FTC1 MACROECONOMICS Chapter 5, 6, 7 AND 9

Gross domestic product (GDP)

-The market value of all the final goods and services produced within a country in a given time period.
-GDP measures not only the value of total production but also total income and total expenditure.

Final good or service is a what produced

A good or service that is produced for its final user and not as a component of another good or service.

Intermediate good or service is a what produced

A good or service that is used as a component of a final good or service.

GDP HAS definition has four parts

Value produced, What produced, Where produced, and When produced.

Value Produced

To measure total production, we must add together the production of apples and oranges, bats and balls. Just counting the items doesn't get us very far. Which is the greater total production: 100 apples and 50 oranges or 50 apples and 100 oranges?
GDP ans

Where produced

Only goods and services that are produced within a country count as part of that country's GDP.

When Produced

-GDP measures the value of production during a given time period.
-This time period is either a quarter of a year�called the quarterly GDP data�or a year�called the annual GDP data.
- The Federal Reserve and others use the quarterly GDP data to keep track

Circular Flows in the U.S. Economy

Four groups buy the final goods and services produced: households, firms, governments, and the rest of the world. Four types of expenditure correspond to these groups:
� Consumption expenditure
� Investment
� Government expenditure on goods and services

Consumption expenditure

-The expenditure by households on consumption goods and services.
-Consumption expenditure also includes house and apartment rents, including the rental value of owner-occupied housing.

Investment

-The purchase of new capital goods (tools, instruments, machines, buildings) and additions to inventories.
-Investment also includes the purchase of new homes by households.
-It is important to note that investment does not include the purchase of stocks

Government expenditure on goods and services

The expenditure by all levels of government on goods and services.

Net exports of goods and services

The value of exports of goods and services minus the value of imports of goods and services.

Total Expenditure

-Total expenditure on goods and services produced in the United States is the sum of the four items that you've just examined.
-We call consumption expenditure C, investment I, government expenditure on goods and services G, and net exports of goods and s

Income

Labor earns wages, capital earns interest, land earns rent, and entrepreneurship earns profits.
- Households receive these incomes.
- Some part of total income, called undistributed profit, is a combination of interest and profit that firms retain and do

Expenditure Equals Income
Figure 5.1 shows the circular flows of income and expenditure that we've just described. The figure is based on Figures 2.5 and 2.6 (on p. 47 and p. 49), but it includes some more details and additional flows.

1. Classify each of the items in List 1 as a final good or service or as an intermediate good or service and identify which is a component of consumption expenditure, investment, or government expenditure on goods and services.
.

-Banking services bought by a student
� New cars bought by Hertz, the car rental firm
� Newsprint bought by USA Today from International Paper
� The purchase of a new aircraft for the vice president
� New house bought by Beyonc�
The student's banking serv

2. Figure 1 shows the flows of expenditure and income on Lotus Island. In 2011, R was $10 billion; W was $30 billion; U was $12 billion; X was $15 billion; and Z was $3 billion. Calculate total expenditure and total income.

The Expenditure Approach

The expenditure approach measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports. This approach is like attaching a meter to the circular flow diagram on all the flows running throug

Expenditures Not in GDP

Total expenditure (and GDP) does not include all the things that people and businesses buy. GDP is the value of final goods and services, so spending that is not on final goods and services is not part of GDP. Spending on intermediate goods and services i

Used Goods

Expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods. For example, a 2008 automobile was part of GDP in 2008. If the car is traded on the used

Financial Assets

When households buy financial assets such as bonds and stocks, they are making loans, not buying goods and services. The expenditure on newly produced capital goods is part of GDP, but the purchase of financial assets is not.

The Income Approach

To measure GDP using the income approach, the Bureau of Economic Analysis uses income data collected by the Internal Revenue Service and other agencies. The BEA takes the incomes that firms pay households for the services of the factors of production they

Wage Income

Wage income, called compensation of employees in the national accounts, is the total payment for labor services. It includes net wages and salaries plus fringe benefits paid by employers such as health-care insurance, Social Security contributions, and pe

Interest, Rent, and Profit Income

Interest, rent, and profit income, called net operating surplus in the national accounts, is the total income earned by capital, land, and entrepreneurship.
Interest income is the interest that households receive on capital. A household's capital is equal

Net domestic product at factor cost

The sum of the wages, interest, rent, and profit.

Net domestic product at factor cost is not GDP,

-and we must make two further adjustments to get to GDP:
-one from factor cost to market prices
- and another from net product to gross product.
- GDP equals net domestic product at factor cost plus indirect taxes less subsidies plus depreciation (capital

From Factor Cost to Market Price

-The expenditure approach values goods and services at market prices,
-and the income approach values them at factor cost
-the cost of the factors of production used to produce them.
-Indirect taxes (such as sales taxes) and subsidies (payments by governm

From Net to Gross

-The income approach measures net product and the expenditure approach measures gross product.
- The difference is depreciation, which is the decrease in the value of capital that results from its use and from obsolescence.
-Firms' profits, which are incl

Depreciation

The decrease in the value of capital that results from its use and from obsolescence.

Statistical Discrepancy

The expenditure approach and income approach do not deliver exactly the same estimate of GDP. If a taxi driver doesn't report all his tips, they get missed in the income approach, but they get caught by the expenditure approach when he spends his income.

Gross National Product

A country's gross national product, or GNP, is the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of that country. For example, Nike's income fr

GNP equals GDP plus net factor income received from or paid to other countries.

The difference between U.S. GDP and GNP is small. But in an oil-rich Middle Eastern country such as Bahrain, where a large amount of capital is owned by foreigners, GNP is much smaller than GDP; and in a poor country such as Bangladesh, whose people work

GDP and Related Product and Income Measures

Real GDP is the value of final goods and services produced in a given year expressed in terms of the prices in a reference base year.

The reference base year is the year we choose against which to compare all other years. In the United States today, the reference base year is 2005.

Nominal GDP

The value of final goods and services produced in a given year expressed in terms of the prices of that same year.

MARKET VALUE

First, GDP measures market value. That is, only goods sold in the marketplace are counted as part of an economy's GDP. GDP does not include illegal goods or any services that are not sold in clearly identified and measurable markets. Many other items and

FINAL GOODS

Second, GDP counts only final goods. The wheat sold by the farmer and used to make flour for baking your bread is not included in GDP. However, the value of this wheat has not been lost. This value is included in the market price of the bread that is fina

DOMESTIC PRODUCTION

Third, GDP is a measure of domestic production. GDP measures the production that takes place within the geographical boundaries of a particular country. If a foreign citizen comes to the United States and works temporarily, the value of that worker's outp

TIME PERIOD

Finally, GDP is measured for a particular time period. Just as your personal income is measured over some set time period, like weeks or months, the value of GDP is stated for a given time period. In the United States, GDP is estimated quarterly and state

GDP is divided in to four main categories of spending:

CONSUMPTION
INVESTMENT
GOVERNMENT PURCHASES
NET EXPORTS

CONSUMPTION

Consumption is spending by households, excluding the purchase of a house. These are called personal consumption expenditures. This GDP component includes both durable goods meant to last three or more years and nondurable goods. For example, spending by h

INVESTMENT

The second category, investment, contains all spending on equipment, inventories, and structures, including houses. This value includes all private investments in things such as equipment, including computers and printers, as well as buildings, such as of

GOVERNMENT PURCHASES

The third category, government purchases, includes spending by all levels of government: local, state, and federal. These expenditures include payments by the government for services or the purchase of things such as military equipment. For example, when

NET EXPORTS

The fourth category of expenditures, net exports, measures the spending on the goods and services a country exports less the spending by residents here on goods and services they import. Exports of goods and services are anything U.S. firms produce and se

EXPENDITURE APPROACH

These four categories are called the expenditure approach for measuring GDP. Overall economic activity for a given period is found with this method by summing each of the four spending categories. The figure shows the May 2011 BEA report on the GDP broken

INCOME APPROACH

In a market, every sale must have a buyer and a seller. Therefore, the total of all expenditure must be equal to the total of all income earned in an economy. If every buyer has a seller, then expenditures must equal income. Therefore, the expenditure app

What Is Not Included?
Because GDP measures the market value of all final goods produced within a country, not all of the country's economic activity is counted in the GDP:

USED GOODS
FINANCIAL ASSETS

Used goods

First, used goods, which are bought and sold in many markets, are not included in the calculation of GDP. Although many economic decisions are made when consumers shop for a used car or pick up a bargain at a garage sale, these items were not produced. We

Financial assets

Second, when investors purchase financial assets, such as stocks or bonds, these expenditures are not part of GDP. Although money is changing hands, these investment decisions are not expenditures on goods and services.

GDP measures two things at once: the total income of everyone in the nation and the total expenditure on this nation's output of goods and services.

TRUE

The value of new home construction is included in the consumption component of GDP.

FALSE

Measuring Economic Growth
Recall that GDP is the value of all the goods and services produced in a country. However, there are two different ways to measure the value:

REAL GDP
NOMINAL GDP

Real GDP

Real GDP is the value of final goods and services produced in a given year expressed in terms of the prices in a base year. Real GDP allows the quantities of production to be compared across time.
EX COMPARING ITEMS FROM 2006 & 2014, USING THE 2006 BASE P

Nominal GDP

Nominal GDP is the value of the final goods and services produced in a given year expressed in terms of the prices in that same year.
EX. COMPARING ITEMS FROM 2006 & 2014, 2006 WILL USE 2006 PRICES AND 2014 WILL USE 2014 PRICES

Calculating Nominal and Real GDP
When studying GDP over time, it is more helpful to know whether output has changed, not prices. Real GDP is a value of the production in a given period using a fixed set of prices from a previous period.

The growth of real GDP will show changes in the amounts being produced and inflation.

FALSE
Changes in real GDP reflect only changes in the amounts being produced.

Nominal GDP uses prices for a given base year to value the economy's production of goods and services, whereas real GDP uses current prices to value the economy's production of goods and services.

FALSE

Changes in real GDP better gauge the change in economic well-being than changes in nominal GDP.

TRUE

If real GDP rises in value, then only the amount of goods and services produced has risen.

TRUE

Suppose an economy produces only bread and fish. In 2010, 20 units of bread are produced and sold at $5 each, whereas 10 units of fish are produced and sold at $15 each. In the previous year, 2009, the base year, bread sold for $4 each and fish was $10 pe

Nominal GDP is $250 and real GDP is $180

Real GDP focuses on a base year, whereas nominal GDP focuses on the same year of the measurement.

The result is that real GDP is a better measure of quantities of production, making it a more accurate and reliable indicator of a rise in standard of living.
The market value of production and hence GDP can increase because either the production of goods

Real GDP per person

Real GDP divided by the population.

Standard of living

The level of consumption of goods and services that people enjoy, on average.

Potential GDP is the level of real GDP when all the economy's factors of production�labor, capital, land, and entrepreneurial ability�are fully employed.

-When some factors of production are unemployed, real GDP is below potential GDP.
- And when some factors of production are over-employed and working harder and for longer hours than can be maintained in the long run, real GDP exceeds potential GDP.

Real GDP and Potential GDP Per Person in the United States: 1961-2011

A business cycle is

-a periodic but irregular up-and-down movement of total production and other measures of economic activity such as employment and income.-
- The business cycle isn't a regular, predictable, and repeating cycle like the phases of the moon.
-The timing and

An expansion is a period during which real GDP increases.

In the early stage of an expansion, real GDP remains below potential GDP and as the expansion progresses, real GDP eventually exceeds potential GDP.

The Most Recent U.S. Business Cycle
The shaded bar in highlights the 2008-2009 recession.

The Standard of Living Among Countries

To use real GDP per person to compare the standard of living among countries, we must convert the numbers for other countries into U.S. dollars. To calculate real GDP, we must also use a common set of prices�called purchasing power parity prices�for all c

Goods and Services Omitted from GDP

GDP measures the value of goods and services that are bought in markets. GDP excludes
� Household production
� Underground production
� Leisure time
� Environment quality

Household production is the production of goods and services (mainly services) in the home.

Examples of this production are preparing meals, changing a light bulb, cutting grass, washing a car, and helping a student with homework. Because we don't buy these services in markets, they are not counted as part of GDP. The result is that GDP underest

Underground production is the production of goods and services hidden from the view of government

because people want to avoid taxes and regulations or their actions are illegal. Because underground production is unreported, it is omitted from GDP.
Examples of underground production are the distribution of illegal drugs, farm work that uses illegal wo

Leisure Time

Leisure time is an economic good that is not valued as part of GDP. Yet the marginal hour of leisure time must be at least as valuable to us as the wage we earn for working. If it were not, we would work instead. Over the years, leisure time has steadily

Environment Quality

Pollution is an economic bad (the opposite of a good). The more we pollute our environment, other things remaining the same, the lower is our standard of living. This lowering of our standard of living is not measured by real GDP.

Other Influences on the Standard of Living

The quantity of goods and services consumed is a major influence on the standard of living. But other influences are
� Health and life expectancy
� Political freedom and social justice

Health and Life Expectancy

Good health and a long life�the hopes of everyone�do not show up directly in real GDP. A higher real GDP enables us to spend more on medical research, health care, a good diet, and exercise equipment. As real GDP has increased, our life expectancy has len

Political Freedom and Social Justice

A country might have a very large real GDP per person but have limited political freedom and social justice. For example, a small elite might enjoy political liberty and extreme wealth while the majority of people have limited freedom and live in poverty.

Standard of Living

A country's standard of living is a measure of its health, or economic well-being. The overall level of economic well-being in a country could be very large but also spread over a large population. To compare the standard of living over time or across cou

Real GDP per person

Real GDP per person is the standard of living measured by the value of goods and services people enjoy on average. By dividing real GDP by a given population, we get an idea as to how well the average citizen is doing compared to previous periods, called

U.S. real GDP in 2010

U.S. real GDP in 2010 was approximately $13.4 trillion, using 2005 prices. The U.S. population in 2010 was just over 311 million people. Thus, real GDP per person was approximately $43,000. That is, the average income for a U.S. citizen in 2010 was approx

U.S. real GDP in 1971

In 1971, real GDP was approximately $4.5 trillion, and the population stood at 209 million people. Real GDP per person in 1971 was then approximately $21,500.

Comparing Across Countries

To compare real GDP per person across countries we have to use a common set of prices. Real GDP is calculated in different countries using that nation's own currency. djusting real GDP for the differences in currency values gives a standard of living meas

Other Measures of the Standard of Living
Real GDP is not the only measure of our nation's income. There are two other ways to measure the standard of living in our country:

GROSS NATIONAL PRODUCT
DISPOSABLE PERSONAL INCOME

Gross national product

Gross national product (GNP) is the market value of all final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of the country. A U company producing airplane parts in Asia woul

Disposable personal income

Another measure of our standard of living is disposable personal income (DPI). What households have to spend on goods and services is a good indicator of how well they can live. DPI is the income received by households less personal income taxes paid. Usi

The Limitations of GDP
Many things are omitted from GDP but nonetheless are very important for a nation's standard of living.

HEALTH
POLITICS

Health

Such omissions include health, life expectancy, and protected civil liberties. GDP will rise with more production, even if higher levels of production pollutes the air or water, workers are dying from unsafe working conditions, or all workers are forced t

Politics

Political freedom and social justice are not measured by real GDP, but both factors tend to increase along with higher levels of real GDP. Studies have shown that, although some countries with very authoritative governments experience periods of high grow

If real GDP for one country is higher than another, it must be true that the standard of living is also higher.

false,
to compare real GDP per person across countries, we have to use a common set of prices and measure GDP per person.

GNP measures the market value of all final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of the country.

false, The definition is incomplete. GNP measures the market value of all final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of the country.

GDP omits things that are very important for a nation's standard of living.

true

Norway's real GDP per person in 2009
United States' real GDP per person in 2009
United Kingdom's real GDP per person in 2009
Japan's real GDP per person in 2009

In order of highest GDP PER PERSON FOR COUNTRIES.

REVIEW

-Standard of living is a measurement of the financial well-being of a given country based on how well its citizens are doing economically.
-You can use GDP, GNP, and disposable income figures to measure standard of living.
-GDP or GNP per person will give

To make comparisons of real GDP between two countries we must_____.

convert the real GDP of one country into the same currency units as the real GDP of the other country, and use the same prices to value the goods and services in the countries being compared.

When the economy is in recession, the real GDP is_____. *

less than the potential GDP
minus potential GDP is negative

During a business cycle, expansion comes after peak.

FALSE

In years when people buy many shares of stock, investment will be high and so will GDP.

false

List Important terms in GDP's Definition

Market Value; Final goods and Services; Within a country; In a specific time period.

Identify which GDP component it belongs to: Cisco decides to build up a new factory in North Carolina *

investment

Suppose the base year is 2005. Real GDP in 2011 is what the total expenditure would have been in 2011 if prices had remained the same as they

true

Choose the correct statement *

A:The difference between gross product and net product is depreciation. depreciation.
B:To get from factor cost to market price, we add subsidies and subtract indirect taxes
C:The sum of all incomes is called net domestic product at market prices
D:Sales

Which of the following are included in the income approach to calculating GDP? *

interest; profit; wages

Real GDP______. *

does not accurately measure household production, underground economic activity, or life expectancy.

A south sea island produces only coconuts. In 2000, the price of a coconut is $1 and quantity produced is 300. In 2001, the price of a coconut is $2 and the quantity produced is 400. 2000 is the base year. Real GDP in 2001 is_____.

$400.00

CHAPTER SUMMARY
Key Points

1 Define GDP and explain why the value of production, income, and expenditure are the same for an economy.
� GDP is the market value of all final goods and services produced within a country in a given time period.
� We can value goods and services either

The total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care or in the U.S. Armed Forces

Working-age population

The number of people employed plus the number unemployed

Labor force

What are the two main labor market indicators

the unemployment rate and the labor force participation rate

The percentage of the working-age population who are members of the labor force?

Labor force participation rate

The unemployment rate based on the official definition of unemployment omits some types of underutilization of labor. The omissions are

Marginally attached workers and part-time workers

A person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past?

Marginally attached worker

A marginally attached worker who has not made specific efforts to find a job within the past four weeks because previous unsuccessful attempts to find a job were discouraging?

Discouraged worker

People who usually work 35 hours or more a week?

Full-time workers

People who usually work less than 35 hours a week?

Part-time workers

People who work 1 to 34 hours per week but are looking for full-time work and cannot find it because of unfavorable business conditions?

Part time for economic reasons

People who work part time for noneconomic reasons do not want?

full-time work and are not available for such work

A period of high unemployment, low incomes, and extreme economic hardship that lasted from 1929 to 1939?

Great Depression

The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs?

Structural unemployment

The fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion?

Cyclical unemployment

The unemployment rate when the economy is at full employment?

Natural unemployment rate

When there is no cyclical unemployment or, equivalently, when all the unemployment is frictional or structural? A situation in which the unemployment rate equals the natural unemployment rate.

Full employment

The natural unemployment rate is influenced by many factors but the most important ones are?

The age distribution of the population, the pace of structural change, the real wage rate and unemployment benefits

The value of real GDP when the economy is at full employment�all the economy's factors of production (labor, capital, land, and entrepreneurial ability) are employed?

Potential GDP

Real GDP minus potential GDP expressed as a percentage of potential GDP?

Output gap

Population Labor Force Categories

Two Main Labor Market Indicators

Using the numbers from the Current Population Survey, the BLS calculates several indicators of the state of the labor market. The two main labor market indicators are
� The unemployment rate
� The labor force participation rate

Unemployment rate

The percentage of the people in the labor force who are unemployed.
Unemployment rate equals Number of people unemployed over Labor force � 100.
In August 2011, the number of people unemployed was 14.0 million and the labor force was 153.6 million. We can

Labor force participation rate

The percentage of the working-age population who are members of the labor force.
In August 2011, the labor force was 153.6 million and the working-age population was 239.9 million. We can use these numbers to calculate the labor force participation rate i

Great Depression

A period of high unemployment, low incomes, and extreme economic hardship that lasted from 1929 to 1939.

The U.S. Unemployment Rate: 1929-2011

The Changing Face of the Labor Market: 1960-2011

WOMEN IN THE LABOR FORCE GLOBALLY

Alternative Measures of Unemployment
shows the history of these six measures of unemployment since 1994 (the year in which the BLS started to measure them). The relative magnitudes of the six measures are explained by what they include�the broader the mea

Part-Time Workers: 1980-2011

Figure 1 shows the unemployment rate in the United States from 1960 to 2010.
- In which decade�the 1960s, 1970s, 1980s, 1990s, or 2000s�was the average unemployment rate the lowest and what brought low unemployment in that decade?
-In which decade was the

-shows that the unemployment rate was lowest during the 1960s when defense spending on the Vietnam War and expansion of social programs brought rapid expansions and lowered the unemployment rate.
- shows that the unemployment rate was highest during the 1

Describe the trends in the participation rates of men and women and of all workers.

The participation rate of women increased because
- (1) better-educated women earn more,
- (2) more white-collar jobs with flexible work hours were created,
- (3) people have more time for paid employment,
-(4) families increasingly needed two incomes to

UNEMPLOYMENT AND FULL EMPLOYMENT

There is always someone without a job who is searching for one, so there is always some unemployment. The key reason is that the labor market is constantly churning. New jobs are created and old jobs die; and some people move into the labor force and some

Frictional unemployment

-is the unemployment that arises from people entering and leaving the labor force, from quitting jobs to find better ones, and from the ongoing creation and destruction of jobs�from normal labor turnover. -Frictional unemployment is a permanent and health

Discouraged workers are counted as unemployed.

FALSE, Discouraged workers are not in labor force

Jason is 18 years old. He works 20 hours per week at his father's company. He is__________

Employed

Both men and women's labor force participation rate have increase over the past 50 years in the U.S.

Men's labor force participation rate has decreased

The officially calculated unemployment rate underestimate the jobless situation in the U.S.

TRUE, Discouraged workers are not included in current unemployment rate calculation.

The unemployment rate is released every_________

MONTH

Definition of Unemployment
There are two ways for a person to be defined as unemployed:

A person must be available to work but unable to find it. In other words, an unemployed person is without work but is making an effort to find a job.
A person waiting to be recalled back to a job from which they have been laid off is also counted as unemp

Other Measures of Unemployment
Because the unemployment rate does not cover everyone who might want a job, the BLS estimates other indicators of labor-force activity. These include the following types of workers:

Discouraged workers
Marginally attached workers
Involuntary part-time workers

Involuntary part-time workers

Involuntary part-time workers are adults working fewer than 34 hours per week but are looking for full-time work. They have been unable to find full-time work because of unfavorable business conditions. Although these workers have jobs, they are considere

Labeling Unemployment

The official unemployment rate, which we defined previously, is labeled U-3 and equals the total unemployed as a percentage of the civilian labor force. U-4 adds discouraged workers to U-3, U-5 adds marginally attached workers to U-4, and U-6 adds part-ti

Duration of Unemployment

The duration of unemployment is another indicator of weakness in the economy. In normal times, workers stay in the ranks of the unemployed for only a short period of time. The longer that workers remain unemployed, the harder it is to maintain any decent

During a recession, the average duration of unemployment tends to decrease.

False. During recessions, unemployed workers take a longer time to find new jobs.

The labor force includes all employed and unemployed workers aged 16 years or older.

True

A marginally attached worker is available and willing to work.

False. Marginally attached workers are available and willing to work but are not looking for work right now.

In normal times, workers stay in the ranks of the unemployed for only a short period of time.

TRUE

Labor-Force Participation

Since the 1960s, there have been significant changes in the U.S. labor force. The U.S. labor force has more than doubled, growing from approximately 70 million workers in January 1960 to nearly 154 million workers in 2010. Over the course of this growth i

Change in the Labor Market
Many economic forces and perspectives have contributed to gender-related changes in the labor market:

Technology
Social Attitudes

Technology

Technological advances have made it easier for households to have two adults working. Goods that were previously unavailable in the house are now available for purchase by most homeowners.
For example, microwave ovens and prepared foods make cooking easie

Social attitudes

Social attitudes have changed, allowing more families to decide to have two incomes. There are also many goods and services, such has home entertainment equipment, that households want and must therefore obtain a higher income level to purchase. That is,

Demographic Differences in Unemployment
The 10% unemployment rate for 2010 does not capture how unemployment differs significantly across various groups of workers in the United States. Unemployment varies by race, education, and age:

Unemployment varies by race, education, and age:

Race

Unemployment rates vary considerably across racial groups. In 2010, the U.S. unemployment rate for whites and Asians averaged below the national rate of 10%, whereas Hispanics and blacks experienced much higher rates and duration of unemployment.

Education

There has long been a dramatically different level of unemployment for high school dropouts (approximately 15% in 2010) compared to workers with bachelor's degrees or higher (approximately 4.5% in 2010).

Age

The unemployment for younger workers is much higher than that of older, more experienced employees. In 2010, approximately one fourth of all teenagers in the labor force could not find work.

The U.S. labor force in 1960 comprised of roughly 70 million workers.
In 1960, the labor-force participation rate for women was approximately 38 percent.
The U.S. labor force in 2010 was made up of nearly 154 million workers.
In 2010, the labor-force part

...

Discouraged workers are counted as unemployed. *

FALSE

Jason is 18 years old. He works 20 hours per week at his father's company. He is__________

EMPLOYED

Both men and women's labor force participation rate have increase over the past 50 years in the U.S.

FALSE Men's labor force participation rate has decreased

The officially calculated unemployment rate underestimate the jobless situation in the U.S.

TRUE, Discouraged workers are not included in current unemployment rate calculation.

The unemployment rate is released every_________

MONTH

Definition of Unemployment
There are two ways for a person to be defined as unemployed:

A person must be available to work but unable to find it. In other words, an unemployed person is without work but is making an effort to find a job.
A person waiting to be recalled back to a job from which they have been laid off is also counted as unemp

There are three types of unemployment:

frictional, structural, and seasonal.
-There is also cyclical unemployment, in which unemployment rises during certain cycles, such as recession, and falls during others, such as expansion.
-Full employment could exist if the only type of unemployment was

The Natural Rate of Unemployment

The natural rate of unemployment covers the flow of workers regularly moving in and out of employment or in and out of the labor force, which means that there is a regular flow of workers searching for jobs.

Positives of Unemployment

What should be considered the natural rate of unemployment is very controversial. Many consider any unemployment to be bad. It is good, however, for society to experience some job search so there are more productive matches between firms and workers.
Beca

Unemployment Flows
The size of the flows of workers is influenced by three main factors:

Demographic change
Unemployment benefits
Structural change

Demographic change

Demographic changes influence the extent to which workers search for jobs. An increase or decrease in the working-age population changes the number of new entrants in the labor market looking for work.

Unemployment benefits

Unemployment benefits influence the extent to which workers are searching for jobs. When the government offers benefits to the unemployed, it affects their incentive to look for work.

Structural change

Structural changes in the economy influence the extent to which workers are searching for jobs. The skills workers need for different jobs are constantly changing. New technologies and new processes will influence the ease with which workers can find the

Types of Unemployment
The economy's natural rate of unemployment can be classified into three broad categories�frictional, structural, and seasonal:

Frictional
Structural
Seasonal

Frictional

Frictional unemployment arises from the normal turnover in jobs and workers. When more people enter the labor market or when unemployment benefits increase, there will be more workers searching for jobs. Any dynamic and growing economy will experience fri

Structural

Structural unemployment is the unemployment that arises when changes in technology or competition change the skills employers require for the available jobs. Structural unemployment can be more problematic for the economy. If the labor force does not have

Seasonal

The number of people looking for work is influenced by the time of year. Seasonal unemployment arises because of seasonal weather patterns. For example, more construction workers are employed in the summer months because building projects slow down during

Full Employment

The unemployment rate is never zero, but rather it fluctuates around the natural rate.
Full employment occurs when there is no cyclical unemployment, and all unemployment is frictional, structural, or seasonal.
Full employment occurs at the economy's natu

The economy has full employment when everyone who wants a job gets a job.

FALSE

Frictional unemployment arises from normal changes in economic activity.

True

Structural changes in the economy influence the extent to which workers are searching for jobs.

True

It is unhealthy for society to experience some job search.

FALSE

Frictional Unemployment

EXAMPLES
-Gina's boyfriend is unemployed for several weeks, after he moves across the country to live near her.
-Each year, the rate of unemployment reflects a large percent of recent college graduates who are searching for their first jobs.

Structural Unemployment

EXAMPLES
-Debbie's local pet shop is in danger of going out of business, as a result of increased competition from bigger, national chain stores. To reduce the budget, she is forced to lay off several employees.
-The Industrial Revolution caused higher ra

Seasonal Unemployment

EXAMPLES
-Dave works on a crab boat for a few months between October and January and remains unemployed for the remainder of the year.
-John works at a campground each summer, before returning home for classes in the fall.

Potential GDP

When all of an economy's factors of production (labor, capital, land, and entrepreneurial ability) are fully used, we can say that the economy has reached its potential. Potential GDP is the level of real GDP that the economy produces when it is at full e

Level of Productivity
To reach its potential, the economy depends on everyone's ability to produce goods and services. This level of productivity depends not only on how many workers are available but also the following:

PHYSICAL CAPITAL
HUMAN CAPITAL
NATURAL RESOURCES
TECHNOLOGICAL KNOWLEDGE

Physical capital

Physical capital includes buildings and equipment used to produce goods and services.

Human capital

Human capital includes all the skills workers have to use from their education, training, and experience.

Natural resources

Natural resources are also necessary for production and include land, rivers, and mineral deposits

Technological knowledge

Technological knowledge is the productive know-how of society. This knowledge includes all the ways we know how to organize and use the other resources.

Unemployment and Real GDP
Like all markets, the labor market has supply and demand. Workers are the suppliers in this market, and employers, or those who have a demand for labor, are the consumers.

Definition
Influence
Quantity

Definition

The supply of labor is the relationship between the quantity of labor supplied and the real, or inflation-adjusted, wage rate when all other influences on worker's plans to work are held constant. Similarly, the demand for labor is the relationship betwee

Influence

-The supply of labor is influenced by taxes on wages and other incomes, unemployment insurance, and workers' overall trade-off between leisure and work. -The demand for labor is influenced by taxes on employers and the use of other inputs to the productio

Quantity

The quantity of labor supplied will increase as the real wage rate rises and the quantity of labor demanded increases as the real wage rate falls, when all else stays the same. When the labor market is in equilibrium, the quantity of labor demand equals t

Economic activity fluctuates around potential GDP, and these fluctuations are primarily influenced by the quantity of labor employed.

TRUE

Potential GDP is reached when all workers in an economy are employed.

FALSE

When the unemployment rate is less than the natural rate of unemployment, real GDP is less than potential GDP.

FALSE

The demand for labor is influenced by taxes on employers.

TRUE

CHAPTER SUMMARY
Key Points

1 Define the unemployment rate and other labor market indicators.
� The unemployment rate is the number of people unemployed as a percentage of the labor force, and the labor force is the sum of the number of people employed and the number unemployed.
� T

Overall during the past 50 years, the labor force participation rate in the U.S. has been

INCREASING

What is the labor force participation rate trend for men during the past 50 years? *

It has decrease by 15% due to young men choose to stay in school for longer time and early retirement.

When the economy is in recession, the unemployment rate_________ *

It is greater than natural unemployment rate

-A measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services.
-The Bureau of Labor Statistics (BLS) calculates the CPI every month, and we can use these numbers to compare what the fixed marke

Consumer Price Index (CPI)

-A period for which the CPI is defined to equal 100. Currently, the period is 1982-1984
-Currently, the reference base period is 1982-1984. That is, the CPI equals 100 on the average over the 36 months from January 1982 through December 1984.

Reference base period

Constructing the CPI is a huge operation that costs millions of dollars and involves what three stages

1. Selecting the CPI market basket,
2. Conducting the monthly price survey, and
3. Calculating the CPI

The CPI calculation has what three steps?

-1.Find the cost of the CPI market basket at base period prices,
-2. Find the cost of the CPI market basket at current period prices, and
-3. Calculate the CPI for the base period and the current period

The percentage change in the price level from one year to the next

Inflation rate

A situation in which the price level is falling and the inflation rate is negative

Deflation

When the price level rises rapidly, the inflation rate is high; when the price level rises slowly, the inflation rate is low; and when the price level is falling, the inflation rate is?

negative

The purpose of the CPI is to measure what?

the cost of living or what amounts to the same thing, the value of money

A measure of the change in the amount of money that people need to spend to achieve a given standard of living?

Cost of living index (CPI is sometimes called this)

The CPI is an imperfect measure of the cost of living because its construction results in four types of bias:

New goods bias, Quality change bias, Commodity substitution bias, and Outlet substitution bias

Avoiding bias in the CPI is important for what two main reasons

Bias leads to distortion of private contracts and increases in government outlays and decreases in taxes

An average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices?

GDP price index, also called GDP deflator

What are the two key differences between the GDP price index and the CPI that result in different estimates of the price level and inflation rate

-First, the GDP price index uses the prices of all the goods and services in GDP�consumption goods and services, capital goods, government goods and services, and export goods and services�while the CPI uses prices of consumption goods and services only.

An average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices

PCE price index (Personal Consumption Expenditures)

The annual percentage change in the PCE price index excluding the prices of food and energy

Core inflation rate

A nominal value is one that is expressed in

current dollars

A real value is one that is expressed in the dollars of?

a given year

The average hourly wage rate measured in current dollars?

Nominal wage rate

The average hourly wage rate measured in the dollars of a given reference base year?

Real wage rate

What is the difference between the nominal and real wage rates?

Because we measure the real wage rate in constant base period dollars, a change in the real wage rate measures the change in the quantity of goods and services that an hour's work can buy. In contrast, a change in the nominal wage rate measures a combinat

Why is the real wage rate a significant economic variable?

because it measures the real reward for labor, which is a major determinant of the standard of living. The real wage rate is also significant because it measures the real cost of labor services, which influences the quantity of labor that firms are willin

The dollar amount of interest expressed as a percentage of the amount loaned?

Nominal interest rate

The goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate?

Real interest rate

The CPI Market Basket

CALCULATING THE CPI

you established that in 2005, the cost of the CPI market basket was $50 and in 2012, it was $70. If we use these numbers in the CPI formula, we can find the CPI for 2005 and 2012. The base period is 2005, so

Figure 7.2(b) shows the inflation rate in the United States between 1971 and 2011. The change in the price level in part (a) and the inflation rate in part (b) are related. When the price level rises rapidly, the inflation rate is high; when the price lev

The CPI is sometimes called a cost of living index�a measure of the change in the amount of money that people need to spend to achieve a given standard of living. The CPI is not a perfect measure of the cost of living (value of money) for two broad reason

First, the CPI does not try to measure all the changes in the cost of living.
-For example, the cost of living rises in a severe winter as people buy more natural gas and electricity to heat their homes. A rise in the prices of these items increases the C

Alternative Measures of the Price Level and Inflation Rate

Several alternative measures of the price level and inflation rate are available. One based on wholesale prices and another based on producers' prices are similar to the CPI, both in the way they are constructed and their potential for bias. But three oth

GDP price index

-(also called the GDP deflator) is an average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices. Two key differences between the GDP price index and the CPI result in different estimates of t

Personal consumption expenditures (PCE) price index

-s an average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices. The PCE price index has the same advantages as the GDP price index�it uses current inform

PCE price index excluding food and energy

-Food and energy prices fluctuate much more than other prices and their changes can obscure the underlying trends in prices. By excluding these highly variable items, the underlying price level and inflation trends can be seen more clearly. The percentage

Three Measures of Consumer Prices

The Bureau of Labor Statistics (BLS) calculates and reports the CPI monthly. What does this report help to measure?

PRICE ESTIMATES
INFLATION
ECONOMIC DECISIONS

PRICE ESTIMATES

-The CPI is an estimate of the prices paid for all goods and services purchased for consumption by urban wage earners, such as professionals, clerical workers, laborers, self-employed people, and retired people.
-The index includes user fees, such as util

INFLATION

-The CPI is the most widely cited and studied measure of a rise in the cost of living, or inflation. Inflation is a rise in the overall price level for an economy.
-If the level of the CPI is rising, the cost of living is going up, or the value of a dolla

ECONOMIC DECISIONS

-As an economic indicator, the CPI can assess the effectiveness of different government policies or as a guide for households and businesses making economic decisions.
-The CPI is also used to adjust other economic data, such as income or wages, for price

Changes in the Cost of Living

-To determine the change in the cost of the living, we look at the inflation rate, which is the percentage change in the price level from one year to the next.
-Recall that inflation is a rise in the price level. Conversely, deflation occurs when the pric

There are four steps in constructing the CPI:

Survey
Determining prices
Cost of the Basket
Index level

Survey

First, the BLS surveys consumers in urban areas to determine what these consumers regularly purchase in the marketplace each month. This survey determines a representative bundle of goods and services, or market basket, purchased by a typical consumer.
In

Determining prices

Second, prices for each of the goods and services in the basket must be determined each month. The BLS has a group of shoppers that travel around recording prices for the goods and services in the market basket. The basket is kept the same for as many con

Cost of the Basket

Third, the cost of the basket is computed. With a fixed basket, only prices are being allowed to change. This allows the BLS to isolate the effects of price changes over time.

Index level

Fourth, the BLS chooses the base period and computes the index level. The level of the CPI in any given month is equal to 100 mulpilied by the ratio of the basket's cost in the current month to the cost in the base period. As an index, the CPI is defined

New goods

First, the CPI does not take into account increases in the purchasing power of the dollar attributable to the introduction of new goods. Although new goods are often more expensive than the goods they replace, consumers have a wider variety of goods and s

Changes in quality

Second, the CPI is biased by unmeasured changes in the quality of goods and services. Many times a rise in the price of product reflects quality improvements. For example, cars become safer, and drugs become more effective at treating diseases.
If the qua

Commodity subtitution

Third, the CPI does not take into account consumers' ability to substitute goods for ones that become relatively cheaper over time. This is called commodity substitution bias. The typical consumer will choose not to buy goods and services with large relat

Outlet substitution

Fourth, the CPI has an outlet substitution bias. When prices rise, people use discount stores more frequently and convenience stores less frequently. Consumers are here again substituting toward relatively cheaper goods. Because the basket doesn't correct

The Problem with Biases

Many contracts and payments are indexed to the CPI. According to the BLS, more than 2 million unionized workers in the United States are covered by agreements with employers that tie their wages to the CPI. If the CPI is biased, then these workers are rec

Other Measures of the Cost of Living
There are two other commonly used measures of the cost of living:

GDP price deflator
Personal consumption expenditure index

The BLS determines the basket of goods and services in the CPI by surveying businesses.

FALSE

If the CPI declines, urban workers and residents will spend fewer dollars to maintain the same standard of living.

TRUE

Because the CPI reflects prices for goods and services bought by consumers, it is more commonly used than the GDP deflator as a gauge of inflation.

TRUE

CPI

-The CPI is a(n) estimate of the prices paid for all goods and services purchased for consumption by urban wage earners.
- The CPI is the most widely cited and studied measure of inflation .
-The CPI can assess the effectiveness of a government policy or

Review

-The Consumer Price Index (CPI) measures the buying patterns of urban consumers�specifically, the average prices they pay from among a specified list of goods. Although it does not measure all goods and services, or even the entire consumer market, it dem

When summer comes, lots of students graduate from college and start to look for a job. The unemployment rate during this time period is a little bit higher than before. Why?

This is natural labor turnover

During economic recession, cyclical unemployment is positive which makes the unemployment rate lower than the natural unemployment rate.

FALSE, Unemployment rate is higher than natural unemployment rate during recession

The price survey used to calculate CPI is conducted on a_________basis.

MONTHLY

When calculating CPI, ________________________________

Only price changes, quantity doesn't change over time, This is CPI's assumption. This way, we can focus on quantity change only.

CPI also includes price level of national defense products.

FALSE, CPI only focuses on consumption goods, which would be purchased by an urban family of 4.

When price of a product increases, people tend to buy it from a discount store. This is called__________. *

OUTLET BASIS

-A sustained expansion of production possibilities
-Maintained over decades, rapid economic growth can transform a poor nation into a rich one. Such has been the experience of Hong Kong, South Korea, Taiwan, and some other Asian economies. Slow economic g

Economic growth

The annual percentage change of real GDP

Economic growth rate

What does the growth rate of real GDP tell us

it tells us how rapidly the total economy is expanding. This measure is useful for telling us about potential changes in the balance of economic power among nations, but it does not tell us about changes in the standard of living.

The standard of living depends on what

real GDP per person (also called per capita real GDP)

Real GDP divided by the population

Real GDP per person

The number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable

Rule of 70

Real GDP grows when the quantities of the factors of production grow or when

persistent advances in technology make them increasingly productive

The quantity of real GDP produced by one hour of labor

Labor productivity

When labor productivity grows, real GDP per person grows. So the growth in labor productivity is the basis of what

of the rising standard of living

If the quantity of capital is small, an increase in capital brings a large increase in production; and if the quantity of capital is large, an increase in capital brings a small increase in production

law of diminishing marginal returns

The relationship that shows how real GDP per hour of labor changes as the quantity of capital per hour of labor changes

Productivity curve (PC)

The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end

Classical growth theory

Another name for classical growth theory�named for Thomas Robert Malthus

Malthusian theory, aka Doomsday theory

The theory that our unlimited wants will lead us to ever greater productivity and perpetual economic growth

New growth theory

The new growth theory emphasizes what three facts about market economies

1. human capital expands because of choices
2. Discoveries result from choices, and
3. Discoveries bring profit, and competition destroys profit

What two other facts play a key role in the new growth theory

Many people can use discoveries at the same time and physical activities can be replicated

The main reason economic growth is either absent or slow is that some societies lack

the incentive system that encourages growth-producing activities

A condition in which people are able to make personal choices, their private property is protected by the rule of law, and they are free to buy and sell in markets

Economic freedom

The social arrangements that govern the protection of private property

Property rights

For growth to be persistent, people must face incentives that encourage them to pursue what three activities that generate ongoing economic growth

saving and investment,
expansion of human capital,
the discovery and application of new technologies

To achieve faster economic growth, we must increase the growth rate of capital per hour of labor, increase the growth rate of human capital, or increase the pace of technological advance. The main actions that governments can take to achieve these objecti

1. Create incentive mechanisms,
2. Encourage saving,
3. Encourage research and development,
4. Encourage international trade, and
5. Improve the quality of education

For example, if real GDP in the current year is $8.4 trillion and if real GDP in the previous year was $8.0 trillion, then

Suppose, for example, that in the current year, when real GDP is $8.4 trillion, the population is 202 million. Then real GDP per person in the current year is $8.4 trillion divided by 202 million, which equals $41,584. And suppose that in the previous yea

We can also calculate the growth rate of real GDP per person by using the formula:

Growth rate of real GDP per person = Growth rate of real GDP ? Growth rate of population.

For example, if real GDP is $8,000 billion and if aggregate hours are 200 billion, then we can calculate labor productivity as

What makes labor productivity grow? We'll answer this question by considering the influences on labor productivity growth under two broad headings:
These two broad influences on labor productivity growth interact and are the sources of the extraordinary g

� Saving and investment in physical capital
� Expansion of human capital and discovery of new technologies

Saving and Investment in Physical Capital

Saving and investment in physical capital increase the amount of capital per worker and increase labor productivity.
Production processes that use hand tools can create beautiful objects, but production methods that use large amounts of capital per worker

Figure 9.1 illustrates the relationship between capital and productivity. The curve PC is a productivity curve, which shows how real GDP per hour of labor changes as the quantity of capital per hour of labor changes.

Expansion of Human Capital

Human capital�the accumulated skill and knowledge of people�comes from three sources:
1. Education and training
2. Job experience
3. Health and diet
Strong, healthy, well-nourished workers are much more productive than those who lack good nutrition, healt

Discovery of New Technologies

Since the Industrial Revolution, technological change has become a part of everyday life. Firms routinely conduct research to develop technologies that are more productive, and partnerships between business and the universities are commonplace in fields s

Illustrating the Effects of Human Capital and Technological Change

Combined Influences Bring Labor Productivity Growth

To reap the benefits of technological change�to use new technologies to make labor productivity grow�capital must increase. Some of the most powerful and far-reaching technologies are embodied in human capital�for example, language, writing, mathematics,

How Labor Productivity Grows
Figure 9.3 shows how the combined effects of capital accumulation, the expansion of human capital, and the discovery of new technologies bring labor productivity growth. In 1960, the productivity curve is PC0, workers have $80

The Sources of Economic Growth
Real GDP grows because labor becomes more productive and also because the quantity of labor increases. Figure 9.4 summarizes the sources of economic growth and shows how the growth in labor productivity together with the gro

ECONOMIC GROWTH

The formula for measuring the growth rate of real GDP is real GDP in the current year minus real GDP in the prior year divided by real GDP in the prior year, multiplied by 100.
Real GDP per person is real GDP divided by the population.This figure is used

Calculating the Economic Growth Rate
This is often referred to as "new minus old divided by old.

For example, at the end of 2009, the value of U.S. real GDP was $13,019 billion. At the end of 2010, the value of U.S. real GDP was $13,380.7 billion. Therefore, the economic growth rate for the United States in 2010 was ($13,380.7 - $13,019)/$13,019, or

Calculating the Economic Growth Rate per Person

It is only gains in real GDP per person that improves the standard of living for a country. Real GDP needs to grow faster than the population if the standard of living is to increase.
For example, between December 2009 and December 2010 the U.S. populatio

The growth rate of real GDP equals real GDP in the current year less real GDP in the previous year divided by real GDP in the current year.

FALSE

Real GDP needs to grow faster than the population if the standard of living is to increase.

TRUE

REVIEW

If the growth rate nears 2 percent, then the standard of living doubles every 35 years. This is found by using the rule of 70 .

REVIEW

The cyclical growth accompanying an economic boom or a sustained recovery after a recession is important, but economic growth is a sustained expansion of production possibilities. You use the measurement of real GDP not only to calculate growth but also t

Growth of real GDP depends on both the quantity of labor growth and growth of labor productivity.

The quantity of labor growth, in turn, depends on population growth, changes in labor force participation, and average work hours.
Labor productivity growth depends on growth of physical capital such as factories, machinery and tools, savings and investme

Higher productivity

Labor productivity is defined as the quantity of real GDP produced by one hour of labor and can be calculated by dividing real GDP by the aggregate hours worked. Alternatively, real GDP equals the aggregate hours worked times labor productivity. This says

Quantity of labor

The quantity of labor is equal to the labor force multiplied by average hours per worker. Population growth is the only way the quantity of labor can be sustained over a long period of time. We cannot expect people to keep working more and more hours. Alt

Sources of Labor Productivity Growth

To find the sources of economic growth, we must look at what increases labor productivity. There are three main factors that influence the growth of labor productivity:
Savings and investments
Human capital
New technology

Savings and investments

The more a country saves its income and invests these savings, the higher its labor productivity will be. More savings and investment also increases the physical capital available to workers. Workers have more tools to produce more and their productivity

Human capital

Labor productivity becomes higher as a country increases its human capital. Human capital is the accumulated skills and knowledge of people. The more people learn, the more productive they can be.

New technology

New technologies increase the ability of workers to get their work done, limit errors, and improve quality. Often these new technologies require new physical capital, such as personal computers. New technologies can include better ways of doing the same t

Labor productivity is defined as real GDP per hour of labor.

TRUE

Increases in human capital arise from the greater quantity of physical capital available to workers.

FALSE

REVIEW

-The more a country saves its income and invests these savings, the higher its labor productivity will be.
-Human capital is the accumulated skills and knowledge of people.
-New technologies increase the ability of workers to get their work done, limit er

Review

-It is important to understand what drives economic growth so that you can better measure both domestic and foreign performance and success.
-The growth of real GDP relies on the quantity of labor growth and the growth of labor productivity.
-The quantity

For countries like the United States which already gain a huge amount of capitals, keep accumulating more and more physical capitals is the right way to increase labor productivity in the future.

FALSE, Due to diminishing return on physical capital accumulation, the right way to increase labor productivity in the U.S. would be accumulating human capital.

How do we measure the annual economic growth?

Real GDP growth rate

Why the U.S. government is willing to spend large amount of money on education?

Because accumulation of human capital would help increase in labor productivity in the U.S.