Eco 104:

Introduction to
Macroeconomics
Lecture 3-6
Parisa Shakur

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Unemployment
• Easier to define employment but not so easy to define
unemployment
• People over 16, not in institutions, having the ability (both
physical and mental) and willingness (actively looking for
work) to work but currently out of work, are counted as
unemployed
• Labour force= Employed + unemployed
• 1. Unemployment rate(U)=(No. of unemployed/labour
force)*100
• 2. Employment rate (E)=(No. of employed/people not in
institutions)*100
• 3. Labour force participation rate(LFPR)=(Labour force/people
not in institutions)*100 2
Problems with unemployment
rates
• U can be overstated because a lot people may be unemployed
due to time lag between losing and getting a job but are
confident that they will get one. However, they are also
counted as unemployed

• U may be understated because

1. A lot of people may give up looking for work given the
prevailing job market but they will not be counted as
unemployed. They are called discouraged workers
2. There are the underemployed who are working part-time
due to lack of decent full-time jobs. Underemployment rate
in BD has risen from 17.6% to 24.5% between 1996 and 3
2006 (BBS)
Types of unemployment
1. Frictional unemployment (UF)- involuntarily unemployed and
taking time for job searching. In a dynamic society this type of
unemployment is inevitable, harmless and even healthy.

2. Structural Unemployment (US)- Unemployed because there are

less jobs available than the the number of unemployed or there is
a lack of matching skills. Re-training might be a solution.

3. Natural rate of Unemployment (UN)- UF+US

4. Full employment is when U=UN

5. Cyclical Unemployment is the difference between U and UN 4

Bangladesh at a glance, source CIA fact
book

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More on Bangladesh
• In case of Bangladesh:
• Natural rate of Unemployment = 4.3%
• Actual unemployment rate (MES, 2009) = 5.1%
• Cyclical unemployment = (5.1- 4.3) % = 0.8 % point

• Unemployment rates in Bangladesh, estimated at 5.1 percent,

are comparatively low due to pervasive under-employment
and the large number of people considered to be out of the
labour force (see box). Unemployment rates are high among
the youth, especially among young men under the age of 30.

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Questions
1. Calculate the unemployment rate given the following data:
· Number of inhabitants: 10 million
· Labour-force participation: 62 %
· Unemployed persons: 455,000
2. Using the following data, compute (a) the unemployment
rate, (b) the structural unemployment rate, and (c) the cyclical
unemployment rate.
•Frictional unemployment rate = 3 percent
•Natural unemployment rate = 4.5 percent
•Civilian labor force=123 million
•Number of employed persons= 79 million 8
Measuring Economic Activity
• Gross Domestic Product (GDP): Value of all final goods and
services produced within a country.
• “Value”: Prices reflect relative social marginal valuations.
Allows us to add up apples and oranges.
• “Final” goods-avoid double counting
• Value of final goods = Total income
• Income=value added
Sells Price Income or
Value added
Farmer Wheat 10
“Final” Teer Maida Flour 20
Baker(Hot Bread 30
Bread)
Meena Packaged 200 9
Bazaar Bread
Total: 260
Measuring Economic Activity
• “Produced”

Sales of: Counted (Yes/No)

Old Homes
New homes
Stocks
Real estate & stock broker fees

• From a social point of view, the only measure of income is

what is produced. New stuff available to be used. Everything 10
else is just an exchange between members of society.
3 ways of measuring GDP
• Expenditure approach: Expenditure on final goods and
services

• Income approach: Counting all wages and profits

• Production or Value-added approach: counting all the money-

value contributed to a final good at each stage of production

• No matter which approach we take, we will get the same

amount of GDP
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All equal: production = income=
expenditure
• Expenditure= Income (for someone)

• Production = Sales (to someone)

• If necessary, to self (inventories)

• Production= Earnings (factors used)

• From a social point of view, the only true measure of income is

new production, and this production is produced by someone,
and ultimately sold to someone.

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GDP and its flaws
• GDP is often considered the best measure of how well the
economy is performing. The purpose of GDP is to summarize
in a single number the money value of economic activity in a
given period of time.

• Its flaws
1.Does not count daily household chores as GDP but does it
when a worker is paid to do it. Example: maid-wife
2.Does not count underground activities, both legal and illegal..
Eg. Trade of drugs, human trafficking and also non-taxable
payments for services.
(1 and 2 together account for ½ of GDP in many economies.)
3.Trading of stocks and bonds do not represent production of 13
new assets so not counted.
Flaws of GDP continued…
4. Government transfer payments are not
added(unemployment benefits, pensions, child benefits)
5. Leisure is not counted because of its complexity although it
is a vital part of GDP
6. Does not account for externalities (pollution) so true cost of
production is hidden
7. It is not a measure of well being or happiness(eg. Gini co-
efficient, HDI)

A lot of important things do not get counted whereas a lot of

unimportant ones do. There is much more to life and economics
than what gets measured in accounts. 14
GDP and happiness
• GDP includes many items that do not boost human wellbeing.
If a hurricane or an earthquake destroys an entire region, the
reconstruction effort is counted as a boost to GDP – even if it
only replaces something that was there not long before.
Likewise, expenditure on crime prevention and security adds
significantly to GDP in many countries – but only restores a
safe environment.

• Happiness, as the ultimate goal, requires the most

encompassing measure. This happiness depends primarily on
family, friends, work satisfaction and activities. Income does
not play a major role
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Continued..

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GDP per capita
• GDP per capita= GDP/total population
• GDP of Bangladesh: Tk. 7874950 million (BBS, 2011)
• GDP per capita: Tk. 53,286 (BBS, 2011)

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Real GDP
• Refers to a GDP that has been adjusted for inflation or deflation to
accurately show the increase or decrease in production for comparison of
economic growth from year to year. Measured in relation to the price index
of a given year

• Real GDP = nominal GDP / price index for a given year

or
= Σ (Base year prices ✖ current year quantities)

• A better indicator of economy’s growth than nominal GDP

• Changes in nominal GDP can be due to:

• changes in prices.
• changes in quantities of output produced.

• Changes in real GDP can only be due to changes in quantities, because real 18
GDP is constructed using constant base-year prices.
 Economic Growth
• The increase in Real GDP from its previous year is known as
Economic Growth

• We calculate change in Real GDP like this

Percentage change in Real GDP=(Real GDPlater year – Real GDPearlier year )
-------------------------------------------------------------------- ✖ 100
Real GDPearlier year
• A positive value indicates economic growth

Q. Calculate the growth rate of the real GDP:

Year Nominal GDP GDP-Deflator (index)
1 600 112 19
2 650 116
GDP

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Business cycle
• The changes in Real GDP makes the economy go through
different phases. The (five) different phases make a business
cycle
• They are peak, contraction, trough, recovery and expansion
• A complete business cycle is measured from peak to peak

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Answers
1.Unemployment rate=(455,000/6200,000)*100= 7.3%
2. U=35.8%, Us=1.5%, Uc=31.3%

• Calculate the growth rate of the real GDP:

Year Nominal GDP GDP-Deflator (index) Real GDP in %
1 600 112 535.7* 100.0
2 650 116 560.3** 104.6

• Growth rate real GDP 4.6

*(600/112) * 100
**(650/116) * 100 22
The expenditure (spending) approach for
calculating GDP
We know,
•Nominal GDP = value of final goods produced
= sum of value added at all stages of production.
•The value of the final goods already includes the value of the intermediate
goods, so including intermediate and final goods in GDP would be double-
counting.
•The four sectors of an economy are Households, Firms, Government and
Foreign sector.
1.Household spending is called consumption (C)
2.Firms’ spending is called Investment (I)
3.Government’s spending is called Government spending (G)
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4.Foreign sector’s spending is Net exports (NX)
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 Consumption (C)
definition: The value of all goods and services bought by
households. Includes:

• durable goods
last a long time
e.g., cars, home appliances
• nondurable goods
last a short time
e.g., food, clothing
• services
work done for consumers
e.g., dry cleaning,
air travel
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Investment (I)
• Spending on goods bought for future use
(i.e., capital goods)
• Includes:
• Business fixed investment
Spending on plant and equipment
• Residential fixed investment
Spending by consumers and landlords on housing units
• Inventory investment
The change in the value of all firms’ inventories

• Does not include financial assets like stocks or bonds

• Must be newly produced 26
Investment vs. Capital
Note: Investment is spending on new capital.
Example (assumes no depreciation):
• 1/1/2012:
economy has $500b worth of capital
• during 2012:
investment = $60b
• 1/1/2013:
economy will have $560b worth of capital
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Government spending (G)
• G includes all government spending on goods and services.
• G excludes transfer payments
(e.g., unemployment insurance payments), because they do not
represent spending on goods and services.

•Net exports (Exports minus Imports)

• Exports of goods and services
Goods (eg. Cars)
Services (eg. Call centre services)
Expenditures of foreign tourists in our home country(hotels, dining,
entertainment) 28
• Imports need to be deducted
 Net Domestic Product
• Depreciation: The amount of the economy’s stock of plants,
equipment, and residential structures that wears out during the
year. It is the cost of producing the output of the economy.

• Net Domestic Product= GDP(calculated using the expenditure

approach)
• −− depreciation

• Net domestic Product is the net result of economic

activity
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% of Bangladesh GDP, 2010
(BBS,2010)
Consumption (C) 75%

Investment (I) 20%

Government (G) 10.8%

Exports (X) 22%

? ?

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The circular flow diagram

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The income approach for calculating
GDP
Two steps to calculating GDP using the income approach
1.Calculate National Income
2.Make some adjustments to get GDP using income approach

STEP 1
National Income: Total income earned by the citizens and businesses no matter where
they are located

National Income (NI)= Compensation of employees + Proprietor's Income

+ Corporate profits + Rental Income + Net interest

•Compensation of employees: The wages and fringe benefits earned by workers

•Proprietor's Income: The income of non-corporate businesses, such as small farms, law
partnerships and neighborhood groceries
•Corporate profits: The income of corporations after payments to their workers and creditors
•Rental Income: The income that landlords receive, including the imputed rent that homeowner’s
“pay” to themselves
•Net interest: The interest domestic businesses pay- minus the interest they receive, plus interest
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earned from foreigners
The income approach for calculating
GDP
STEP 2
Make some adjustments to National Income
• Income earned for the rest of the world: Nationals producing goods and services
abroad and earning income
• Income earned by the rest of the world: Income foreigners earned by producing
goods and services locally
• Indirect business taxes: Income firms do not receive. Eg. Sales tax, property tax
• Depreciation: This is added to give us an idea of total income earned
• Statistical discrepancy: Different data sets are used for computing GDP and NI so
we should allow for errors

• GDP= NI-Income earned for the rest of the world+ Income

earned by the rest of the world+ Indirect business taxes+
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Depreciation+ Statistical discrepancy
Personal and Disposable
Income
• Personal Income: the amount of income households and non
corporate businesses receive

• Personal Income =NI-Undistributed corporate profits-Social

contribution payments(DCC tax)-Corporate profit taxes+
Transfer payments

• Disposable Income= Personal Income- Personal taxes

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Math Problems
• Page 151 numbers 1-5 and 8-12

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