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Measuring the macro economy student Presentation Transcript

  • 1. PART 1: Measuring the National Economy, Business Cycle, Unemployment, & Inflation
    Unit #5: The Macroeconomy
    -study of the workings of the economy as a whole
  • 3. How do we assess our economy’s health?
    We examine economic indicators – data/statistics gathered about an economy
  • 4. Economic Indicator #1: Gross Domestic Product
    Read Econ Alive pages 252-254 and complete notes in section III (A – D)
  • 5. GDP – The Measure of National Output
    Gross Domestic Product
    Market value of all final goods and services produced within a country during a given time period
    Market value – price x quantity produced
    Final goods – any new good that is ready for use by a consumer
    GDP excludes intermediate goods (one’s that are used to make others)
    GDP excludes secondhand sales (sale of used goods)
    Produced within a country – foreign owned firms that produce within the borders COUNT towards GDP
    Given time period – look at quarterly GDP & yearly
    Most important is the growth rate of GDP
    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
  • 6.
  • 7.
  • 8. The Output-Expenditure Model
    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.
    GDP = C + I + G + NX
    C = Consumer Sector
    I = Business/Investment Sector
    G = Government Sector
    NX = Foreign Sector (Exports-Imports)
  • 9. Adjusting GDP
    Let’s say this:
    2006 GDP was $13.2 trillion
    2007 GDP is $13.8 trillion
    Is this good for the U.S. economy?
  • 10. Real vs. Nominal GDP
    Nominal GDP measures the output of an economy valued at today’s prices
    Problem – Nominal GDP will go up if prices go up, even if the actual output of the economy does not!
    Real GDP measures the ouput of an economy valued at prices that are fixed over time
    Solution – Real GDP allows us to compare the total output of an economy from year to year as if prices have never changed!
  • 11. GDP per capita
    GDP per person where the total GDP is divided by the population (measures standard of living from country to country)
  • 12. Economic Indicator #2: Inflation
    Read Econ Alive pages 261-266 and complete notes in section V (A-E)
  • 13. Inflation Rate
    Definition: the percentage increase in the average price level of goods & services from one month/year to the next
    Consumer Price Index (CPI)
    price index for the “market basket” of consumer goods & services
    Market basket based on thousands of surveys of households about spending habits and then BLS tracks price changes of these items each month
    Primary measure of inflation in the U.S.
  • 14.
  • 15. Severity of Inflation
    Creeping Inflation - 1-3 % annually , very gradual rise in the price level
    Hyperinflation – over 500% annually, the most severe inflation
    Deflation – decrease in the general level of prices in the economy (opposite of inflation)
    Why could this be good or bad?
  • 16. Causes of Inflation
    Increase in Money Supply
    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
    Cost-Push Inflation: costs of production increase so producers must raise prices of their products
    Usually involves energy prices!
    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)!!!
  • 17. What are the COSTS of INFLATION?
    The dollar buys less (loss of purchasing power)
    Fixed incomes suffer
    Change in Spending Habits
    Savings worth reduced = People SPEND NOW!
    Without savings economy cannot prosper
    Higher Interest Rates
    Lenders are hurt (getting repaid in money with less purchasing power)
    Demand for Loans decreases = Without lending economy cannot prosper
  • 18. Economic Indicator #3: Unemployment
    Read Econ Alive pages 258-261 and complete notes in section VI (B-C)
  • 19. Unemployment
    The unemployment rate shows the percentage of unemployed people divided by the total number of people in the civilian labor force
    Let's start by defining a few concepts that are needed to help us understand the unemployment rate. 
    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."
    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
    Employed (E): The number of adult civilians who are working and on a payroll of some type.
    Unemployed (U): The number of adult civilians who are not working but are actively seeking work.
  • 20. Problems with the Rate
    Counts part-time workers as employed
    Causes underestimation
    Leaves out “discouraged workers”
    Causes underestimation
    Doesn’t count underground economy
    Causes overestimation
  • 21. Four Types of Unemployment:
    Frictional: workers in between jobs – seeking first job or looking for new one
    Structural: advances in technology reduces demand for certain skills
    Seasonal: results from changes in weather
    Cyclical: related to the health of the economy – THIS IS BAD UNEMPLOYMENT!
  • 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.
    2. Many travel agents have left the field because their former customers now go to the Internet for the lowest fares.
    3. National Unemployment rose to 6% as the economy slumped for the third straight month.
    4. A Broadway musical show had its final run, leaving all the actors unemployed.
    5. A typewriter company let go all its workers and shut down after one hundred years in business because computers made its product obsolete.
    6. Jenny lost her job at Rita’s Water Ice late fall as the demand for water ice decreases when temperatures drop.
    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.
    8. Lumber companies laid off hundreds of workers after reducing their projected output due to a slow-down of housing starts throughout the nation.
  • 23. Full Employment (also called Natural Rate of Unemployment)
    Frictional, Structural, and Seasonal are all acceptable unemployment types but what we want to minimize is cyclical unemployment
    Full Employment occurs when jobs exist for everyone who wants to work and the economy is healthy & growing
    4-6% unemployment is healthy
    This rate may be changing!!!
  • 24. http://www.econedlink.org/unemployment/
  • 25. Business Cycles – Measuring Our Nation’s Economy Through Real GDP Changes
    Read Econ Alive pages 266-269 and complete notes in section VII (A-C)
  • 26. Phases of the Business Cycle
    Phase: Expansion- period of increasing real GDP (we’re producing more!)
    Recovery– period when the economy begins to produce more again
    Phase: Contraction- period of decline in real GDP (we’re producing less!)
    Recession– when real GDP declines for two consecutive quarters or six months
    Depression– prolonged economic downturn characterized by extreme conditions – plummeting GDP, extremely high unemployment, bank/business failures, etc.
    Phase: Peak– point where real GDP stops going up
    Phase: Trough– point where real GDP stops going down
  • 27. Highest level of employment would be at the peak
  • 28.
  • 29. Indicator Performance During Business Cycle:
    During expansion:
    Unemployment decreases
    Inflation increases
    Real GDP increases
    During contraction:
    Unemployment increases
    Inflation decreases
    Real GDP decreases