Introductions of Macroeconomics

Macroeconomics is the study of the structure and performance of national economies and of
the policies that governments use to try to affect economic performance
 The issues that macroeconomists address include the following:
 What determines a nation's long-run economic growth ?
 What causes a nation's economic activity to fluctuate?
 What causes unemployment?
 What causes prices to rise?
 How does being part of a global economic system affect nations' economies?
 Can government policies be used to improve a nation's economic performance?
What determines a nation's long-run economic growth ?
.From a macroeconomic perspective, the difference between rich nations and
developing nations may be summarized by saying that rich nations have at some
point in their history experienced extended periods of rapid economic growth but that
the poorer nations either have never experienced sustained growth or have had
periods of growth offset by periods of economic decline.
 average labor productivity: The amount of output produced per unit of labor
input (per worker or per hour of work) is called average labor productivity. since
1900. In 2008, the average U.S. worker produced more than six times as much
output as the average worker at the beginning of the twentieth century, despite
working fewer hours over the course of the year. Because today's typical worker is
so much more productive, Americans enjoy a significantly higher standard of
living than would have been possible a century ago
Other factors that’s effect the average productive of labour.

 Rates of saving and investment are important for growth.

 the rate at which technological change and other factors help increase the productivity of
machines and workers.
 Business Cycles
If you look at the history of U.S. output you will notice that the growth of output isn't
always smooth but has hills and valleys. Most striking is the period between 1929 and 1945,
which spans the Great Depression and World War II. During the 1929-1933 economic collapse
that marked the first major phase of the Great Depression, the output of the U.S. economy fell
by nearly 30°/o. Over the period 1939-1944, as the United States entered World War II and
expanded production of armaments, output nearly doubled. No fluctuations in U.S. output
since 1945 have been as severe as those of the 1929-1945 period. However, during the postwar
era there have been periods of unusually rapid economic growth, such as during the 1960s and
1990s, and times during which output actually declined from one year to the next, as in 1973-
1975, 1981-1982, and 1990-1991
Macroeconomists use the term business cycle to describe short-run, but sometimes sharp,
contractions and expansions in economic activity.
Macroeconomists put a lot of effort into trying to figure out what causes business cycles and
deciding what can or should be done about them. In this book we describe a variety of features
of business cycles, compare alternative explanations for cyclical fluctuations, and evaluate the
policy options that are available for affecting the course of the cycle.
 Unemployment
the number of people who are available for work and are actively
seeking work but cannot find jobs. Along with growth and business cycles, the
problem of unemployment is a third major issue in macroeconomics.
The best-known measure of unemployment is the unemployment rate,
which is the number of unemployed divided by the total labor force (the
number of people either working or seeking work).
 the unemployment rate in the United States over the past century. The highest and
most prolonged period of unemployment occurred during the Great Depression of
the 1930s. In 1933, the unemployment rate was 24.9°/o, indicating that about one
of every four potential workers was unable to find a job. In contrast, the
tremendous increase in economic activity that occurred during World War II
significantly reduced unemployment. In 1944, at the peak of the wartime boom,
the unemployment rate was 1 .2°/o. Recessions have led to significant increases in
unemployment in the postwar period. For example, during the 1981-1982
recession the U.S. unemployment rate reached 10.8°/o. 3 Even during periods of
economic expansion, however, the unemployment rate remains well above zero,
In 2000, after nine years of economic growth with no recession, the
unemployment rate was still about 4°/o. Why the unemployment rate can remain
fairly high even when the economy as a whole is doing well is another important
question in macroeconomics.
 Inflation
When the prices of most goods and services are rising over time, the
economy is said to be experiencing inflation. a measure of the average level
of prices faced by consumers in the United States over the past two centuries.
Note that prior to World War II inflation usually occurred only during wartime,
such as during the War of 1812, the Civil War, and World War I
 deflation, during which the prices of most goods and services fell. The last
significant deflation in the United States occurred during 1929-1933, the
initial phase of the Great Depression. Since then, inflation, without offsetting
deflation, has become the normal state of affairs, although inflation was
fairly low in the 1990s and 2000s. Figure 1 .4 shows that consumer prices
have risen significantly since World War II, with the measure of prices shown
increasing tenfold.
 The percentage increase in the average level of prices over a
year is called the inflation rate. If the inflation rate in consumer
prices is 10°/o, for example, then on average the prices of
items that consumers buy are rising by 10°/o per year. Rates of
inflation may vary dramatically both over time and by country,
from 1 or 2 percent per year in low-inflation countries (such as
Switzerland) to 1000°/o per year or more in countries (such as
a number of the former Soviet republics in the early 1990s)
that are experiencing hyperinflations, or extreme inflations.
When the inflation rate reaches an extremely high level, with
prices changing daily or hourly, the economy tends to function
poorly. High inflation also means that the purchasing power of
money erodes quickly. This situation forces people to scramble
to spend their money almost as soon as they receive it.
 The International Economy
Today every major economy is an open economy, or one that has
extensive trading and financial relationships with other national
economies. (In contrast, a closed economy doesn't interact
economically with the rest of the world.) Macroeconomists study
patterns of international trade and borrowing to understand better the
links among national economies. For example, an important topic in
macroeconomics is how international trade and borrowing
relationships can help transmit business cycles from country to country.
Another issue for which international considerations are central is
trade imbalances When exports exceed imports, a trade surplus exists.
excess of imports over exports, or trade deficit,
 Macroeconomic Policy
Another extremely important factor affecting economic performance is
the set of macroeconomic policies pursued by the government.
Macroeconomic policies affect the performance of the economy as a
whole. The two major types of macroeconomic policies are fiscal
policy and monetary policy. Fiscal policy, which is determined at the
national, state, and local levels, concerns government spending and
taxation. Monetary policy determines the rate of growth of the nation's
money supply and is under the control of a government institution
known as the central bank. In the United States, the central bank is the
Federal Reserve System, or the Fed.
 Aggregation
Macroeconomics and microeconomics have many basic economic ideas and
methods in common; the difference between them is the level at which the
economy is studied. Microeconomists focus on individual consumers, workers,
and firms, each of which is too small to have an impact on the national
economy. Macroeconomists ignore the fine distinctions among the many
different kinds of goods, firms, and markets that exist in the economy and instead
focus on national totals. For example, in their analysis's macroeconomists do not
care whether consumers are buying Microsoft Xboxes or Sony PlayStations, beef
or chicken, Pepsi or Coke. Instead, they add consumer expenditures on all goods
and services to get an overall total called aggregate consumption.
The process of summing individual economic variables to obtain
economywide totals is called aggregation. The use of aggregation and the
emphasis on aggregate quantities such as aggregate consumption, aggregate
investment, and aggregate output are the primary factors that distinguish
macroeconomics from microeconomics.
What Macroeconomists Do
• How do macroeconomists use their skills, and
what do they do with all the data they gather
and the theories they develop? Besides teaching
economics, macroeconomists engage in a wide
variety of activities, including forecasting,
macroeconomic analysis, basic research, and
data development for government, nonprofit
organizations, and private businesses.
Macroeconomic Forecasting
• Many people believe that economists spend most of their time trying to forecast the
performance of the economy. In fact, except for a relatively small number of forecasting
specialists, forecasting is a minor part of what macroeconomists do. One reason
macroeconomists don't emphasize forecasting is that on the whole they are not terribly
good at it! Forecasting is difficult not only because our understanding of how the
economy works is imperfect, but also because it is impossible to take into account all the
factors many of them not strictly economic that might affect future economic trends. Here
are some questions that a forecaster, in trying to project the course of the economy, might
have to try to answer: How will events abroad affect congressional authorizations for
military spending over the next few years? What oil price will the Organization of
Petroleum Exporting Countries (OPEC) decide on at its next meeting? Will there be a
severe drought in agricultural regions, with adverse effects on food quantities and prices?
Will productivity rise as rapidly in the future as it did in the late 1990s and early 2000s as
businesses increasingly adopted computer technology? Because answers to such questions
are highly uncertain, macroeconomic forecasters rarely offer a single prediction. Instead,
they usually combine a "most likely" forecast with "optimistic" and "pessimistic"
alternative scenarios.
Macroeconomic Ana lysis
• Macroeconomic analysts monitor the economy and
think about the implications of current economic
events.
Many analysts are employed in the private
sector, such as in banks or large corporations.
Private-sector analysts try to determine how general
economic trends will affect their employers'
financial investments, their opportunities for
expansion, the demand for their products, and so on.
Some private firms specialize in macroeconomic
analysis and assist clients on a fee-for-service
basis.
The public sector, which includes national and
regional governments and international agencies such
as the World Bank and the International Monetary
Macroeconomic Research
• Macroeconomic research takes an amazing variety
of forms, from abstract mathematical analysis
to psychological experimentation to simulation
projects in which computers are used to
generate random numbers that represent the
randomness of day-to-day economic activity.
Nevertheless, the goal of all macroeconomic
research is to make general statements about
how the economy works. The general insights
about the economy gained from successful
research form the basis for the analyses of
specific economic problems, policies, or
situations.
Economic Theory
• An economic theory is a set of ideas about the economy that has been organized in a logical
framework. Most economic theories are developed in terms of an economic model, which is a
simplified description of some aspect of the economy, usually expressed in mathematical form.
Economists evaluate an economic model or theory by applying four criteria.
1. Are its assumptions reasonable and realistic?
2. Is it understandable and manageable enough to be used in studying real problems?
3. Does it have implications that can be tested by empirical analysis? That is, can its implications
be evaluated by comparing them with data obtained in the real world?
4. When the implications and the data are compared, are the implications of the theory consistent
with the data?
For a theory or model of any type, not just economic to be useful, the answer to each of
these questions must be "yes." Unfortunately, though, economists may not always agree in their
evaluation of a particular model, with the result that controversies sometimes persist about the best
way to model a given economic situation.
Data Development
• The collection of economic data is a vital part
of macroeconomics, and many economists are
involved in the data development process. In
the United States as well as all other major
countries, data on thousands of economic
variables are collected and analyzed. We have
already presented some important macroeconomic
data series, such as measures of output and the
price level.Macroeconomists use economic data
to assess the current state of the economy,
make forecasts, analyze policy alternatives,
and test macroeconomic theories.
Why Macroeconomists Disagree
• We can provide an insight into why macroeconomists
disagree by drawing the important distinction
between positive and normative analyses of
economic policy. A positive analysis of an
economic policy examines the economic consequences
of a policy but doesn't address the question of
whether those consequences are desirable. A
normative analysis of policy tries to determine
whether a certain policy should be used. This
normative analysis will involve not only the
economist's objective, scientific understanding of
how the economy works but also personal value
judgments.
This normative analysis will involve not only
the economist's objective, scientific understanding
National Income Accounting:
• The national income accounts are based on the idea that the amount of
economic activity that occurs during a period of time can be measured in
terms of
1. the amount of output produced, excluding output used up in intermediate
stages of production (the product approach);
2. The incomes received by the producers of output (the income approach);
3. The amount of spending by the ultimate purchasers of output (the
expenditure approach).
Each approach gives a different perspective on the economy. However,
the fundamental principle underlying national income accounting is that,
except for problems such as incomplete or misreported data, all three
approaches give identical measurements of the amount of current economic
activity.
Gross Domestic Product
• The product approach defines a nation's gross domestic product (GDP)
as the market value of final goods and services newly produced within
a nation during a fixed period of time.
ignored in the calculation of GDP
✓Homemaking and child-rearing services performed within the
family without pay.
✓benefit gain without payment. For example, the benefits of clean air
and water aren't bought and sold in markets
Underground economy
✓Some nonmarket goods and services are partially incorporated in
official GDP measures. An example is activities in the so-called
underground economy.
The underground economy includes both legal activities
hidden from government record keepers (to avoid payment of taxes
or compliance with regulations, for example) and illegal activities
such as drug dealing, prostitution, and (in some places) gambling
How to public goods treated in GDP CALCULATION

• A particularly important component of economic activity that does not pass

through markets is the value of the services provided by government, such
as defense, public education, and the building and maintenance of roads and
bridges. The fact that most government services are not sold in markets
implies a lack of market values to use when calculating the government's
contribution to GDP. In this case, the solution that has been adopted is to
value government services at their cost of production. Thus, the contribution
of national defense to GDP equals the government's cost of providing
defense: the salaries of service and civilian personnel, the costs of building
and maintaining weapons and bases, and so on. Similarly, the contribution
of public education to GDP is measured by the cost of teachers' salaries,
new schools and equipment, and so on.
Newly Produced Goods and Services.
• As a measure of current economic activity, GDP includes only goods
or services that are newly produced within the current period. GDP
excludes purchases or sales of goods that were produced in previous
periods. Thus, although the market price paid for a newly constructed
house would be included in GDP, the price paid in the sale of a used
house is not counted in GDP. (The value of the used house would have
been included in GDP for the year it was built.) However, the value of
the services of the real estate agent involved in the sale of the used
house is part of GDP, because those services are provided in the
current period.
Capital good
• A capital good is a good that is itself produced (which rules out
natural resources such as land) and is used to produce other
goods; however, unlike an intermediate good, a capital good is not
used up in the same period that it is produced. The preparers of
the national income accounts decided to classify capital goods as
final goods and thus to include their production in GDP.
inventory investment
• Inventories are stocks of unsold finished goods, goods in process, and raw
materials held by firms. Inventory investment is the amount by which
inventories increase during the year.
For example, suppose that a baker began the year with $1000 worth of
flour in her storeroom and that at the end of the year she is holding $1100
worth of flour. The difference between her beginning and ending stocks, or
$100 worth of flour, equals the baker's inventory investment during the year.
Even though the ultimate purpose of the baker's flour is for making bread, her
increase in inventory represents production of flour that is not used up during
the year.
As in the case of capital goods, inventory investment is treated as a final good
and thus part of GDP because increased inventories on hand imply greater
productive capacity in the future
GNP Versus GDP
• Until 1991, most economists working with U.S. data focused on a
measure of economic activity known as gross national product
(GNP) rather than on GDP. However, in 1991, primarily to conform
with national income accounting practices in other major
industrialized countries, the Department of Commerce began to
use GDP as its basic measure of economic activity.
The difference between GNP and GDP lies in the treatment of
output produced by capital and labor working outside its home
(domestic) country. Specifically, gross national product is the
market value of final goods and services newly produced by
domestic factors of production during the current period,
whereas GDP is production taking place within a country.
• When U.S. capital and labor also called factors of production are used
abroad, they produce output and earn income. This output and income
are included in U.S. GNP but not in U.S. GDP because they don't
represent production taking place within the United States. So, for
example, the value of roads built by a U.S. construction company in
Saudi Arabia, as measured by the fees that the construction company
receives from the Saudi government, is counted in U.S. GNP but not in
U.S. GDP. Similarly, when foreign capital or labor is used in the United
States, the output produced and the income earned are part of U.S.
GDP (because the production occurs within the United States) but not
of U.S. GNP (they are counted in the foreign country's GNP instead).
For example, the portion of the value of Japanese cars built in the
United States that is attributable to Japanese capital and management
counts in Japanese GNP and U.S. GDP, but not in U.S. GNP
Net factor payments from abroad (NFP)
• net factor payments from abroad (NFP) to be income paid to
domestic factors of production by the rest of the world minus
income paid to foreign factors of production by the domestic
economy. Using this concept, we express the relationship
between GDP and GNP as
GDP =GNP - NFP
The Expenditure Approach to Measuring GDP
• A different perspective on the components of GDP is obtained by looking at the expenditure side of the
national income accounts. The expenditure approach measures GDP as total spending on final goods
and services produced within a nation during a specified period of time. Four major categories of
spending are added to get GDP: consumption, investment, government purchases of goods and
services, and net exports of goods and services.
In symbols,
Y = GDP = total production (or output) = total income = total expenditure;
C = consumption;
I = investment;
G = government purchases of goods and services;
NX = net exports of goods and services.
With these symbols, we express the expenditure approach to measuring GDP as
Y = C + I + G + NX.
Equation is one of the basic relationships in macroeconomics. Equation is called the income-
expenditure identity because it states that income, Y, equals total expenditure, C + I + G + NX.
The Income Approach to Measuring GDP
• It calculates GDP by adding the incomes received by producers,
including profits, and taxes paid to the government. A key part of the
income approach is a concept known as national income. National
income is the sum of eight types of income.
✓Compensation of employees.
✓Proprietors' income.
✓Rental income of persons.
✓Corporate profits
✓Net interest.
✓Business current transfer payments (net)
✓Current surplus of government enterprises
• Statistical discrepancy arises because data on income are
compiled from different sources than data on production; the
production measure minus the income measure equals the
statistical discrepancy. Thus, a positive statistical discrepancy
means that the income measure adds up to less than the
production measure. National income plus the statistical
discrepancy equals net national product (NNP),
• Depreciation (also known as consumption of fixed capital) is the
value of the capital that wears out during the period over which
economic activity is being measured. In the calculation of the
components of national income (specifically, proprietors' income,
corporate profits, and rental income), depreciation is subtracted
from total, or gross, income. Thus, to compute the total or gross
amount of income, we must add back in depreciation. The sum of
net national product and depreciation is gross national product
(GNP). Gross national product and gross domestic product are
called gross because they measure the nation's total production
or output of goods and services without subtracting depreciation.
Nominal vs real GDP
• All of the key macroeconomic variable's GDP, the components of
expenditure and income, national wealth, and saving are measured in
terms of current market values. Such variables are called nominal
variables. Nominal GDP, also called current-dollar GDP, is the dollar
value of an economy's final output measured at current market prices
• an economic variable that is measured by the prices of a base year is
called a real variable. Real economic variables measure the physical
quantity of economic activity. Specifically, real GDP, also called
constant-dollar GDP, measures the physical volume of an economy's
final production using the prices of a base year.
GDP Growth
 GDP Calculation for ABC and XYZ Computers

Problem 3 Solutions:

(a) Without Imports:

Product Approach (Value Added):

- ABC Value Added = $2,000,000

- XYZ Value Added = $1,200,000

Total GDP (Product Approach) = $3,800,000

Expenditure Approach:

- Sales (3 computers) = $3,000,000

- Inventory (1 computer) = $800,000

GDP = $3,800,000

Income Approach:

- Labor Income = $1,800,000

- Interest = $100,000

- Taxes = $600,000

- Profits = $1,300,000

Total GDP (Income Approach) = $3,800,000

(b) With $500,000 Imported Chips:

Product Approach (Value Added):

 GDP Calculation for ABC and XYZ Computers

- ABC Value Added = $1,500,000

- XYZ Value Added = $1,200,000

Total GDP (Product Approach) = $2,700,000

Expenditure Approach:

- Sales (3 computers) = $3,000,000

- Inventory (1 computer) = $800,000

- Imports = $500,000

GDP = $3,800,000 - $500,000 = $3,300,000

Income Approach:

- Labor Income = $1,800,000

- Interest = $100,000

- Taxes = $600,000

- Profits = $800,000

Total GDP (Income Approach) = $3,300,000

 Effects of Data Revisions on GDP Components

Problem 2 Solutions:

(a) Consumers bought $6 billion more furniture, manufactured in North Carolina.

- Consumption increases by $6 billion.

- Investment: no change.

- Government purchases: no change.

- Net exports: no change.

- GDP increases by $6 billion.

(b) Consumers bought $6 billion more furniture, manufactured in Sweden.

- Consumption increases by $6 billion.

- Imports increase by $6 billion.

- Net exports decrease by $6 billion.

- Investment: no change.

- Government purchases: no change.

- GDP: No change.

(c) Businesses bought $6 billion more furniture, manufactured in North Carolina.

- Investment increases by $6 billion.

- Consumption: no change.

- Government purchases: no change.

- Net exports: no change.

- GDP increases by $6 billion.

 Effects of Data Revisions on GDP Components

(d) Businesses bought $6 billion more furniture, manufactured in Sweden.

- Investment increases by $6 billion.

- Imports increase by $6 billion.

- Net exports decrease by $6 billion.

- Consumption: no change.

- Government purchases: no change.

- GDP: No change.
 Gilligan's Island GDP Problem

Step 1: Total Production

- Professor harvested:

- 1000 coconuts

- 500 fish

- Conversion rate: 1 fish = 2 coconuts. Thus, 1 coconut = 0.5 fish.

In terms of fish:

- 1000 coconuts = 1000 × 0.5 = 500 fish

- 500 fish = 500 fish

Total production in fish units = 500 + 500 = 1000 fish

=> GDP = 1000 fish

Step 2: Investment

- The Professor stored 100 coconuts for future consumption.

- 100 coconuts = 100 × 0.5 = 50 fish worth.

=> Investment = 50 fish

Step 3: Consumption

Since GDP = Consumption + Investment,

Consumption = GDP - Investment

Consumption = 1000 - 50 = 950 fish

 Gilligan's Island GDP Problem

Step 4: Incomes

The Professor paid Gilligan:

- 200 coconuts = 200 × 0.5 = 100 fish

- 100 fish

Gilligan received: 100 + 100 = 200 fish worth of goods.

Thus:

- Gilligan's income = 200 fish

- Professor's income = 1000 - 200 = 800 fish

Final Answers:

- GDP = 1000 fish

- Consumption = 950 fish

- Investment = 50 fish

- Professor's income = 800 fish

- Gilligan's income = 200 fish

 GDP Contributions and Effects on Accounts

a. Gasoline Purchase

- Contribution to GDP: $28.00

- Explanation:

- Product Account: Sale of final good ($28 counted).

- Income Account: Gas station earns margin income ($2.00).

- Expenditure Account: Household consumption ($28).

b. Purchase of a Civil War-era Mansion

- Contribution to GDP: $60,000 (broker's fee)

- Explanation:

- Product Account: Only service (broker's fee) counted, not sale of used asset.

- Income Account: Broker's earnings.

- Expenditure Account: Household consumption of real estate service ($60,000).

c. Homemaker Entering Workforce

- Contribution to GDP: $56,000

- Explanation:

- Product Account: New services (childcare) counted.

- Income Account: $40,000 wages and $16,000 childcare provider income.

- Expenditure Account: $16,000 household spending on services.

d. Japanese Company Builds Auto Plant

- Contribution to GDP: $100,000,000

- Explanation:

- Product Account: New capital good produced domestically.

- Income Account: Payments to local labor and suppliers.

- Expenditure Account: Investment (I) in GDP.

e. Winning the State Lottery

 GDP Contributions and Effects on Accounts

- Contribution to GDP: $0

- Explanation:

- Product Account: No production involved.

- Income Account: Transfer payment.

- Expenditure Account: No direct effect.

f. Payment for Appearing in Lottery Commercial

- Contribution to GDP: $5,000

- Explanation:

- Product Account: Provision of service.

- Income Account: $5,000 labor income.

- Expenditure Account: Government expenditure on services.

g. Hertz Buys New Cars and Sells Old Fleet

- Contribution to GDP: $100,000,000

- Explanation:

- Product Account: Only purchase of new cars counted.

- Income Account: General Motors' revenue.

- Expenditure Account: Business investment.

 Economy Problem Solution

Given Information

- Gross private domestic investment (I) = 40

- Government purchases (G) = 30

- Gross National Product (GNP) = 200

- Current Account Balance (CA) = -20

- Taxes (T) = 60

- Government Transfers (TR) = 25

- Government Interest Payments (INT) = 15

- Factor income received from rest of world = 7

- Factor payments made to rest of world = 9

- Government investment = 0

(d) Net Factor Payments from Abroad (NFP)

NFP = Factor income received - Factor payments made

NFP = 7 - 9 = -2

(c) GDP

GNP = GDP + NFP

GDP = GNP - NFP

GDP = 200 - (-2) = 202

(b) Net Exports (NX)

CA = NX + NFP

-20 = NX + (-2)

NX = -18

(a) Consumption (C)

GDP = C + I + G + NX
 Economy Problem Solution

202 = C + 40 + 30 + (-18)

C = 150

(e) Private Saving (Sp)

Private disposable income = GDP - T + TR + INT

= 202 - 60 + 25 + 15 = 182

Sp = Private disposable income - C

Sp = 182 - 150 = 32

(f) Government Saving (Sg)

Sg = T - G - Transfers - Interest payments

Sg = 60 - 30 - 25 - 15 = -10

(g) National Saving (S)

S = Sp + Sg

S = 32 + (-10) = 22

Summary of Results

- a. Consumption = 150

- b. Net Exports = -18

- c. GDP = 202

- d. Net Factor Payments from Abroad = -2

- e. Private Saving = 32

- f. Government Saving = -10

- g. National Saving = 22
 Fruit Economy GDP Calculation

Given Information

**Base Year:**

- Apples: 3,000 bags @ $2 each

- Bananas: 6,000 bunches @ $3 each

- Oranges: 8,000 bags @ $4 each

**Current Year:**

- Apples: 4,000 bags @ $3 each

- Bananas: 14,000 bunches @ $2 each

- Oranges: 32,000 bags @ $5 each

Step 1: Nominal GDP Calculation

Nominal GDP = (4,000 × 3) + (14,000 × 2) + (32,000 × 5)

= 12,000 + 28,000 + 160,000

= 200,000

**Nominal GDP = $200,000**

Step 2: Real GDP Calculation (Base Year Prices)

Real GDP = (4,000 × 2) + (14,000 × 3) + (32,000 × 4)

= 8,000 + 42,000 + 128,000

= 178,000

**Real GDP = $178,000**

Summary

- Nominal GDP = $200,000

- Real GDP = $178,000

 CPI Inflation Rate Calculation (1930-1933)

Given CPI Data

1929: 51.3

1930: 50.0

1931: 45.6

1932: 40.9

1933: 38.8

Formula

Inflation Rate = ((CPI in Current Year - CPI in Previous Year) / CPI in Previous Year) × 100

Calculations

- 1930: ((50.0 - 51.3) / 51.3) × 100 = -2.53%

- 1931: ((45.6 - 50.0) / 50.0) × 100 = -8.80%

- 1932: ((40.9 - 45.6) / 45.6) × 100 = -10.31%

- 1933: ((38.8 - 40.9) / 40.9) × 100 = -5.13%

Summary of Inflation Rates

1930: -2.53%

1931: -8.80%

1932: -10.31%

1933: -5.13%

Observation

This period is unusual because it experienced continuous deflation (negative inflation) during the Great

Depression, which is different from modern economies that usually experience positive inflation.
 Hy Marks Bond Investment Analysis

Given Information

- Purchase Price: $500

- Amount Received: $545

- CPI (Jan 1, 2009): 200

- CPI (Jan 1, 2010): 214

- Hy's Expected CPI (Jan 1, 2010): 210

Step 1: Nominal Interest Rate

Nominal Interest Rate = ((545 - 500) / 500) × 100 = 9%

Step 2: Actual Inflation Rate

Actual Inflation Rate = ((214 - 200) / 200) × 100 = 7%

Step 3: Real Interest Rate

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Real Interest Rate = 9% - 7% = 2%

Step 4: Hy's Expected Inflation Rate

Expected Inflation Rate = ((210 - 200) / 200) × 100 = 5%

Step 5: Hy's Expected Real Interest Rate

Expected Real Interest Rate = Nominal Interest Rate - Expected Inflation Rate

Expected Real Interest Rate = 9% - 5% = 4%

Summary

- Nominal Interest Rate: 9%

- Actual Inflation Rate: 7%

 Hy Marks Bond Investment Analysis

- Real Interest Rate: 2%

- Expected Inflation Rate: 5%

- Expected Real Interest Rate: 4%

 GDP Deflator Inflation Analysis in Econoland

Given Information

- GDP Deflator on Jan 1, 2008 = 200

- GDP Deflator on Jan 1, 2010 = 242

- GDP Deflator on Jan 1, 2011 = 266.2

(a) Annual Rate of Inflation (2008 to 2010)

Formula: (1 + pi)^2 = 242 / 200

Calculation: 242 / 200 = 1.21

Then: (1 + pi) = (1.21) to the power 1/2 = 1.1

Thus: pi = 1.1 - 1 = 0.1 = 10%

Answer: Annual Inflation Rate = 10%

(b) Annual Rate of Inflation (2008 to 2011)

Formula: (1 + pi)^3 = 266.2 / 200

Calculation: 266.2 / 200 = 1.331

Then: (1 + pi) = (1.331) to the power 1/3 approximately 1.1

Thus: pi = 1.1 - 1 = 0.1 = 10%

Answer: Annual Inflation Rate = 10%

(c) General Formula Proof

After 1 year: Price = P0 times (1+pi)

After 2 years: Price = P0 times (1+pi)^2

...

After n years: Price = P0 times (1+pi)^n

Thus: (1+pi)^n = Pn divided by P0

Hence proved.

Summary
 GDP Deflator Inflation Analysis in Econoland

- (a) 10%

- (b) 10%

- (c) (1+pi)^n = Pn / P0
What Is Economic Growth?
• Economic growth is an increase in the production of economic goods
and services in one period compared to a previous period. It can be
measured in nominal or real terms. Aggregate economic growth is
traditionally measured in terms of gross national product
(GNP) or gross domestic product (GDP) but alternative metrics are
sometimes used.
Growth in economics is commonly modeled as a function
of physical capita human capital, labor force, and technology. Increasing
the quantity or quality of the working-age population, the tools they
have to work with, and the recipes they have available to combine labor,
capital, and raw materials will lead to increased economic output.
• To measure economic growth, economists use data
on gross domestic product, which measures the
total income of everyone in the economy. The real
GDP of the United States today is more than five
times its 1950 level, and real GDP per person is
more than three times its 1950 level. In any
given year, we also observe large differences in
the standard of living among countries.the 2007
income per person in the world’s 14 most populous
countries. The United States tops the list with
an income of $45,790 per person. Bangladesh has
an income per person of only $1,242—less than 3
percent of the figure for the United States.
How to Measure Economic Growth
• The most common measure of economic growth is real GDP. This is
the total value of all goods and services produced in an economy with
that value adjusted to remove the effects of inflation. There are three
different methods for looking at real GDP:
Quarterly growth at an annual rate.
This looks at the change in the GDP from quarter to quarter which is
then compounded into an annual rate. The annual rate would be
extrapolated to 1.2% if one quarter’s change is 0.3%.
Four-quarter or year-over-year growth rate:
This compares a single quarter’s GDP from two
successive years as a percentage. It's often
used by businesses to offset the effects of
seasonal variations.
Annual average growth rate: This is the average
of changes in each of the four quarters. The
annual average growth rate for the year would
be 7.5% ÷ 4 = 1.875% if there were four-quarter
rates of 2%, 3%, 1.5%, and 1% in one year.
How to Generate Economic
Growth
• Increase in physical capital goods
The first factor is an increase in the amount of physical capital
goods in the economy. Adding capital to the economy tends to increase the
productivity of labor. Newer, better, and more tools mean that workers can
produce more output per period. A fisherman with a net will catch more fish
per hour than a fisherman with a rod.
• Improvements in technology
A second method of producing economic growth is through
technological improvements. The economic value of petroleum was relatively
low before the discovery of the energy-generating power of gasoline fuel.
This changed when the use of gasoline proved to be a more productive method
of transporting goods.
• Growth of the labor force
Another way to generate economic growth is to grow the labor force.
More workers generate more economic goods and services.
• Increase human capital
The last method is to increase human capital. Laborers become more
accomplished at their crafts, raising their productivity through skills
training, trial and error, or simply more practice. Savings, investment,
and specialization are the most consistent and easily controlled methods.
Challenges to Sustaining
Growth
• Diminishing returns: Adding more capital or
labor may yield smaller gains over time.
• Aging populations: Fewer workers can slow
growth (e.g., Japan, Europe).
• Environmental constraints: Climate change may
limit resource-intensive growth.
• Income inequality: Can reduce overall economic
potential if large populations remain
unproductive.
Linear stages of growth model

The linear stages of growth model is an economic

model which is heavily inspired by the Marshall
Plan which was used to revitalize Europe's
economy after World War II. It assumes
that economic growth can only be achieved
by industrialization. Growth can be restricted
by local institutions and social attitudes,
especially if these aspects influence
the savings rate and investments. The
constraints impeding economic growth are thus
considered by this model to be internal to
society
According to the linear stages of growth
model, a correctly designed massive injection
Rostow's Stages
• Rostow's Stages of Economic Growth model,
published in 1960, outlines a linear path for a
country's development from a traditional
society to a high mass consumption economy. The
model posits that all countries progress
through five distinct stages:
1. Traditional Society,
2. Preconditions to Take-off,
3. Take-off,
4. Drive to Maturity,
5. Age of High Mass Consumption.
• Traditional Society:
This stage is characterized by a subsistence economy, primarily agricultural, with low levels
of trade and limited technology.
• Preconditions to Take-off:
This stage sees the beginnings of industrialization, a shift from subsistence farming, and the
emergence of a more national and international outlook.
•Take-off:
A period of rapid industrialization, increased investment, and a decline in agricultural
employment, often driven by a new key industry like steel or textiles.
•Drive to Maturity:
The economy diversifies, with industries expanding and adapting to new technologies.
•Age of High Mass Consumption:
This is the final stage where the economy is driven by consumer goods and services, with
high levels of disposable income and a focus on quality of life.
14 Guide to understanding the KILM

Global and regional estimates factors such as military service requirements.The

series includes both nationally reported and
The ninth edition of the KILM offers users imputed data and only estimates that are national,
direct access to ILO global and regional estimates meaning there are no geographical limitations on
from 1991 to the present.Tables are presented for coverage. Table 1b contains labour force partici-
the following indicators: labour force participa- pation rates as nationally reported by sex and age
tion (table R1), employment-to-population ratio group: total (15+), youth (15−24) and adult (25+),
(R2), status in employment (R3), employment by where available.
sector (R4), unemployment rate (R5), youth
unemployment rate (R6), ratio of youth un- KILM 2. Employment-to-population ratio
employment rate (R7), labour productivity (R8)
and employment by economic class (R9). The employment-to-population ratio is
defined as the proportion of a country’s working-
Like other KILM tables based on country-level age population that is employed (the youth
data, several of these data sets (R1, R2, R7 and R9) employment-to-population ratio is the propor-
can be filtered according to year, sex and age tion of the youth population – typically defined
group; users will have access to both raw numbers as persons aged 15−24 – that is employed). A
and rates.The estimates are derived using one of high ratio means that a large proportion of a
three models which apply multivariate regression country’s population is employed, while a low
techniques to impute missing values at the coun- ratio means that a large share of the population is
try level. The processes used in the ILO global not involved directly in labour market related
and regional estimation models are described in activities, either because they are unemployed or
detail in box 1b. (more likely) because they are out of the labour
force altogether. Table 2a provides a harmonized
series of employment-to-population ratios as
estim­ated and projected by the ILO (like table 1a)
Summary of the 17 ILO Key by sex and age group: total (15+), youth (15−24)
and adult (25+).Table 2b contains national estim­
Indicators of the Labour ates of employment-to-population ratios, also by
Market sex and age group, where available.

The ninth edition of the KILM provides indi- The employment-to-population ratio provides
cators related to labour force, employment, information on the ability of an economy to create
unemployment, underemployment, educational employment; for many countries the indicator
attainment, wages and compensation costs, offers more insight than the unemployment rate.
productivity and poverty. Each of the 17 indica- Although a high overall ratio is typically consid-
tors is briefly described below. ered positive, this indicator alone is not sufficient
for assessing the level of decent work or of decent
KILM 1. Labour force participation rate work deficit: additional indicators are required to
assess such issues as earnings, hours of work,
The labour force participation rate is a informal employment, under­employment and
measure of the proportion of a country’s work- working conditions. Employment-to-population
ing-age population that engages actively in the ratios are of particular interest when broken
labour market, either by working or by looking down by sex, as the ratios for men and women
for work; it provides an indication of the relative can provide information on gender differences in
size of the supply of labour available to engage in labour market activity in a given country.
the production of goods and services.The break-
down of the labour force (formerly known as KILM 3. Status in employment
economically active population) by sex and age
group gives a profile of the distribution of the Indicators of status in employment distin-
labour force within a country. guish between the two main categories of the
employed: (1) employees (also known as wage
Table 1a contains labour force participation and salaried workers) and (2) the self-employed.
rate estimates and projections by sex, for the The self-employed are further disaggregated
following standardized age groups: 15+, 15−24, into (a) employers, (b) own-account workers,
15−64, 25−34, 25−54, 35−54, 55−64 and 65+, and (c) members of producers’ cooperatives, and
for the years 1990 to 2030.The participation rates (d) contributing family workers. Each of these
are harmonized to account for differences in categories is expressed as a proportion of the
national data collection and tabulation method- total number of employed persons. Categorization
ologies as well as for other country-specific by employment status can help in understanding
 Guide to understanding the KILM 15

both the dynamics of the labour market and the There is widespread interest in this indicator.
level of development in any particular country. Economists use occupation in the analysis of
Over the years, and with economic growth, one differences in the distribution of earnings and
would typically expect to see a shift in employ- incomes over time and between groups – men
ment from agriculture to the industrial and and women, for example – as well as in the ana-
services sectors, with a corresponding increase lysis of imbalances of supply and demand in
in wage and salaried workers and concomitant different labour markets. Policy-makers use occu-
decreases in self-employed and contributing pational statistics in support of the formulation
family workers, many of whom will have previ- and implementation of economic and social pol-
ously been employed in the agricultural sector. icies and to monitor progress with respect to
their application, for example in respect of labour
The method of classifying employment by planning and the planning of educational and
status is based on the 1993 International vocational training. Managers need occupational
Classification by Status in Employment (ICSE), statistics for planning and deciding on personnel
which classifies the job held by a person at a policies and monitoring working conditions,
point in time with respect to the type of explicit both at the enterprise level and in the context of
or implicit employment contract that person has their industry and relevant labour markets.
with other persons or organizations. Such status
classifications reflect the degree of economic risk KILM 6. Part-time workers
entailed in these various types of arrangements,
an element of which is the strength of the attach- There has been rapid growth in part-time
ment between the person and the job, and the work in the past few decades in the developed
type of authority over establishments and other economies.This trend is related to the increase in
workers that the person has or will have. the number of women in the labour market, but
also to attempts to introduce labour market flexi­
KILM 4. Employment by sector bility in response to changes in work organiza-
tion within industry, and to the growth of the
services sector.
This indicator disaggregates employment into
three broad sectors – agriculture, industry and
The indicator on part-time workers focuses
services – and expresses each as a percentage of
on individuals whose working hours total less
total employment. The indicator shows employ-
than “full time”, as a proportion of total employ-
ment growth and decline on a broad sectoral
ment. Because there is no agreed international
scale, while also highlighting differences in trends
definition as to the minimum number of hours in
and levels between developed and developing
a week that constitute full-time work, the dividing
economies. Sectoral employment flows are an
line is determined either on a country-by-country
important factor in the analysis of productivity
basis or through the use of special estimations.
trends, because within-sector productivity
Two measures are calculated for this indicator:
growth needs to be distinguished from growth
total part-time employment as a proportion of
resulting from shifts from lower to higher produc-
total employment, sometimes referred to as the
tivity sectors. The addition of further sectoral
“part-time employment rate” or the “incidence of
detail in tables 4b, 4c and 4d is useful for demon-
part-time employment”; and the percentage of
strating trends of employment within individual
the part-time workforce composed of women.
sectors of the economy.
KILM 7. Hours of work
The sectors of economic activity are defined
according to the International Standard Industrial The number of hours worked has an impact
Classification of All Economic Activities (ISIC), on the health and well-being of workers as well
Revision 2 (1968), Revision 3 (1990) and Revision 4 as on levels of productivity and labour costs of
(2008). establishments. Measuring levels of and trends in
hours worked in a society, for different groups of
KILM 5. Employment by occupation workers and for workers individually, is therefore
important when monitoring working and living
Employment by occupation is presented conditions as well as when analysing economic
according to major classification groups in three developments.
tables: table 5a according to the International
Standard Classification of Occupation, 2008 Two measurements related to working time
(ISCO-08); table 5b according to ISCO-88; and are included in KILM 7 in order to give an overall
table 5c according to ISCO-68. All three tables are picture of the time that the employed throughout
disaggregated by sex. the world devote to work activities. The first
16 Guide to understanding the KILM

measure relates to the hours an employed person terms of labour markets for countries that regu-
works per week (table 7a). This table shows larly collect information on the labour force.The
numbers of employed classified according to unemployment rate tells us the proportion of the
their weekly hours of work, using the following labour force that does not have a job, is available
bands: less than 15 hours worked per week, to work and is actively looking for work. It should
15−29 hours, 30−34 hours, 35−39 hours, 40−48 not be misinterpreted as a measurement of
hours, and 49 hours and over, as available. The economic hardship, although a correlation often
data are broken down by sex, age group (total, exists. Table 9a provides a harmonized series of
youth and adult) and employment status (total, unemployment rates as estimated by the ILO
and employees or wage and salaried workers), (like tables 1a and 2a) by sex; table 9b contains
wherever possible. The second measure is the national estimates on total unemployment by sex,
average annual actual hours worked per person where possible; and table 9c shows flows in and
(table 7b). out of unemployment, measured by the probabil-
ity (hazard rate) of losing a job once employed or
KILM 8. Employment in the informal finding a job once unemployed.
economy
The resolution concerning statistics of work,
The informal economy plays a major role in employment and labour underutilization adopted
employment creation, income generation and by the 19th ICLS, which updates and replaces the
production in many countries. In countries with resolution concerning statistics of the econom­
high rates of population growth or urbanization, ically active population, employment, unemploy-
the informal economy tends to absorb most of ment and underemployment adopted by the 13th
the growth in the labour force.Work in the infor- ICLS, defines the unemployed as all persons of
mal economy is generally recognized as entailing working age who, during the reference period,
absence of legal identity, poor working condi- were without work, currently available for work
tions, lack of membership in social protection and seeking work. However, it should be recog-
systems, higher incidence of work-related acci- nized that national definitions and coverage of
dents and ailments, and limited freedom of asso- unemployment can vary with regard to factors
ciation. Knowing how many people are in the such as age limits, criteria for seeking work, and
informal economy is a starting point for consider- treatment of, for example, persons temporarily
ing the extent and content of policy responses laid off, discouraged about job prospects or seek-
required. ing work for the first time.

KILM 8 includes national estimates of infor- KILM 10. Youth unemployment

mal employment.Table 8 combines two measures
of the informal economy: employment in the Youth unemployment is an important policy
informal sector, the enterprise-based measure issue for many countries at all stages of develop-
defined by the 15th ICLS; and informal employ- ment. For the purpose of this indicator, the term
ment, the broader job-based measure recom- “youth” covers persons aged 15−24, while “adults”
mended in the 17th ICLS.The latter includes both are defined as persons aged 25 and over, although
persons employed in informal sector enterprises national variations in age definitions do occur.
and persons in informal employment outside the The indicator presents youth unemployment in
informal sector (employees holding informal the following four ways: (a) the youth unemploy-
jobs), as well as contributing family workers in ment rate; (b) the ratio of the youth unemploy-
formal or informal sector enterprises and own- ment rate to the adult unemployment rate; (c) the
account workers engaged in the production of youth share in total unemployment; and (d) youth
goods for own end-use by their household. unemployment as a proportion of the youth
Informal employment and its subcategories are population.
presented as a share of total non-agricultural
employment. The KILM 10 measures should be analysed
together; any of the four, analysed in isolation,
KILM 9. Unemployment could present a distorted image. For example, a
country might have a high ratio of youth-to-adult
The unemployment rate is probably the best- unemployment but a low youth share in total
known labour market measure and certainly one unemployment. The presentation of youth un-
of the most widely quoted by the media in many employment as a proportion of the youth popula-
countries.Together with the labour force partici- tion recognizes the fact that a large proportion of
pation rate (KILM 1) and employment-to-popula- young people enter unemployment from outside
tion ratio (KILM 2), it provides the broadest avail- the labour force. Taken together, the four indica-
able indicator of economic activity and status in tors provide a fairly comprehensive indication of
 Guide to understanding the KILM 17

the problems that young people face in finding ICLS, amended in 1998 by the 16th ICLS and
jobs. Table 10a provides a harmonized series of further clarified by the 19th ICLS in 2013. It
youth unemployment rates as estimated by the includes all persons in employment who “wanted
ILO (like tables 1a, 2a and 9a) by sex; table 10b to work additional hours, whose working time in
contains national estimates on total youth un- all jobs was less than a specified hours threshold,
employment by sex, where possible. Table 10c and who were available to work additional hours
complements the labour market situation of given an opportunity for more work”.
youth by showing the number of young people
who are not in employment, education or train- The indicator is important for improving the
ing (NEET) as a percentage of the youth popula- description of employment-related problems, as
tion. The NEET rate is presented for youth aged well as for assessing the extent to which available
15−24 unless otherwise indicated in the notes. human resources are being used in the produc-
tion process of the country concerned. It also
KILM 11. Long-term unemployment provides useful insights for the design and evalu-
ation of employment, income and social
Unemployment tends to have more severe programmes. The indicator is calculated as time-
effects the longer it lasts. Short periods of jobless- related underemployment as a percentage of
ness can normally be dealt with through un- total employment.
employment compensation, savings and, perhaps,
assistance from family members. Unemployment KILM 13. Persons outside the labour
lasting a year or longer, however, can cause force
substantial financial hardship, especially when
unemployment benefits either do not exist or The inactivity rate is defined as the percent-
have been exhausted. Long-term unemployment age of the population that is neither working nor
is not generally viewed as an important indicator seeking work (that is, not in the labour force).
for developing economies, where the duration of Inactivity rates for the age groups 15+, 15−24,
unemployment often tends to be short, given the 15−64, 25−34, 25−54, 35−54, 55−64 and 65+ are
lack of unemployment compensation and the shown in table 13. The 25−54 age group can be
fact that most people therefore cannot afford to of particular interest since it is considered to be
be without work for long periods. Accordingly, the “prime” age band, representing individuals
most of the information available for this indica- who are generally expected to be in the labour
tor comes from the more developed economies. force, having normally completed their education
The data are presented by sex and age group and not yet reached retirement age; it is therefore
(total, youth and adult), wherever possible. worth investigating why these potential labour
force participants are inactive.The inactivity rate
Table 11a includes two separate measures of of women, in particular, tells us a lot about the
long-term unemployment: (a) those unemployed social customs of a country, attitudes towards
for one year or more as a percentage of the labour women in the labour force, and family structures
force; and (b) those unemployed for one year or in general.
more as a percentage of the total unemployed
(the incidence of long-term unemployment). When the inactivity rate is added to the labour
Table 11b includes the number of unemployed force participation rate (KILM table 1a) for the
(as well as their share of total unemployed) at corresponding group, the total will equal 100 per
different durations: (a) less than one month; cent. Data in table 13 have been harmonized to
(b) one month to less than three months; (c) three account for differences in national data collection
months to less than six months; (d) six months to and tabulation methodologies as well as for other
less than 12 months; (e) 12 months or more. Data country-specific factors such as military service
are disaggregated by sex and age group (total, requirements.The series includes both nationally
youth and adult). reported and imputed data and only estimates
that are national, meaning there are no geograph-
KILM 12. Time-related ical limitations in coverage.
underemployment
KILM 14. Educational attainment
Underemployment reflects underutilization of and illiteracy
the productive capacity of the labour force.Time-
related underemployment is the first component An increasingly important aspect of labour
of underemployment to have been agreed upon market performance and national competitive-
and properly defined within the international ness is the skill level of the workforce. Information
community of labour statisticians. The interna- on levels of educational attainment is currently
tional definition was adopted in 1982 by the 13th the best available indicator of labour force skill
18 Guide to understanding the KILM

levels. These are important determinants of a Table 15a presents trends in average monthly
country’s capacity to compete successfully in wages, in both nominal and real terms (i.e. adjusted
world markets and to make efficient use of rapid for changes in consumer prices). Both the nominal
technological advances; they are also among the and real average wage series are presented in
factors determining the employability of workers. national currency.This enables data users to calcu-
late nominal and real wage growth rates without
Table 14a presents information on the educa- the distortion caused by exchange rate fluctu­
tional attainment of the labour force, with data ations, and to link wage data to other data
broken down by sex and age group (total, youth expressed in national currency. Table 15b is
and adult) wherever possible.Table 14b presents concerned with the levels, trends and structures
the distribution of the unemployed population of employers’ hourly compensation costs for the
by level of educational attainment, with data employment of workers in the manufacturing
broken down by sex and age group (total, youth sector. Total compensation is also broken down
and adult) wherever possible.Table 14c presents into “hourly direct pay” with subcategories “pay for
the unemployment rates of persons who attained time worked”, “directly paid benefits” and “social
education at, respectively, primary level or less, insurance expenditure and labour-related taxes”;
secondary level or tertiary level. The categories here all variables are expressed in US dollars.
used in the three indicators are conceptually
based on the levels of the International Standard KILM 16. Labour productivity
Classification of Education (ISCED). ISCED was
designed by UNESCO to serve as an instrument Productivity, in combination with hourly
for assembling, compiling and presenting com- compensation costs, can be used to assess the
parable indicators and statistics of education, international competitiveness of a labour market.
both within countries and internationally. Finally, Economic growth in a country or sector can be
table 14d is a measure of illiteracy in the popu­- ascribed either to increased employment or to
l­ation (total, youth and adult). more effective work by those who are employed.
The latter can be described through data on
KILM 15. Wages and compensation labour productivity. Labour productivity, there-
costs fore, is a key measure of economic performance.
An understanding of the driving forces behind it,
Wages represent a measure of the level and in particular the accumulation of machinery and
trend of workers’ purchasing power and an equipment, improvements in organization and in
approximation of their standard of living. physical and institutional infrastructures,
Compensation costs provide an estimate of improved health and skills of workers (“human
employers’ expenditure on the employment of capital”) and the generation of new technology,
their workforce. The indicators are, in this sense, is important in formulating policies to support
complementary in that they reflect the two main economic growth.
facets of existing wage measures; one aiming to
track the income of employees, the other show- Labour productivity is defined as output per
ing the costs incurred by employers for employ- unit of labour input.Two measures are presented
ing them. Information on average wages repre- in table 16a: GDP per person engaged and GDP
sents one of the most important elements of per hour worked, both in 1990 US dollars and
labour market information. Because wages are a indexed to 1990 = 100 with information taken
substantial form of income, accruing to a high from The Conference Board. Table 16b presents
proportion of the economically active popula- ILO estimates of labour productivity expressed as
tion, information on wage levels is essential to GDP per person engaged in 2005 international
evaluate the living standards and conditions of dollars at PPP as well as in 2005 constant US
work and life of this group of workers in both dollars at market exchange rates.
developed and developing economies.
KILM 17. Poverty, income distribution
Average hourly compensation cost is a measure and the working poor
intended to represent employers’ expenditure on
the benefits granted to their employees as compen- Poverty can result when individuals are
sation for an hour of labour.These benefits accrue unable to generate sufficient income from their
to employees either directly – in the form of total labour to maintain a minimum standard of living.
gross earnings, or indirectly – in terms of employ- The extent of poverty, therefore, can be viewed
ers’ contributions to compulsory, contractual and as an outcome of the functioning of labour
private social security schemes, pension plans, markets. Because labour is often the most signifi-
casualty or life insurance schemes and benefit cant, if not the only, asset of individuals in poverty,
plans in respect of their employees. the most effective way to improve the level of
 Guide to understanding the KILM 19

Box 1c. Resolution concerning statistics of work, employment

and labour underutilization

In October 2013, the 19th ICLS adopted a “resolution concerning statistics of work, employment and
labour underutilization” in which several concepts in the world of work are redefined and new ones
are introduced (ILO, 2013). The progressive implementation of this resolution will bring about several
changes in how statistics are compiled.

Even though there are no immediate changes to the data in the KILM (statistics such as employment
and unemployment are based on concepts that remain unchanged at their core, despite the expansion
of the overall labour market framework and the introduction of new measures of labour underutilization),
the new resolution will affect the future compilation of labour market statistics, particularly in terms
of indicators related to the concept of work, and forms of work other than employment.

A substantial change to the statistics on employment is the introduction of “five mutually exclusive
forms of work [that are] identified for separate measurement. These forms of work are distinguished
on the basis of the intended destination of the production (for own final use; or for use by others, i.e.
other economic units) and the nature of the transaction (i.e. monetary or non-monetary transactions,
and transfers), as follows:
(a) own-use production work comprising production of goods and services for own final use;
(b) employment work comprising work performed for others in exchange for pay or profit;
(c) unpaid trainee work comprising work performed for others without pay to acquire workplace
experience or skills;
(d) volunteer work comprising non-compulsory work performed for others without pay;
(e) other work activities not defined in this resolution” (para. 7).

Furthermore: “Persons in employment are defined as all those of working age who, during a short
reference period, were engaged in any activity to produce goods or provide services for pay or profit.
They comprise:
(a) employed persons ‘at work’, i.e. who worked in a job for at least one hour;
(b) employed persons ‘not at work’ due to temporary absence from a job, or to working-time arrange-
ments (such as shift work, flexitime and compensatory leave for overtime)” (para. 27).

The resolution extends the definition of unemployment to include examples of “activities to seek
employment” and three specifically defined groups of jobseekers:
(a) future starters defined as persons ‘not in employment’ and ‘currently available’ who did not ‘seek
employment’ … because they had already made arrangements to start a job within a short subse-
quent period, set according to the general length of waiting time for starting a new job in the
national context but generally not greater than three months;
(b) participants in skills training or retraining schemes within employment promotion programmes,
who on that basis, were ‘not in employment’, not ‘currently available’ and did not ‘seek employ-
ment’ because they had a job offer to start within a short subsequent period generally not greater
than three months;
(c) persons ‘not in employment’ who carried out activities to migrate abroad in order to work for pay
or profit but who were still waiting for the opportunity to leave” (para. 48).

The definition for persons in time-related underemployment was also extended to define this group
of people as “all persons in employment who, during a short reference period, wanted to work
additional hours, whose working time in all jobs was less than a specified hours threshold, and who
were available to work additional hours given an opportunity for more work, where:
(a) the ‘working time’ concept is hours actually worked or hours usually worked, dependent on the
measurement objective (long- or short-term situations) and in accordance with the international
statistical standards on the topic;
(b) ‘additional hours’ may be hours in the same job, in an additional job(s) or in a replacement job(s);
(c) the ‘hours threshold’ is based on the boundary between full-time and part-time employment, on
the median or modal values of the hours usually worked of all persons in employment, or on
working time norms as specified in relevant legislation or national practice, and set for specific
worker groups;
20 Guide to understanding the KILM

(Box 1c, continued)

(d) ‘available’ for additional hours should be established in reference to a set short reference period
that reflects the typical length of time required in the national context between leaving one job
and starting another” (para. 43).

For further information and details on the resolution, see http://www.ilo.org/global/statistics-and-

databases/meetings-and-events/international-conference-of-labour-statisticians/19/lang--en/index.htm.

well-being is to increase employment opportuni- have Internet access will be notified by email of
ties and labour productivity through education the availability of updates, once they have filled
and training. in the registration material. Users can download
the KILM programme from www.ilo.org/kilm.
Any estimate of the number of people in
poverty in a country depends on the choice of The KILM database can also be directly
the poverty threshold. What constitutes such a accessed through the KILM web page, making
threshold of minimum basic needs is a subjective access to country-level data for the 17 key labour
judgement, varying with culture and national market indicators, as well as the descriptive text
priorities. Definitional variations create difficul- explaining their use, definitions and basic trends,
ties in making international comparisons. easier than ever. Users can run quick and easy
Therefore, in addition to national poverty searches of KILM indicators, and display and
measurements and the Gini index shown in table export data in spreadsheet format, directly from
17a, this indicator presents data on employment the Internet. As with the software, direct access
by economic class, showing individuals who are to the KILM indicators is available through www.
employed and who fall within the per capita ilo.org/kilm.
consumption thresholds of a given economic
class group. By combining labour market charac-
teristics with household consumption group
data, estimates of employment by economic
class give a clearer picture of the relationship References
between economic status and employment.
Because of the important linkages between International Labour Office (ILO). 1999. Decent
employment and material well-being, evaluating Work, Report of the Director-General,
these two components side by side also provides International Labour Conference, 87th
a more detailed perspective on the dynamics of Session, Geneva, 1999 (Geneva).
productive employment generation, poverty
reduction and growth in the middle class —. 2003. Working out of poverty, Report of the
throughout the world. Director-General, International Labour Con-
ference, 91st Session, Geneva, 2003 (Geneva).
—. 2007. KILM, 4th edn (Geneva).
—. 2009. KILM, 6th edn (Geneva).
—. 2010. Women in labour markets: Measuring
KILM electronic versions progress and identifying challenges (Geneva).
Available at: http://www.ilo.org/empelm/
The ILO hopes to reach a wider audience by pubs/WCMS_123835/lang--en/index.htm.
presenting KILM data in electronic form. As in
previous editions, the electronic version of this —. 2011. KILM, 7th edn (Geneva).
ninth edition of the KILM contains all the data —. 2013. Resolution concerning statistics of
sets for the indicators, together with an Excel work, employment and labour underutiliza-
add-in and interactive software through which tion, adopted by the 19th International
users can select and query the indicators by Conference of Labour Statisticians, Geneva,
country, year, type of source and other user- Oct. Available at: http://www.ilo.org/global/
defined functions according to specific needs. statistics-and-databases/standards-and-guide-
Data updates will be automatically downloaded lines/resolutions-adopted-by-international-
each time a user opens the programme (if conferences-of-labour-statisticians/
connected to the Internet). Users who do not WCMS_230304/lang--en/index.htm.
•What are different types
of unemployment rate?
Based on Duration:

•Short-term unemployment rate: This measures the percentage of the

labor force that has been unemployed for a relatively short period,
typically less than 27 weeks. It often reflects frictional unemployment as
people transition between jobs.
•Long-term unemployment rate: This measures the percentage of the
labor force that has been unemployed for 27 weeks or longer. A high
long-term unemployment rate can indicate more serious structural issues
within the economy, as individuals may face skill depreciation or
discouragement.
Based on Duration:

• Structural Unemployment Rate: This arises from a mismatch between the skills
and qualifications of the unemployed and the skills required by available jobs. It
can be caused by technological advancements, changes in industry structure, or
geographical mismatches where jobs are available in different locations than
where the unemployed reside and they are unable or unwilling to relocate.
Structural unemployment tends to be longer-lasting than frictional unemployment
as it often requires workers to acquire new skills or relocate.
• Frictional Unemployment Rate: This type of unemployment occurs when people
are temporarily between jobs. This can happen when individuals are voluntarily
quitting to seek better opportunities, new graduates are entering the labor force
and searching for their first job, or people are re-entering the workforce after a
period of absence. Frictional unemployment is generally considered a natural part
of a healthy and dynamic economy. The frictional unemployment rate is calculated
by dividing the number of people actively looking for jobs by the total labor force.
• Frictional unemployment exists because both jobs and workers
are heterogeneous, and a mismatch can result between the
characteristics of supply and demand. Such a mismatch can be related
to skills, payment, worktime, location, attitude, taste, and a multitude
of other factors. New entrants (such as graduating students) and re-
entrants (such as former homemakers) can also suffer a spell of
frictional unemployment. Workers as well as employers accept a
certain level of imperfection, risk or compromise, but usually not right
away; they will invest some time and effort to find a match. This is in
fact beneficial to the economy since it results in a better allocation of
resources.
Why a certain amount of frictional unemployment is probably necessary
in a well-functioning economy:

A healthy level of frictional unemployment is actually a sign of a dynamic

and well-functioning labor market for several reasons
 Efficient Allocation of Labor: Frictional unemployment allows for a better
match between workers and jobs. When individuals take time to search for
positions that align with their skills, qualifications, and preferences, it
ultimately leads to greater job satisfaction and productivity. This means that
the economy's resources, in the form of human capital, are being used more
efficiently.
 Economic Growth and Innovation: People moving between jobs can
facilitate the spread of new ideas, skills, and best practices across different
organizations and industries. This can contribute to innovation and overall
economic growth. When individuals seek better opportunities, they may
move to companies or sectors that are expanding and driving economic
progress
•Wage Flexibility: Frictional unemployment can contribute to wage flexibility. As people
search for better-paying jobs, it can put upward pressure on wages in certain sectors, reflecting
the demand for specific skills and attracting more people to those areas.
•Individual Improvement: For individuals, frictional unemployment can be a period of growth
and advancement. It allows them to seek out roles that offer better career paths, skill
development, and overall job satisfaction. This ultimately benefits the individual and the
economy in the long run.
•Natural Turnover: In any economy, there will always be some level of job turnover as
companies expand, contract, or restructure, and as individuals' career goals and personal
circumstances change. Frictional unemployment reflects this natural movement within the labor
market.
In essence, a zero rate of unemployment is not a realistic or even desirable goal for a
healthy economy. Some frictional unemployment indicates that people have the freedom and
opportunity to seek out better employment matches, which contributes to a more productive and
dynamic economy overall. However, if the level of frictional unemployment becomes
excessively high or prolonged, it could signal inefficiencies in the job-matching process or other
underlying issues in the labor market
•Cyclical Unemployment Rate: This type of unemployment is directly related to the
fluctuations in the business cycle. During economic downturns or recessions, there is
reduced demand for goods and services, leading businesses to lay off workers, thus
increasing cyclical unemployment. Conversely, during economic expansions, demand
increases, and businesses hire more workers, reducing cyclical unemployment. The
cyclical unemployment rate is the difference between the current unemployment rate
and the natural rate of unemployment (the sum of frictional and structural
unemployment rates).
•Seasonal Unemployment Rate: This occurs due to seasonal variations in employment.
Certain industries have periods of high and low activity depending on the time of year
(e.g., agriculture, tourism, retail during holidays). The seasonal unemployment rate
reflects the number of people unemployed during the off-season. Many official
unemployment statistics are seasonally adjusted to remove these predictable fluctuations
and provide a clearer picture of underlying trends
• Underemployment Rate: This measures the
percentage of employed individuals who are
working part-time but would prefer full-time
work or are working in jobs below their skill
level. It highlights the issue of labor
underutilization, where people are not working
to their full potential.
• Hidden Unemployment: This refers to individuals
who are not counted in the official
unemployment statistics because they are not
actively seeking work. This can include
discouraged workers who have given up their job
search or individuals who would like to work
but are not actively looking due to factors