[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

to have occurred when real GDP falls for at least two consecutive quarters. (For
statistical purposes, a year is divided into quarters, each three months long.)
Low utilization of capacity, like the unemployment of workers, represents a waste
of scarce economic resources. In recessions the economy operates well below its
potential. Unemployment is high and a large fraction of machines remain idle or
underutilized.
Because the difference between the actual level of GDP the economy produces
and its potential level of GDP is an important measure of fluctuations, economists
have a special name for it. The percentage difference between GDP and potential
GDP is called the output gap. When the economy is in a recession, actual GDP is
less than potential and the output gap is negative. If actual GDP is greater than
potential, the output gap is positive. The output gap will play an prominent role in
Part Seven when we examine economic fluctuations in more detail.
Wrap-Up
ALTERNATIVE APPROACHES TO
MEASURING GDP
Measuring the value of output:
consumption + investment + government purchases + net exports
sum of value added in each stage of production
Measuring income:
employee compensation + profits, interest, rents + indirect taxes + depreciation
Output = income
PROBLEMS IN MEASURING OUTPUT
The U.S. economy is constantly changing—new industries emerge, old industries
decline, new technologies lead to new products and different methods of production.
Does the way our economy is being fundamentally altered by new technologies
mean that economists will need to rethink how we measure the economy’s
output? Three problems cause particular difficulties for measuring output.
Measuring Quality Changes With many products, such as computers,
improvements in quality occur every year. GDP statisticians try to make adjustments
for these changes in quality. But in some sectors, such as the financial and
health sectors and the computer industry, the adjustments may be inadequate.
Because these sectors are expanding rapidly, the magnitude of the real growth of
GDP may be understated.
Measuring Service Output Defining and measuring output in the service
sector of the economy are increasingly complex and difficult tasks. Because the
service sector is a growing share of the economy, the conventional GDP measure
may understate the real growth of the economy.
496 ∂ CHAPTER 22 MEASURING OUTPUT AND UNEMPLOYMENT