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Chapter Review Chapter 22: Measuring Output and Unemployment

  1. Gross domestic product (GDP) is the typical way of mea¬ suring the value of national output. Real GDP adjusts GDP for changes in the price level.
  2. GDP can be calculated in three ways: the final goods approach, which adds the value of all final goods produced in the economy in a given year; the value-added approach, which adds the difference between firms’ revenues and costs of intermediate goods; and the income approach, which adds together all income received by those in the economy. All three methods give the same answer.
  3. Aggregate output in the economy is equal to aggregate income.
  4. Economists distinguish between flows-such as output per year-and stocks-such as the total value of buildings and machines in an economy at a given time (the capital stock).
  5. Unemployment imposes costs both on individuals and on society as a whole, which loses what the unemployed workers could have contributed and must supply what is needed to support them in other ways.
  6. Seasonal unemployment occurs regularly in sectors such as tourism, construction, and agriculture. Frictional unemployment results when people are in transition between one job and another or when they first enter the labor market to search for work. Structural unemployment occurs when the economy changes, as the new jobs being created have requirements different from the old jobs being lost. Cyclical unemployment increases or decreases as the level of actual real output fluctuates around potential GDP.
  7. Seasonal, frictional, and structural unemployment account for the positive unemployment rate even when the economy operates at potential GDP.
  8. The natural rate of unemployment is the sum of seasonal, structural, and frictional unemployment.
  9. Okun’s Law is a relationship between the cyclical unemployment rate and real GDP relative to potential GDP (the output gap).
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