Measuring the macro economy student

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Measuring the macro economy student

  1. 1. PART 1: Measuring the National Economy, Business Cycle, Unemployment, & Inflation<br />Unit #5: The Macroeconomy<br />
  2. 2. WHAT IS MACROECONOMICS?<br />-study of the workings of the economy as a whole<br />
  3. 3. How do we assess our economy’s health?<br />We examine economic indicators – data/statistics gathered about an economy<br />
  4. 4. Economic Indicator #1: Gross Domestic Product<br />Read Econ Alive pages 252-254 and complete notes in section III (A – D)<br />
  5. 5. GDP – The Measure of National Output<br />Gross Domestic Product<br />Market value of all final goods and services produced within a country during a given time period<br />Market value – price x quantity produced<br />Final goods – any new good that is ready for use by a consumer<br />GDP excludes intermediate goods (one’s that are used to make others)<br />GDP excludes secondhand sales (sale of used goods)<br />Produced within a country – foreign owned firms that produce within the borders COUNT towards GDP<br />Given time period – look at quarterly GDP & yearly<br />Most important is the growth rate of GDP<br />Issues with GDP – leaves out unpaid household & volunteer work, ignores informal/underground economy, says nothing about income distribution, doesn’t show what was exactly produced<br />
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  8. 8. The Output-Expenditure Model<br />The output-expenditure model (created by Keynes) is a model used to help calculate GDP by examining how much certain sectors of the economy spend on different types of goods & services that were produced. <br />GDP = C + I + G + NX<br />C = Consumer Sector<br />I = Business/Investment Sector<br />G = Government Sector <br />NX = Foreign Sector (Exports-Imports)<br />
  9. 9. Adjusting GDP<br />Let’s say this:<br />2006 GDP was $13.2 trillion<br />2007 GDP is $13.8 trillion<br />Is this good for the U.S. economy?<br />
  10. 10. Real vs. Nominal GDP<br />Nominal GDP measures the output of an economy valued at today’s prices <br />Problem – Nominal GDP will go up if prices go up, even if the actual output of the economy does not!<br />Real GDP measures the ouput of an economy valued at prices that are fixed over time<br />Solution – Real GDP allows us to compare the total output of an economy from year to year as if prices have never changed!<br />
  11. 11. GDP per capita<br />GDP per person where the total GDP is divided by the population (measures standard of living from country to country)<br />
  12. 12. Economic Indicator #2: Inflation<br />Read Econ Alive pages 261-266 and complete notes in section V (A-E)<br />
  13. 13. Inflation Rate<br />Definition: the percentage increase in the average price level of goods & services from one month/year to the next<br />Consumer Price Index (CPI)<br />price index for the “market basket” of consumer goods & services<br />Market basket based on thousands of surveys of households about spending habits and then BLS tracks price changes of these items each month<br />Primary measure of inflation in the U.S.<br />
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  15. 15. Severity of Inflation<br />Types<br />Creeping Inflation - 1-3 % annually , very gradual rise in the price level<br />Hyperinflation – over 500% annually, the most severe inflation<br />Deflation – decrease in the general level of prices in the economy (opposite of inflation)<br />Why could this be good or bad?<br />
  16. 16. Causes of Inflation<br />Increase in Money Supply<br />Demand-Pull Inflation: all sectors of the economy try to buy more goods and services than the economy can produce so producers must raise prices<br />Cost-Push Inflation: costs of production increase so producers must raise prices of their products<br />Usually involves energy prices!<br />Wage-Price Spiral occurs when higher prices throughout the economy force workers to demand higher wages, forcing producers to raise their prices even more (cycle)!!!<br />
  17. 17. What are the COSTS of INFLATION?<br />The dollar buys less (loss of purchasing power)<br />Fixed incomes suffer<br />Change in Spending Habits<br />Savings worth reduced = People SPEND NOW!<br />Without savings economy cannot prosper<br />Higher Interest Rates<br />Lenders are hurt (getting repaid in money with less purchasing power)<br />Demand for Loans decreases = Without lending economy cannot prosper<br />
  18. 18. Economic Indicator #3: Unemployment<br />Read Econ Alive pages 258-261 and complete notes in section VI (B-C)<br />
  19. 19. Unemployment<br />The unemployment rate shows the percentage of unemployed people divided by the total number of people in the civilian labor force<br />Let's start by defining a few concepts that are needed to help us understand the unemployment rate. <br />Civilian and Non-institutionalized Adult Population: Everyone 16 years old or older and who is not in the military, not in jail or prison, not living permanently in nursing homes, and not in other "institutions." <br />Labor Force (LF): The total number of adult non-institutionalized civilians who are either working and on a payroll (E) OR are actively seeking work (U). LF = E + U <br />Employed (E): The number of adult civilians who are working and on a payroll of some type. <br />Unemployed (U): The number of adult civilians who are not working but are actively seeking work. <br />
  20. 20. Problems with the Rate<br />Counts part-time workers as employed<br />Causes underestimation<br />Leaves out “discouraged workers”<br />Causes underestimation<br />Doesn’t count underground economy<br />Causes overestimation<br />
  21. 21. Four Types of Unemployment:<br />Frictional: workers in between jobs – seeking first job or looking for new one<br />Structural: advances in technology reduces demand for certain skills<br />Seasonal: results from changes in weather<br />Cyclical: related to the health of the economy – THIS IS BAD UNEMPLOYMENT!<br />
  22. 22. 1. People in a resort area that is busy in the summer and winter try to make enough money during these times of the year to tide them over during the fall and spring.<br />2. Many travel agents have left the field because their former customers now go to the Internet for the lowest fares. <br />3. National Unemployment rose to 6% as the economy slumped for the third straight month. <br />4. A Broadway musical show had its final run, leaving all the actors unemployed. <br />5. A typewriter company let go all its workers and shut down after one hundred years in business because computers made its product obsolete.<br />6. Jenny lost her job at Rita’s Water Ice late fall as the demand for water ice decreases when temperatures drop.<br />7. Hundreds of Mexican immigrants moved to California in the last year, but many remained unemployed because their English is not yet adequate for most jobs.<br />8. Lumber companies laid off hundreds of workers after reducing their projected output due to a slow-down of housing starts throughout the nation. <br />
  23. 23. Full Employment (also called Natural Rate of Unemployment)<br />Frictional, Structural, and Seasonal are all acceptable unemployment types but what we want to minimize is cyclical unemployment<br />Full Employment occurs when jobs exist for everyone who wants to work and the economy is healthy & growing<br />4-6% unemployment is healthy<br />This rate may be changing!!!<br />
  24. 24. http://www.econedlink.org/unemployment/<br />
  25. 25. Business Cycles – Measuring Our Nation’s Economy Through Real GDP Changes<br />Read Econ Alive pages 266-269 and complete notes in section VII (A-C)<br />
  26. 26. Phases of the Business Cycle<br />Phase: Expansion- period of increasing real GDP (we’re producing more!)<br />Recovery– period when the economy begins to produce more again <br />Phase: Contraction- period of decline in real GDP (we’re producing less!)<br />Recession– when real GDP declines for two consecutive quarters or six months<br />Depression– prolonged economic downturn characterized by extreme conditions – plummeting GDP, extremely high unemployment, bank/business failures, etc.<br />Phase: Peak– point where real GDP stops going up<br />Phase: Trough– point where real GDP stops going down <br />
  27. 27. Highest level of employment would be at the peak<br />
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  29. 29. Indicator Performance During Business Cycle:<br />During expansion:<br />Unemployment decreases<br />Inflation increases<br />Real GDP increases<br />During contraction:<br />Unemployment increases<br />Inflation decreases<br />Real GDP decreases<br />

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