Business Economics

Lecture 7
Measuring a Nation’s Income
and unemployment

1
 Learning Objectives
• What is Gross Domestic Product
• The components of GDP
• The measurement of GDP
• GDP and the economy

2
 Microeconomics vs. macroeconomics
• Microeconomics is the study of how
individual households and firms make
decisions and how they interact with one
another in markets.

• Macroeconomics is the study of the

economy as a whole.
 Its goal is to explain the economic changes that
affect many households, firms, and markets.

3
 Macroeconomics
• Macroeconomics answers questions like
the following:
 Why is average income in some countries are
higher or lower compared with others?
 Why do prices sometimes rise rapidly or
sometimes remain stable in various periods?
 Why do production and employment expand or
contract in various years?

4
 Income and Expenditure
• When judging whether the economy is doing
well or poorly, it is natural to look at the total
income that everyone in the economy is
earning.
• For an economy as a whole, income must
equal expenditure because:
 Every transaction has a buyer and a seller.
 Every dollar of spending by some buyer is a
dollar of income for some seller.
5
 Gross Domestic Product
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• It is the total market value of all final goods
and services produced within a country in a
given period of time.
• The equality of income and expenditure can
be illustrated with the circular-flow diagram

6
 GDP ranking (Top 15)
• Data available from the World Bank (2022) as follows:
• United States: $20.89 trillion
• China: $14.72 trillion
• Japan: $5.06 trillion
• Germany: $3.85 trillion
• United Kingdom: $2.67 trillion
• India: $2.66 trillion
• France: $2.63 trillion
• Italy: $1.89 trillion
• Canada: $1.64 trillion
• South Korea: $1.63 trillion
• Russia: $1.48 trillion
• Brazil: $1.44 trillion
• Australia: $1.32 trillion
• Spain: $1.28 trillion
• Indonesia: $1.05 trillion
*
 GDP ranking (Top 15)
• 1. United States
• GDP – Nominal: $20.89 trillion
• GDP per Capita: $63,413
• GDP – Purchasing Power Parity (PPP): $20.89 trillion
• An entrepreneurial environment that encourages hard work and long hours certainly helps.
• The decentralized government, advanced research universities, and favorable regulatory
environments also contribute.

• 2. China
• GDP – Nominal: $14.72 trillion
• GDP per Capita: $10,434
• GDP – Purchasing Power Parity (PPP) : $17,204
• The Chinese economy, one of the fastest growing economies of the 21st century.
• With China’s Belt and Road Initiative effectively merging its foreign and economic policy,
promotion of using the Chinese Renminbi for the use of settlements has increased.
• The country is increasingly playing an influential role in the global economy. It has been the
largest contributor to global growth since the financial crisis of 2008.
8
 GDP ranking(Top 15)
• 4. Germany
• GDP – Nominal: $3.85 trillion
• GDP per Capita: $45,466
• GDP – Purchasing Power Parity (PPP): $4.45 trillion
• The total value of exports and imports is equal to 86.9% of GDP.
• Germany is a European nation with the biggest drivers of its economy being its
service industries, including telecommunication, healthcare, and tourism.
• The nation employs a social market economy that emphasizes the value of open-
market capitalism and also ensures a number of social services guarantees.
• The country is ranked #1 in the world for entrepreneurship due to its skilled labor
force, highly developed infrastructure, and technological expertise.

• https://globalpeoservices.com/top-15-countries-by-gdp-in-2022/

9
GDP growht rate G20

10
 GDP growth rate G20

https://tradingeconomics.com/country-list/gdp-annual-growth-rate?continent=world
11
 GDP of Hong Kong
• Hong Kong’s economy grew 2.7% year-on-year in the first quarter of 2023,
recovering from a downwardly revised 4.1% contraction in the previous
quarter and confirming preliminary estimates.
• It marked the first economic upturn since the fourth quarter of 2022,
supported by the strong recovery of inbound tourism and domestic
demand.
• Private consumption advanced sharply (13% vs 1.7% in the previous
period), while fixed investments rebounded (5.8% vs -8.9%).
• Meanwhile, government spending reported a smaller increase of 0.9% (vs
9.1%).
• On external trade, solid growth was seen from exports of services (16.5%
vs 0.6%) and imports of services (20.4% vs 1.2%).

12
 GDP of Hong Kong
• Conversely, goods continued to fall for exports (-18.7% vs -24.9%)
and imports (-14.4% vs -22.9%).
• On a seasonally adjusted quarterly basis, the economy expanded
5.3%, the largest rise since Q1 of 2021.
• source: Census and Statistics Department, Hong Kong

• https://tradingeconomics.com/hong-kong/gdp-growth-annual

13
 Hong Kong GDP Annual Growth Rate

• In recent years, Hong Kong has become an international hub for business, trade and finance
importers willing to access the Chinese market.
• The largest sector of the economy is services, which accounts for around 93% of GDP.
• wholesale and retail trade (25%);
• public administration and social services (17%);
• finance and insurance (16%);
• real estate and business services (11%);
• ownership of premises (10%);
• transportation and postal services (6 %):
• Information and communications and food and accommodation account for (8%).
• Construction represents (3.5%)
• Electricity, water and gas supply, waste management and manufacturing (3.4%).

14
 GDP of Hong Kong
• What are the four major key industries in 2021?
• Financial Services(21.3%)
• Tourism (0.1%)
• Trading & Logistics (23.7%)
• Professional services and other Prodcuer services (11.4%)

• https://www.censtatd.gov.hk/en/scode80.html
• https://www.censtatd.gov.hk/en/data/stat_report/product/
FA100099/att/B72212FC2022XXXXB0100.pdf

15
 The Circular-Flow Diagram
Revenue Spending
Market for
Goods
Goods & Goods &
Services sold and Services
Services
bought

Firms Households

Inputs for Labor, land,

production Market for and capital
Factors
Wages, rent, of Production Income
and profit 16
 The measurement of GDP
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
• Output is valued at market prices.
• It records only the value of final goods, not
intermediate goods (the value is counted only
once).
• It includes both tangible goods (food, clothing,
cars) and intangible services (haircuts,
housecleaning, doctor visits).
17
 The measurement of GDP
• It includes goods and services currently
produced, not transactions involving goods
produced in the past.
• It measures the value of production within the
geographic confines of a country.
• It measures the value of production that takes
place within a specific interval of time, usually
a year or a quarter (three months).

18
 The measurement of GDP
• GDP includes all items produced in the
economy and sold legally in markets.
• GDP excludes most items that are produced
and consumed at home and that never enter
the marketplace such as housework.
• It excludes items produced and sold illegally,
such as illegal drugs.

19
 Other measurement of Income
• Gross National Product (GNP)
• Net National Product (NNP)
• National Income
• Personal Income
• Disposable Personal Income

20
 Gross National Product(GNP)
• Gross national product (GNP) is the total
income earned by a nation’s permanent
residents (called nationals).
• It differs from GDP by including income that
our citizens earn abroad and excluding income
that foreigners earn here.

21
 Net National Product(NNP)
• Net National Product (NNP) is the total
income of the nation’s residents (GNP) minus
losses from depreciation.
• Depreciation is the wear and tear on the
economy’s stock of equipment and structures.

22
 National Income
• National Income is the total income earned by
a nation’s residents in the production of goods
and services.
• It differs from NNP by excluding indirect
business taxes (such as sales taxes) and
including business subsidies.

23
 Personal Income
• Personal income is the income that
households and noncorporate businesses
receive.
• Unlike national income, it excludes retained
earnings, which is income that corporations
have earned but have not paid out to their
owners.
• In addition, it includes household’s interest
income and government transfers.

24
 Disposable Personal income
• Disposable personal income is the income that
household and noncorporate businesses have
left after satisfying all their obligations to the
government.
• It equals personal income minus personal
taxes and certain nontax payments.

25
 The components of GDP
GDP (Y ) is the sum of the following:
 Consumption (C)
 Investment (I)
 Government Purchases (G)
 Net Exports (NX)

Y = C + I + G + NX

26
 The components of GDP
• Consumption (C):
 The spending by households on goods and services, with the
exception of purchases of new housing.
• Investment (I):
 The spending on capital equipment, inventories, and structures,
including new housing.
• Government Purchases (G):
 The spending on goods and services by local, state, and federal
governments.
 Does not include transfer payments because they are not made
in exchange for currently produced goods or services.
• Net Exports (NX):
 Exports minus imports.

27
 GDP and Its Components US. (2021)

Government Purchases
Investment 19.5% Net Exports
15.2% -3.4 %

Consumption
68.6 %
 Nominal GDP vs. Real GDP
• Nominal GDP values the production of goods
and services at current prices.
• Real GDP values the production of goods and
services at constant prices
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.

29
 GDP deflator
• The GDP deflator measures the current level
of prices relative to the level of prices in the
base year.
• It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a
rise in the quantities produced.

Nominal GDP
GDP deflator =  100
Real GDP
30
 Converting Nominal GDP to Real GDP

Nominal GDP is converted to real GDP

as follows:
(Nominal GDP20xx )
Real GDP20xx = X 100
(GDP deflator20xx )

31
 GDP and the economy
• GDP is the best single measure of the economic well-
being of a society.
• GDP per person tells us the income and expenditure of
the average person in the economy.
• Higher GDP per person indicates a higher standard of
living.
• GDP is not a perfect measure of the happiness or quality
of life, however
• http://cn.knoema.com/nwnfkne/world-gdp-ranking-
2021-gdp-by-country-data-and-charts

32
 GDP and the economy
• Some things that contribute to well-being are
not included in GDP.
 The value of leisure.
 The value of a clean environment.
 The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.

33
 Categories of Unemployment
• The problem of unemployment is usually
divided into two categories.
• The long-run problem and the short-run
problem:
 The natural rate of unemployment
 The cyclical rate of unemployment
• .
 Natural Rate of Unemployment
• The natural rate of unemployment is
unemployment that does not go away on its
own even in the long run.
• It is the amount of unemployment that the
economy normally experiences
 Cyclical Unemployment
• Cyclical unemployment refers to the year-to-
year fluctuations in unemployment around its
natural rate.
• It is associated with with short-term ups and
downs of the business cycle.
 3 main points of Unemployment
Three Basic Questions:
1) How does government measure the
economy’s rate of unemployment?
2) What problems arise in interpreting the
unemployment data?
3) How long are the unemployed typically
without work?
 Unemployment Rate
• A person an adult if he or she is over 16 years old.
• The Bureau of Labor Statistics (BLS) places each adult
into one of three categories:
 Employed
 Unemployed
 Not in the labor force
• A person who fits neither of these categories, such as a full-
time student, homemaker, or retiree, is not in the labor
force.
• The BLS defines the labor force as the sum of the employed
and the unemployed.
• https://www.bls.gov>pdf>empsit
The Breakdown of the Population in 2020

Employed Labor force

(155.2 million) (161.7 million)

Adult population
(257 million)
Unemployed (6.5 million)

Not in labor force

(95.3 million)
 How is Unemployment Measured?

The unemployment rate is

calculated as the percentage of the
labor force that is unemployed.

Number unemployed
Unemployme nt rate =  100
Labor force
 Unemployment Rate
• It is difficult to distinguish between a person who
is unemployed and a person who is not in the
labor force.
• Discouraged workers, people who would like to
work but have given up looking for jobs after an
unsuccessful search, don’t show up in
unemployment statistics.
• Other people may claim to be unemployed in
order to receive financial assistance, even though
they aren’t looking for work.
 Frictional Unemployment
• Frictional unemployment refers to the
unemployment that results from the time that
it takes to match workers with jobs. It takes
time for workers to search for the jobs that
are best suited for them.
• Job search is the process by which workers
find appropriate jobs given their tastes and
skills.
 Structural Unemployment
• Structural unemployment occurs when the
quantity of labor supplied exceeds the
quantity demanded.
• Changes in the composition of demand among
industries or regions are called sectoral shifts.
• It takes time for workers to search for and find
jobs in new sectors.
• Structural unemployment is often last for a
longer time.
3 Possible Reasons for an Above-Equilibrium Wage

• Minimum-wage laws
• Unions
• Efficiency wages
 Minimum Wage
• When the minimum wage is set above the
level that balances supply and demand, it
creates unemployment.
 Unemployment from a Wage Above the
Equilibrium Level...
Wage
Surplus of labor = Labor
Unemployment supply
Minimum
wage

WE

Labor
demand

0 LD LE LS Quantity of
Labor
 Unions and Collective Bargaining
• The process by which unions and firms agree
on the terms of employment is called
collective bargaining.
• A strike will be organized if the union and the
firm cannot reach an agreement.
• A strike refers to when the union organizes a
withdrawal of labor from the firm.
 SUMMARY
• Because every transaction has a buyer and a
seller, the total expenditure in the economy
must equal the total income in the economy.
• Gross Domestic Product (GDP) measures an
economy’s total expenditure on newly
produced goods and services and the total
income earned from the production of these
goods and services.

48
 Unions and Collective Bargaining
• Critics argue that unions cause the allocation of
labor to be inefficient and inequitable.
 Wages above the competitive level reduce the
quantity of labor demanded and cause
unemployment.
 Some workers benefit at the expense of other workers.
• Unions are a necessary antidote to the market
power of firms that hire workers.
• They claim that unions are important for helping
firms respond efficiently to workers’ concerns.
 SUMMARY
• GDP is the market value of all final goods and
services produced within a country in a given
period of time.
• GDP is divided among four components of
expenditure: consumption, investment,
government purchases, and net exports.

50
 Efficiency Wage
• Efficiency wages are above-equilibrium wages
paid by firms in order to increase worker
productivity.
• The theory of efficiency wages states that
firms operate more efficiently if wages are
above the equilibrium level.
 Efficiency Wage
• A firm may prefer higher than equilibrium
wages for the following reasons:
 Worker Health: Better paid workers eat a better
diet and thus are more productive.
 Worker Turnover: A higher paid worker is less
likely to look for another job.
 Worker Effort: Higher wages motivate workers to
put forward their best effort.
 Worker Quality: Higher wages attract a better pool
of workers to apply for jobs.
 Inflation
• Inflation is an increase in the overall level of prices.
• Hong Kong annual inflation is 2.3% in 2021
• https://tradingeconomics.com/hong-kong/inflation-cpi
• Over the past sixty years, prices have risen on average about 5
percent per year.
• Deflation, meaning decreasing average prices, occurred in the
U.S. in the nineteenth century and HK in 2003.
• High inflation for U.S.accelerates to 7.9% in February of 2022.
• Hyperinflation refers to high rates of inflation such as
Germany experienced in the 1920s and Argentina in 2018.

53
 HK economic situation
• Hong Kong Inflation Rate Below Expectations
• The annual inflation rate in Hong Kong quickened to 1.6 percent in February of
2022 from a seven-month low of 1.2 percent in the previous month, missing
market expectations of 1.9 percent.
• Netting out the effects of all Government's one-off relief measures and the
Lunar New Year, the inflation rate was also 1.5 percent in the first two months
of 2022, mainly due to higher prices of fresh vegetables.
• Among CPI components, prices rose the most for clothing & footwear (8.0
percent); transport (7.0 percent); basic food (4.5 percent); meals bought away
from home (3.6 percent); and durable goods (2.0 percent).
• Looking ahead, external inflationary pressure will remain, also due to soaring
energy and raw material prices, while a worsening local epidemic should keep
domestic prices in check, a government spokesman said.

54