The basic measure of an economy's output is gross domestic product (GDP), the market value of the final goods and services produced in a country during a given period. Expressing output in terms of market values allows economists to aggregate the millions of goods and services produced in a modern economy.
Only final goods and services (which include capital goods) are counted in GDP, since they are the only goods and services that directly benefit final users. Intermediate goods and services, which are used up in the production of final goods and services, are not counted in GDP, nor are sales of existing assets, such as a 20-year-old house. Summing the value added by each firm in the production process is a useful method of determining the value of final goods and services.
GDP can also be expressed as the sum of four types of expenditure: consumption, investment, government purchases, and net exports. These four types of expenditure correspond to the spending of households, firms, the government, and the foreign sector, respectively.
To compare levels of GDP over time, economists must eliminate the effects of inflation. They do so by measuring the market value of goods and services in terms of the prices in a base year. GDP measured in this way is called real GDP, while GDP measured in terms of current-year prices is called nominal GDP. Real GDP should always be used in making comparisons of economic activity over time.
Real GDP per person is an imperfect measure of economic well-being. With a few exceptions, notably government purchases of goods and services (which are included in GDP at their cost of production), GDP includes only those goods and services sold in markets. It excludes important factors that affect people's well-being, such as the amount of leisure time available to them, the value of unpaid or volunteer services, the quality of the environment, quality of life indicators such as the crime rate, and the degree of economic inequality.
Real GDP is still a useful indicator of economic well-being, however. Countries with a high real GDP per person not only enjoy high average standards of living; they also tend to have higher life expectancies, low rates of infant and child mortality, and high rates of school enrollment and literacy.
The unemployment rate, perhaps the best-known indicator of the state of the labor market, is based on surveys conducted by the Bureau of Labor Statistics. The surveys classify all respondents over age 16 as employed, unemployed, or not in the labor force. The labor force is the sum of employed and unemployed workers-that is, people who have a job or are looking for one. The unemployment rate is calculated as the number of unemployed workers divided by the labor force. The participation rate is the percentage of the working-age population that is in the labor force.
The costs of unemployment include the economic cost of lost output, the psychological costs borne by unemployed workers and their families, and the social costs associated with problems like increased crime and violence. The greatest costs are imposed by long unemployment spells (periods of unemployment). Critics of the official unemployment rate argue that it understates "true" unemployment by excluding discouraged workers and involuntary part-time workers.
