GDP Gap

GDP Gap- the amount by which actual GDP falls short of potential GDP.

Okan's Law- for every 1% in which actual employment exceeds the natural rate of unemployemnt (NRU) a GDP Gap of about 2% occurs.

Rule of 70- is used to determine how many years it will take for a value to double given a paticular annual growth rate.

Unemployment

Now we look at the factors of unemployment and unemployment rate. Unemployment is the failure to use available resources, particularly labor to produce desired goods and services.

Labor is defined as those above 16 years of age, and those that are also able and willing to work.

Those not in the labor force are those in military, mental institutions, jail or prisons, retired, students, and people not looking for a job.

Unemployment Rate: 4-5% full employment
Natural rate of unemployment = NRU

How to calculate
(# of unemployed / (# of employed + # of unemployed)) x 100 = unemployment rate

Types of unemployment

Frictional- searching for a job, temporarily unemployed, and have transferable skills.
Structural- changes in the structure of the labor force, makes some skills obselete, and have no transferable skills.
Seasonal- due to time and nature of job
Siclicle- results from economic downturns, recession, laid off.

Nominal vs. Real GDP

Now nominal GDP is the value of output produced in current prices. It can increase from year to year if either output or price increases. Real GDP is the value of output produced in constant base year price, it can increase year to year only if output increases.

Nominal GDP = Current year quantity x Current year price
Real GDP = Current year quantity x Base year price

From these it's possible to find a GDP deflator, it is a price index used to adjust from nominal to real GDP.

Deflator = (Nominal GDP x Real GDP) x 100

Now from the deflator we can calculate the inflation rate
Inflation Rate = (Deflator of current year- Deflator of old year) / Deflator of old year


Now there is also the consumer price index ( CPI), it is the most commonly used measurement of inflation.

(The price of the market basket of the current year/ the price of the market basket in the same year) x 100 = CPI

GDP

Now we move on to GDP, the total market value of all final goods and services produced in a country's border within a given year, and we also move on to the exciting set of calculations that come with it.


What's included in GDP?
C- personal consumption expenditures 65%
Ig- Gross private Domestic Investment 17%

• factory equipment maintenance
• factory equipment
• construction of houses
• unsold inventory of products built in a year

G- Government Spending 20%

Xn- Net Exports (Exports-Imports) -2%

With this information we can find GDP using the expenditure approach which is 

GDP= C+Ig+G+Xn

There is also the income approach which is

Wages+Rents+Investments+Profits+Statistical Adjustments

          

Now that we've covered what's in GDP, we can discuss what's not in GDP which is

1. Intermediate Goods- a good that required futher processing
2. Used or Secondhand Goods- avoids double counting
3. Purely Economic Transactions (Stocks & Bonds)
4. Illegal Activity (Drugs)
5. Unreported Business Activity (Tips)
6. Transfer Payments
7. Non-market Activity