labor force, and how the
former is divided into employed and unemployed workers.

The unemployment rate is defined as U/(U + E) = U/LF, where LF is the size of the labor force. There is a flow each month between all three boxes, and these combine to create an unemployment rate that will be above zero even when workers are satisfied with their present conditions. Workers will be laid off expectedly; others will be engaged in job search to find positions that fit them better. This is often known as voluntary unemployment.

What we need to understand is why we get involuntary unemployment, so that those who would like jobs at current wages are unable to get them. This may be because wages don't adjust to clear the labor market, or workers simply mistake a decline in the value of money for higher real wages. Seen in this light, it becomes more difficult to imagine what government can do to
prevent this.