Chapter Two: National Income and Product Accounts (NIPA) PDF

**CHAPTER TWO** 2**. National Income and Product account (NIPA)** To measure the performance of a given economy macroeconomics relies on data, much of it collected by the government. To measure the economic performance, we need data on total output, total income, total consumption, investment, exp...

**CHAPTER TWO** 2**. National Income and Product account (NIPA)** To measure the performance of a given economy macroeconomics relies on data, much of it collected by the government. To measure the economic performance, we need data on total output, total income, total consumption, investment, export, import, and the like. Much of these data are obtained from the national income and product accounts. \- It provide as information about how much output we produce and how much income resulting from producing during the year \- NIPA not only measure economic activity but also how economic agents i.e. HH, firms, and government affect the flow of income and expenditure in output and factor market. **Income, Expenditure and circular flow Model** - Imagine an economy that produces single good, bread, from a single input, labor. Figure 2-1 illustrates all the economic transactions that occur between households and firms in this economy. - The inner loop represents the flows of **bread and labor.** The households sell their labor to the firms. The firms use the labor of their workers to produce bread, which the firms in turn sell to the households. Hence, labor flows from households to firms, and bread flows from firms to households. - The outer loop represents the corresponding flow of **dollars**. The households buy bread from the firms. The firms use some of the revenue from these sales to pay the wages of their workers, and the remainder is the profit belonging to the owners of the firms (who themselves are part of the household sector). - Hence, expenditure on bread flows from households to firms, and income in the form of wages and profit flows from firms to households. GDP measures the flow of dollars in this economy. - We can compute it in two ways. GDP is the total income from the production of bread, which equals the sum of wages and profit---the top half of the circular flow of dollars. GDP is also the total expenditure on purchases of bread---the bottom half of the circular flow of dollars. To compute GDP, we can look at either the flow of dollars from firms to households or the flow of dollars from households to firms. - These two ways of computing GDP must be equal because, by the rules of accounting, the expenditure of buyers on products is income to the sellers of those products. Every transaction that affects expenditure must affect income, and every transaction that affects income must affect expenditure. For example, suppose that a firm produces and sells one more loaf of bread to a household. Clearly this transaction raises total expenditure on bread, but it also has an equal effect on total income. If the firm produces the extra loaf without hiring any more labor (such as by making the production process more efficient), then profit increases. If the firm produces the extra loaf by hiring more labor, then wages increase. In both cases, expenditure and income increase equally. Figure 2.1 **2.1 The Concept of GDP and GNP** **Gross domestic product (GDP):** It is the market value of all final goods and services produced within a given period of time by factors of production located within a country. Therefore, it is an estimated value of the total worth of a country's production and services, within its boundary, by its nationals and foreigners, calculated over the course on one year. **Gross national product (GNP):** An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land, calculated over the course on one year **2.2 Approaches of Measuring National Income (GDP/GNP)** **Gross domestic product (GDP):-**is the measure of how well the economy is performing. The primary sources include both administrative data, which are by products of government functions such as tax collection, education programs, defense, and regulation, and statistical data, which come from government surveys. - The purpose of GDP is to summarize all these data with a single number representing the dollar value of economic activity in a given period of time. - **GDP can be computed in two ways** - The Expenditure approach - The income approach. These two methods lead to the same value for GDP ***(the reason every payment (expenditure) by a buyer is at the same time a receipt (income) for the seller***). The reason is that these two quantities are really the same: for the economy as a whole, **income** must equal **expenditure.** Because every transaction has a buyer and a seller, every dollar of expenditure by a buyer must become a dollar of income to a seller. When Alex paints John's house for \$1,000, that \$1,000 is income to Alex and expenditure by John. **The Expenditure approach** - is to add up the total amount spent on all final goods during a given period - There are four economic agents (groups) in the economy: households, firms, the government, and the rest of the world. - There are also four main categories of expenditure - Personal consumption expenditures(C) : households spending on consumer goods - Gross private domestic investment(I): Spending by firms and households on new capital, i.e. plant, equipment, inventory, and new residential structures - Government consumption and gross investment (G) - Net exports(EX-IM): net spending by the rest of the world, or exports(EX) minus imports(IM) The expenditure approach computes GDP by adding together these four components of spending. In equation form: GDP= C+I+G+ (EX-IM) The four components of the expenditure approach are shown in Table 2.1 below, **Example-1. The Expenditure approach** ----------------------------------------- --------------------- ------------------- Billions of Dollars Percentage of GDP **Personal consumption expenditure(C)** **7,303.7** **69.9** Durable goods 871.9 8.3 Nondurable goods 2,115.0 20.2 Services 4,316.8 41.3 **Gross private investment(I)** **1,593.2** **14.8** Nonresidential 1,117.4 10.7 Residential 471.9 4.5 Change in business inventories 3.9 0 **Government consumption(G)** **1,972.9** **18.9** Federal 693.7 6.6 State and local 1,279.2 12.2 **Net export(EX-IM)** **-423.6** **-4.1** Exports(EX) 1,014.9 9.8 Import(IM) 1,438.5 13.8 **Total gross domestic product(GDP)** **10,446.2** **100.0** Source: U.S Department of commerce, Bureau of Economic Analysis - **Personal consumption Expenditure(C**) The largest part of GDP consists of personal consumption expenditure.Table 2.1 shows that in 2002 the amount of personal consumption expenditures accounted for 66.9 percent of GDP. These are expenditures by consumers on goods and services - There are three main categories of consumer expenditure: durable, nondurable goods and services. - ***Durable goods*** such as automobiles, furniture, and household appliances, last relatively long time. - **Nondurable goods**, such as food, clothing, gasoline, and cigarettes, etc are used fairly quickly. - **Payments for services**:- those things that we buy that do not involve the production of physical items- include expenditures for doctors, lawyers, and educational institutions, As table 2.1 shows in 2002 durable goods expenditures accounted for 8.3 percent of GDP, nondurables for 20.2 percent, and services for 41.3 percent. - **Gross private Domestic investment (I)**: Investment, as we use the in economics, refers to the purchase of new capital- housing, plants, equipments, and inventory. Total investment in capital by the private sector is called gross private domestic investment (I). Expenditures by firms for machines, tools, plants, and so forth make up **nonresidential investment**. Because these are goods that firms buy for their own final use, they are part of "final sales" and counted in GDP. Expenditures for new houses and apartment buildings constitute **residential investment**.The third component of gross private investment, the change in **business inventories**, is the amount by which firms' inventories change during a period. Remember that GDP is not the market value of total final sales during a period- it is the market value of total production. - **Government Consumption Expenditure (G)**: it includes expenditures by federal, state, and local governments for final goods (bombs, pencils, school buildings) and services (military salaries, school teacher's salaries etc). Some of these expenditures are counted as government consumption and some are counted as government investment. Government transfer payments (social security benefits) are not included in G because these transfers are not purchase of anything currently produced. The payments are not made in exchange for any goods or services. Interest payment on the government debt are also counted as transfers, they are also excluded from GDP on the ground that they are not payments for current goods or services. - Net Exports (EX-IM): The value of net exports (EX-IM) is the difference between exports (sales to foreigners) and imports (purchase of goods and services from abroad).This figure can be positive or negative. **The income Approach** - This approach add up the income i.e. wages, rents, interest, and profits- received by all factors of production in producing final goods. This is the **income approach** to calculating GDP - Computes GDP in terms of who receives it as income, not who purchases it. The income approach to GDP breaks down GDP into five components: national income, depreciation, indirect taxes minus subsidies, net factor payments to the rest of the world and "other" Functional form:- **GDP = national income + depreciation + (indirect taxes -- subsides) + net factor payments to the rest of the world + others** *NB*: As we examine each, keep in mind that total expenditures always equal to total income. - **National income:** - is the total income earned by factors of production owned by a country citizen. As table 2.2 below shows that national income is the sum of five items (1). compensation of employees (2). Proprietor's income, (3) corporate profits (4) net interest and (5) rental income. - **Compensation of employees**: - is the largest of the five items includes **wages** and **salaries** paid to households by firms and by government. - **Proprietor's income**:- is the income of unincorporated business and - **Corporate profits** :- are the income of corporate businesses - **Net interest: -** is the interest paid by business. (Interest paid by households and by the governments is not counted in GDP because it is not assumed to the flow from the production of goods and services). - **Rental income:-** is the income received by property owners in the form of rent. - **Depreciation:**- when capital assets wear out or become obsolete, they decrease in value. The measurement of that decline in value is called *depreciation*. This depreciation is a part of GDP in the income approach. It may seem odd that we add depreciation to national income when we calculate GDP by the income approach. To see why depreciation is added let us assume the economy made up of just one firm and total output (GDP) for the year is \$1 million. Assume that the firm pays wags, interest, and rent, it has left \$100,000. Assume also that its capital stock depreciated by \$40,000 during the year. National income includes corporate profits and in calculating corporate profits the depreciation is subtracted from the \$100, 000, leaving the profit of only \$60,000. - When we calculate GDP using the income approach, we must add depreciation because it has been subtracted from the amount that corporations actually receive (the full \$100,000). This is necessary to balance the income and expenditure side.In other words, the national income as defined in table 2.2 includes corporate profits after depreciation has been deducted and so depreciation must be added back. - **Indirect Taxes minus subsides**: Taxes like sales taxes, custom duties, and license fees are included in indirect taxes. Because these taxes are counted on the expenditure side, they must also be counted on the income side. Subsides are payments made by gov't for which it receives no goods or services in return. These subsides are subtracted from national income to get GDP. - **Net Factor payments to the rest of the world**: - equal the payment of the factor income (income to the factor of production) to the rest of the world minus the receipt of factor income from the rest of the world. - **Other**:-includes business transfer payments and the statistical discrepancy. The statistical discrepancy adjusts for errors in the data collection. **Example-2 The income approach** -------------------------------------------------- --------------------- ----------- Billions of dollars \% of GDP **National income** **8340.1** **79.8** Compensation of employees 5969.5 57.1 Proprietors' income 756.5 7.2 Corporate profits 787.4 7.5 Net interest 684.2 6.5 Rental income 142.4 1.4 **Depreciation** **1393.5** **13.3** **Indirect taxes minus subsides** 767.9 7.4 **Net factor payments to the rest of the world** 9.6 0.1 **Other** -64.9 -0.6 **Total gross domestic product(GDP)** **10446.2** **100** Source: U.S Department of commerce, Bureau of Economic Analysis **2.3 Other Social Accounts (GNP, NNP,NI, PI and DI)** - The national income accounts include other measures of income that differ slightly in definition from GDP. - To see how the alternative measures of income relate to one another, we start with GDP and add or subtract various quantities. - **To obtain *gross national product(GNP),*** we add receipts of factor income (wages, profit, and rent) from the rest of the world and subtract payments of factor income to the rest of the world: GNP = GDP + Factor Payments from Abroad - Factor Payments to Abroad. Whereas GDP measures the total income produced *domestically,* GNP measures the total income earned by *nationals* (residents of a nation). For instance, if a Japanese resident owns an apartment building in Addis Ababa, the rental income he earns is part of Ethiopia GDP because it is earned in the Ethiopia. But because this rental income is a factor payment to abroad, it is not part of Ethiopia. GNP. - **To obtain *net national product (NNP),*** we subtract the depreciation of capital the amount of the economy's stock of plants, equipment, and residential structures that wears out during the year: **NNP = GNP- Depreciation**. In the national income accounts, depreciation is called the *consumption of fixed capital.* Because the depreciation of capital is a cost of producing the output of the economy, subtracting depreciation shows the net result of economic activity. - **National income**: - National income measures how much everyone in the economy has earned. **NI= NNP -- (indirect taxes - subsidies)** - The national income accounts divide national income into five components, depending on who earns the income. - The five categories, these are - ***Compensation of employees**: -* The wages and fringe benefits earned by workers. - ***Proprietors' income: -*** The income of non corporate businesses, such as small farms - ***Rental income: -*** The income that landlords receive, including the imputed rent that homeowners "pay" to themselves, less expenses, such as depreciation. - ***Corporate profits**: -* The income of corporations after payments to their workers and creditors. - ***Net interest**: -* The interest domestic businesses pay minus the interest they receive, plus interest earned from foreigners. - ***Personal income**:- is the total income of households.To calculate personal income from national income* - Two items are subtracted from NI 1\. Corporate profit minus dividend 2\. Social insurance contribution B/C - **Corporate profits are** paid to households in the form of dividends and dividends are part of personal income. - The profits that remain after dividends are paid are not paid to HHs as income(profit-dividend) - **Social insurance** contribution is payments made to gov't, some by firms and some by employee. b/c these payments are not received by HHs.(subtract from NI) - Two items must be added to NI 1\. Personal interest income 2. Transfer payments to persons B/C - **Interest payments** made by gov't and HHs (consumers) are not counted in GDP and are not reflected in NI figure. However, these payments are income received by households, so they must be added to NI when computing PI. - **Transfer payments** are not counted in GDP b/c they do not represent the production of any G&S. - Based on the above justification we have the following functional form for PI - **Personal Income(PI)** = National Income \- (Corporate Profits- Dividends) \- Social Insurance Contributions - **Disposable personal income (DPI):-**is the amount of personal income that is remained after payment of personal tax. Therefore, it is the amount of income that households can spend or save. **DPI = Personal income -- personal tax** **2.4. Nominal versus Real DGP** Economists use the rules just described to compute GDP, which values the economy's total output of goods and services. But is GDP a good measure of economic well-being? Consider once again the economy that produces only apples and oranges. In this economy GDP is the sum of the value of all the apples produced and the value of all the oranges produced. That is, **GDP = (Price of Apples × Quantity of Apples) + (Price of Oranges × Quantity of Oranges).** - ***Nominal GDP*** - The value of goods and services measured at current prices is called **nominal GDP.** - ***Nominal GDP*** can increase either because: - ***prices rise*** or ***quantities rise.*** - That is, this measure does not accurately reflect how well the economy can satisfy the demands of households, firms, and the government. - If all prices doubled without any change in quantities, nominal GDP would double. - Yet it would be misleading to say that the economy's ability to satisfy demands has doubled, because the quantity of every good produced remains the same. - **Real GDP** - A better measure of economic well-being would tally the economy's ***output of goods*** and ***services*** without being influenced by ***changes in prices***. - Which is the value of goods and services measured using constant prices. - To see how real GDP is computed, imagine we wanted to compare output in 2009 with output in subsequent years for our apple-and-orange economy. We could begin by choosing a set of prices, called *base-year prices,* such as the prices that prevailed in 2009. Goods and services are then added up using these base-year prices to value the different goods in each year. 1\. Real GDP for 2009 would be 2\. Similarly, Real GDP in 2010 would be Real GDP = (2009 Price of Apples ×2010 Quantity of Apples) \+ (2009 Price of Oranges× 2010 Quantity of Oranges). 3\. Real GDP in 2011 would be Real GDP = (2009 Price of Apples × 2011 Quantity of Apples) \+ (2009 Price of Oranges × 2011 Quantity of Oranges). - Notice that 2009 prices are used to compute real GDP for all three years. Because the prices are held constant, real GDP varies from year to year only if the quantities produced vary. Because a society's ability to provide economic satisfaction for its members ultimately depends on the quantities of goods and services produced, real GDP provides a better measure of economic well-being than nominal GDP. - **EXAMPLE.** 2006 2007 2008 -------- ------- ------ ------- ------ ------- ------- P Q P Q P Q Good A \$30 900 \$31 1000 \$36 1,050 Good B \$100 192 \$102 200 \$100 205 Q1. Compute nominal GDP in each year. Q2. Compute real GDP in each year using 2006 as the base year **Answer** **A1. Nominal GDP**: - multiply *Ps & Qs from same year* Nominal GDP in year 2006 = \$30 × 900 + \$100 × 192 = \$46,200 Nominal GDP in year 2007 = \$31 × 1000 + \$102× 200 = \$51,400 Nominal GDP in year 2008: = \$36 × 1050 + \$100 × 205 = \$58,300 ***A2. Real GDP**: - multiply each year's Qs by 2006 Ps* Real GDP in year 2006 = \$30 × 900 + \$100 × 192 = \$46,200 Real GDP in year 2007 = \$30 × 1000+ \$100 × 200 = \$50,000 Real GDP in year 2008 = \$30 × 1050 + \$100 × 205 = \$52,000 **The GDP Deflator** From nominal GDP and real GDP we can compute a third statistic: the GDP deflator. The **GDP deflator,** also called the *implicit price deflator for GDP,* is the ratio of nominal GDP to real GDP [\$\\text{GDP}\\ \\text{Deflator} = \\ \\frac{\\text{Nominal}\\ \\text{GDP}}{\\text{Real}\\ \\text{GDP}}\$]{.math.inline} The GDP deflator reflects what's happening to the overall level of prices in the economy. To better understand this, consider again an economy with only one good, bread. If ***P*** is the price of bread and ***Q*** is the quantity sold, then nominal GDP is the total number of dollars spent on bread in that year, ***P* x *Q.*** Real GDP is the number of loaves of bread produced in that year times the price of bread in some base year, ***Pbase xQ.*** The GDP deflator is the price of bread in that year relative to the price of bread in the base year, *P*/*P*base. The definition of the GDP deflator allows us to separate nominal GDP into two parts: one part measures quantities (real GDP) and the other measures prices (the GDP deflator). That is, Nominal GDP = Real GDP × GDP Deflator. *Real GDP measures output valued at constant prices. The GDP deflator measures the price of output relative to its price in the base year.* We can also write this equation as [\$\\text{Real}\\ \\text{GDP} = \\ \\frac{\\text{Nominal}\\ \\text{GDP}}{\\text{GDP}\\ \\text{Deflator}}\$]{.math.inline} In this form, you can see how the deflator earns its name: it is used to deflate (that is, take inflation out of) nominal GDP to yield real GDP. **The Consumer Price Index (CPI): Measuring the cost of living** A dollar today doesn't buy as much as it did twenty years ago. The cost of almost everything has gone up. This increase in the overall level of prices is called ***inflation**,* and it is one of the primary concerns of economists and policymakers **The price of a basket of Goods** The most commonly used measure of the level of prices is the **consumer price index (CPI).**The Bureau of Labor Statistics, which is part of the U.S. Department of Labor, has the job of computing the CPI. It begins by collecting the prices of thousands of goods and services. Just as GDP turns the quantities of many goods and services into a single number measuring the value of production, the CPI turns the prices of many goods and services into a single index measuring the overall level of prices. How should economists aggregate the many prices in the economy into a single index that reliably measures the price level? They could simply compute an average of all prices. Yet this approach would treat all goods and services equally. Because people buy more chicken than caviar, the price of chicken should have a greater weight in the CPI than the price of caviar. The CPI is the price of this basket of goods and services relative to the price of the same basket in some base year. For example, suppose that the typical consumer buys 5 apples and 2 oranges every month. Then the basket of goods consists of 5 apples and 2 oranges, and the CPI is. \ [\$\$\\text{CPI} = \\ \\frac{\\left( 5\\ x\\ \\text{current}\\ \\text{price}\\ \\text{of}\\ \\text{apples} \\right) + (2\\ x\\ \\text{current}\\ \\text{price}\\ \\text{of}\\ \\text{oranges})}{\\left( 5\\ x\\ 2009\\ \\text{price}\\ \\text{of}\\ \\text{apples} \\right) + \\ (2\\ x\\ 2009\\ \\text{price}\\ \\text{of}\\ \\text{oranges}}\$\$]{.math.display}\ In this CPI, 2009 is the base year. The index tells us how much it costs now to buy 5 apples and 2 oranges relative to how much it cost to buy the same basket of fruit in 2009. **The CPI vs. GDP Deflator** Earlier in this chapter we saw another measure of prices---the implicit price deflator for GDP, which is the ratio of nominal GDP to real GDP. The GDP deflator and the CPI give somewhat different information about what's happening to the overall level of prices in the economy. There are **three** key differences between the two measures. The **first** difference is that the GDP deflator measures the prices of all goods and services produced, whereas the CPI measures the prices of only the goods and services bought by consumers. Thus, an increase in the price of goods bought only by firms or the government will show up in the GDP deflator but not in the CPI. In other word GDP deflator include price of capital goods if it is produced domestically, where as CPI does not include capital goods. The **second** difference is that the GDP deflator includes only those goods produced domestically. Imported goods are not part of GDP and do not show up in the GDP deflator. Hence, an increase in the price of a Toyota made in Japan and sold in this country affects the CPI, because the Toyota is bought by consumers, but it does not affect the GDP deflator. The **third** difference results from the way the two measures aggregate the many prices in the economy. The CPI assigns fixed weights to the prices of different goods, whereas the GDP deflator assigns changing weights. In other words, the CPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes. **Example:- GDP deflator and inflation rate** [\$\\mathbf{Rate\\ of\\ inflation = \\ }\\frac{\\mathbf{GDP\\ Deflator\\ current - GDP\\ Deflator\\ preceding\\ }}{\\mathbf{\\text{GDP\\ Deflator\\ preceding}}}\\mathbf{x}\\mathbf{100}\$]{.math.inline} **Nominal GDP** **Real GDP** ---------- ----------------- -------------- **2006** **\$46,200** **\$46,200** **2007** **\$51,400** **\$50,000** **2008** **\$58,300** **\$52,000** **Q1. Compute the GDP deflator in each period** **Q2. Using GDP deflator to compute the rate of inflation from 2006 to 2007 and from 2007 to 2008** **Answer** **Nominal GDP** **Real GDP** **GDP deflator** **Rate of inflation** ---------- ----------------- -------------- ------------------ ----------------------- **2006** **\$46,200** **\$46,200** **100** **n.a** **2007** **\$51,400** **\$50,000** **102.8** **2.8%** **2008** **\$58,300** **\$52,000** **112.1** **9.1%** **Example:- CPI and inflation rate** \ [\$\$\\mathbf{Rate\\ of\\ inflation = \\ }\\frac{\\mathbf{CPI\\ current\\ year - CPI\\ preceding\\ year\\ }}{\\mathbf{\\text{CPI\\ preceding\\ year}}}\\mathbf{x}\\mathbf{100}\$\$]{.math.display}\ **Basket: 20 pizzas, 10 compact discs** **Prices:** ------------- ----------- ---------- **Pizza** **CDs** **2002** **\$10** **\$15** **2003** **\$11** **\$15** **2004** **\$12** **\$16** **2005** **\$13** **\$15** **For each year, compute** 1\. The cost of the basket 2. The CPI using year 2002 as the base year 3. The rate of inflation from the preceding year Answer Cost of basket year, 2002 = \$10 x 20 + \$15 x 10 = \$350 ,, year ,2003 = \$11 x 20 + \$15 x 10 = \$370 Cost of basket year, 2004 = \$12 x 20 + \$16 x 10 = \$400 ,, year ,2005 = \$13 x 20 + \$15x 10 = \$410 Cost of basket CPI Rate of inflation ------ ---------------- ------- ------------------- 2002 \$350 100.0 n.a 2003 \$370 105.7 5.7% 2004 \$400 114.3 8.1% 2005 \$410 117.1 2.5% 2.6. **Weaknesses of GDP as welfare indicator** - **Measures only output that is traded in markets** - e.g. meals made at home and home-care of children are not included in GDP. - Statistics of certain countries estimated that household production of final goods and services equaled 40% of measured national GDPs - **Does not include illegal activities** - e.g. smuggling rare objects, some forms of gambling, prostitution, and drugs. - These are final goods and services consumed by people, even if they are illegal. - **Does not include externalities (pollution)** - e.g. effects of acid rain, water pollution, or smog. Each of these factors either directly lowers our welfare now, or is "negative production" in the sense that part of our environment has been destroyed - **Does not include the value of leisure** - e.g. if a person works, this contributes to GDP, but if the person decides to choose leisure, then it is not counted in GDP even though increased leisure does make us better off! - **GDP misses out or mislabels some forms of investment;** e.g. human capital is an important part of our capital stock, but investments in it (education, training) are not necessarily included, or may not be included in the appropriate category Each of these factors either directly lowers our welfare now, or is "negative production" in the sense that part of our environment has been destroyed - **It is a flow measure, so it is not an accurate indicator of our productive capacity;** - e.g. if an earthquake wiped out certain city (town) in Ethiopia; we would lose a large part of our capital stock, - and therefore be less productive in the future even though Ethiopia's GDP would likely increase as people and firms rebuilt what had previously existed, and we would definitely not be better off than before the earthquake **2.7 The Unemployment rate: Measuring joblessness** One aspect of economic performance is how well an economy uses its resources. Because an economy's workers are its chief resource, keeping workers employed is a paramount concern of economic policymakers. The unemployment rate is the statistic that measures the percentage of those people wanting to work who do not have jobs Each household is placed into one of three categories: ***Employed**:* This category includes those who at worked as paid employees, worked in their own business, or worked as unpaid workers in a family member's business. It also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather. ***Unemployed:*** This category includes those who were not employed, were available for work (actively searching for jobs but unable to obtain). ***Not in the labor force:*** This category includes those who fit neither of the first two categories, such as a full-time student, homemaker, or retiree. **Notice** that a person who wants a job but has given up looking---a *discouraged* *worker*---is counted as not being in the labor force. The **labor force** is defined as the sum of the employed and unemployed, and the **unemployment rate** is defined as the percentage of the labor force that is unemployed. That is, Labor Force = Number of Employed + Number of Unemployed \ [\$\$\\text{Unem}\\text{ployment}\\ \\text{rate} = \\frac{\\text{Number}\\ \\text{of}\\ \\text{Employed}}{\\text{Labor}\\ \\text{Force}}\\ x\\ 100\$\$]{.math.display}\ A related statistic is the **labor-force participation rate,** the percentage of the adult population that is in the labor force: \ [\$\$\\text{Labor}\\ \\text{Force}\\ \\text{participation}\\text{\\ \\ }\\text{rate} = \\frac{\\text{Labor}\\ \\text{Force}\\ }{\\text{Adult}\\ \\text{population}}\\ x\\ 100\$\$]{.math.display}\ Example Labor Force = 145.0 + 10.1 = 155.1 million. Unemployment Rate = (10.1/155.1) ×100 = 6.5%. Labor-Force Participation Rate = (155.1/234.6) ×100 = 66.1%. Hence, about two-thirds of the adult population was in the labor force, and about 6.5 percent of those in the labor force did not have a job.