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Unit 4 student

  1. 1. UNIT 4: Measuring the Macroeconomy The Business Cycle & Economic Indicators such as GDP, Unemployment, & Inflation
  2. 2. WHAT IS MACROECONOMICS? -study of the workings of the economy as a whole
  3. 3. How do we assess our economy’s health? We examine economic indicators – data/statistics gathered about an economy
  4. 4. Economic Indicator #1: Gross Domestic Product
  5. 5. GDP – The Measure of National Output <ul><li>Gross Domestic Product </li></ul><ul><ul><li>Market value of all final goods and services produced within a country during a given time period </li></ul></ul><ul><li>Market value – price x quantity produced </li></ul><ul><li>Final goods – any new good that is ready for use by a consumer </li></ul><ul><ul><li>GDP excludes intermediate goods (one’s that are used to make others) </li></ul></ul><ul><ul><li>GDP excludes secondhand sales (sale of used goods) </li></ul></ul><ul><li>Produced within a country – foreign owned firms that produce within the borders COUNT towards GDP </li></ul><ul><li>Given time period – look at quarterly GDP & yearly </li></ul><ul><ul><li>Most important is the growth rate of GDP </li></ul></ul><ul><li>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 </li></ul>
  6. 8. The Output-Expenditure Model <ul><li>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. </li></ul><ul><li>GDP = C + I + G + NX </li></ul><ul><ul><li>C = Consumer Sector </li></ul></ul><ul><ul><li>I = Business/Investment Sector </li></ul></ul><ul><ul><li>G = Government Sector </li></ul></ul><ul><ul><li>NX = Foreign Sector (Exports-Imports) </li></ul></ul>
  7. 9. Adjusting GDP <ul><li>Let’s say this: </li></ul><ul><ul><li>2006 GDP was $13.2 trillion </li></ul></ul><ul><ul><li>2007 GDP is $13.8 trillion </li></ul></ul><ul><li>Is this good for the U.S. economy? </li></ul>
  8. 10. Real vs. Nominal GDP <ul><li>Nominal GDP measures the output of an economy valued at today’s prices (current dollars) </li></ul><ul><ul><li>Current Dollars – reflects the purchasing power of the dollars in the year they are spent </li></ul></ul><ul><ul><li>Problem – Nominal GDP will go up if prices go up, even if the actual output of the economy does not! </li></ul></ul><ul><li>Real GDP measures the ouput of an economy valued at prices that are fixed over time (constant dollars) </li></ul><ul><ul><li>Constant Dollars - value is fixed at a rate that was current in a specified base year </li></ul></ul><ul><ul><li>Solution – Real GDP allows us to compare the total output of an economy from year to year as if prices have never changed! </li></ul></ul>
  9. 11. Other Income Measures <ul><li>Per capita GDP </li></ul><ul><ul><li>GDP per person where the total GDP is divided by the population (measures standard of living from country to country) </li></ul></ul><ul><li>Gross National Product </li></ul><ul><ul><li>Market value of all final goods, services, and structures produced in a given time period by American-owned businesses </li></ul></ul><ul><li>PI – Personal Income </li></ul><ul><ul><li>Income before taxes </li></ul></ul><ul><li>DPI – Disposable Personal Incom </li></ul><ul><ul><li>Income after taxes </li></ul></ul>
  10. 12. GDP per capita
  11. 13. Economic Indicator #2: Inflation
  12. 14. Inflation Rate <ul><li>Definition : the percentage increase in the average price level of goods & services from one month/year to the next </li></ul><ul><li>Consumer Price Index (CPI) </li></ul><ul><ul><li>price index for the “market basket” of consumer goods & services </li></ul></ul><ul><ul><li>Called the “cost-of-living” index </li></ul></ul><ul><ul><li>Primary measure of inflation in the U.S. </li></ul></ul><ul><ul><li>Market basket based on thousands of surveys of households about spending habits and then BLS track price changes of these items each month </li></ul></ul>
  13. 16. Price Index <ul><ul><li>A price index is a statistic that measures changes in price over time of goods in a market basket </li></ul></ul><ul><ul><li>A market basket is a group of goods/services that are representative of purchases made over time (quantity of items remains fixed) </li></ul></ul><ul><ul><li>A price index always has a base year (starting point to track price changes) </li></ul></ul><ul><ul><li>Over time, the value of the market basket changes (because of price changes of particular items) </li></ul></ul>
  14. 17. How can you calculate a price index and track inflation? <ul><li>2009 Prices </li></ul><ul><li>Now let’s take that market basket and examine its prices in 2009 </li></ul><ul><li>2 Apples ($1), 1 pack of Oreos ($4), and 5 Toothpastes ($14) </li></ul><ul><li>$1 + $4 + $14 = $19 (price of basket in year 2009) </li></ul><ul><li>2008 Prices </li></ul><ul><li>Base year (2008) </li></ul><ul><li>Market Basket – 2 Apples ($1 total), 1 pack of Oreos ($3), 5 Toothpastes ($10 total) </li></ul><ul><li>$1 + $3 + $10 = $14 (price of basket in base year 2008) </li></ul>
  15. 18. Calculations… Remember…in 2008 the market basket was valued at $14 … in 2009 the market basket was valued at $19 1. If the base year is 2008, what is the price index of 2009? Price Index = (New Year Price / Base Year Price) X 100 2. What is the inflation rate for 2009? Inflation Rate = { (New Year Price – Base Year) / Base Year Price } X 100
  16. 19. What is a price index used for? <ul><li>Converting GDP from nominal to real </li></ul><ul><li>Tracking Consumer and Prices </li></ul><ul><li>Evaluating Inflation </li></ul><ul><li>Evaluating Cost of Living – http://www.bls.gov/data/inflation_calculator.htm </li></ul><ul><ul><li>Nominal Cost of Living – cost in current dollars of all goods/services a person needs </li></ul></ul><ul><ul><ul><li>Consumers pay costs with nominal wages, ones based on current prices </li></ul></ul></ul><ul><ul><li>Real Cost of Living – cost in constant dollars of all goods/services a person needs (helps us to compare prices over time) </li></ul></ul><ul><ul><ul><li>Consumers pay costs with real wages, ones that are based on prices that are fixed over time </li></ul></ul></ul>
  17. 20. Severity of Inflation <ul><li>Types </li></ul><ul><ul><li>Creeping Inflation - 1-3 % annually , very gradual rise in the price level </li></ul></ul><ul><ul><li>Hyperinflation – over 500% annually, the most severe inflation </li></ul></ul><ul><ul><li>Deflation – decrease in the general level of prices in the economy (opposite of inflation) </li></ul></ul><ul><ul><ul><li>Why could this be good or bad? </li></ul></ul></ul>
  18. 21. Causes of Inflation <ul><ul><li>Increase in Money Supply </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Cost-Push Inflation : costs of production increase so producers must raise prices of their products </li></ul></ul><ul><ul><ul><li>Usually involves energy prices! </li></ul></ul></ul><ul><ul><li>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)!!! </li></ul></ul>
  19. 22. What are the COSTS of INFLATION? <ul><li>The dollar buys less (loss of purchasing power) </li></ul><ul><ul><li>To calculate purchasing power change : </li></ul></ul><ul><ul><li>% Raise - % Inflation = PURCHASING POWER CHANGE </li></ul></ul><ul><ul><li>(if answer is negative = lost PP) </li></ul></ul><ul><ul><li>(if answer is positive = gained PP) </li></ul></ul><ul><li>Fixed incomes suffer </li></ul><ul><li>Change in Spending Habits </li></ul><ul><ul><li>Savings worth reduced = People SPEND NOW! </li></ul></ul><ul><ul><li>Without savings economy cannot prosper </li></ul></ul><ul><li>Higher Interest Rates </li></ul><ul><ul><li>Lenders are hurt (getting repaid in money with less purchasing power) </li></ul></ul><ul><ul><li>Demand for Loans decreases = Without lending economy cannot prosper </li></ul></ul>
  20. 23. Economic Indicator #3: Unemployment
  21. 24. Unemployment <ul><li>The unemployment rate shows the percentage of unemployed people divided by the total number of people in the civilian labor force </li></ul><ul><li>Let's start by defining a few concepts that are needed to help us understand the unemployment rate.  </li></ul><ul><ul><li>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 &quot;institutions.&quot; </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Employed (E): The number of adult civilians who are working and on a payroll of some type. </li></ul></ul><ul><ul><li>Unemployed (U): The number of adult civilians who are not working but are actively seeking work. </li></ul></ul>
  22. 25. Problems with the Rate <ul><li>Counts part-time workers as employed </li></ul><ul><ul><li>Causes underestimation </li></ul></ul><ul><li>Leaves out “discouraged workers” </li></ul><ul><ul><li>Causes underestimation </li></ul></ul><ul><li>Doesn’t count underground economy </li></ul><ul><ul><li>Causes overestimation </li></ul></ul>
  23. 26. <ul><li>Four Types of Unemployment: </li></ul><ul><ul><li>Frictional : workers in between jobs – seeking first job or looking for new one </li></ul></ul><ul><ul><li>Structural: advances in technology reduces demand for certain skills </li></ul></ul><ul><ul><li>Seasonal: results from changes in weather </li></ul></ul><ul><ul><li>Cyclical: related to the health of the economy – THIS IS BAD UNEMPLOYMENT! </li></ul></ul>
  24. 27. <ul><li>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. </li></ul><ul><li>2. Many travel agents have left the field because their former customers now go to the Internet for the lowest fares. </li></ul><ul><li>3. National Unemployment rose to 6% as the economy slumped for the third straight month. </li></ul><ul><li>4. A Broadway musical show had its final run, leaving all the actors unemployed. </li></ul><ul><li>5. A typewriter company let go all its workers and shut down after one hundred years in business because computers made its product obsolete. </li></ul><ul><li>6. Jenny lost her job at Rita’s Water Ice late fall as the demand for water ice decreases when temperatures drop. </li></ul><ul><li>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. </li></ul><ul><li>8. Lumber companies laid off hundreds of workers after reducing their projected output due to a slow-down of housing starts throughout the nation. </li></ul>
  25. 28. Full Employment (also called Natural Rate of Unemployment) <ul><li>Frictional, Structural, and Seasonal are all acceptable unemployment types but what we want to minimize is cyclical unemployment </li></ul><ul><li>Full Employment occurs when jobs exist for everyone who wants to work and the economy is healthy & growing </li></ul><ul><ul><li>4-6% unemployment is healthy </li></ul></ul><ul><ul><li>This rate may be changing!!! </li></ul></ul>
  26. 29. http://www.econedlink.org/unemployment/
  27. 30. Business Cycles – Measuring Our Nation’s Economy Through Real GDP Changes
  28. 31. Phases of the Business Cycle <ul><li>Phase: Expansion - period of increasing real GDP (we’re producing more!) </li></ul><ul><ul><li>Recovery – period when the economy begins to produce more again </li></ul></ul><ul><li>Phase: Contraction - period of decline in real GDP (we’re producing less!) </li></ul><ul><ul><li>Recession – when real GDP declines for two consecutive quarters or six months </li></ul></ul><ul><ul><li>Depression – prolonged economic downturn characterized by extreme conditions – plummeting GDP, extremely high unemployment, bank/business failures, etc. </li></ul></ul><ul><li>Phase: Peak – point where real GDP stops going up </li></ul><ul><li>Phase: Trough – point where real GDP stops going down </li></ul>
  29. 32. Highest level of employment would be at the peak
  30. 34. How do we predict these cycles? <ul><li>The index of leading indicators is a monthly statistical series that helps economists predict the direction of future economic activity. </li></ul><ul><ul><li>1. the average weekly hours worked by manufacturing workers 2. the average number of initial applications for unemployment insurance 3. the amount of manufacturers' new orders for consumer goods and materials 4. the speed of delivery of new merchandise to vendors from suppliers 5. the amount of new orders for capital goods unrelated to defense 6. the amount of new building permits for residential buildings 7. the S&P 500 stock index 8. the inflation-adjusted monetary supply (M2) 9. the spread between long and short interest rates 10. consumer sentiment  </li></ul></ul>
  31. 35. Other economic indicators <ul><li>Coincident Indicators – measures that rise or fall along with business cycles </li></ul><ul><ul><li>Ex: inflation rate & real GDP </li></ul></ul><ul><li>Lagging Indicators – measures that rise or fall several months after expansion or contraction </li></ul><ul><ul><li>Ex: unemployment rate </li></ul></ul>
  32. 36. <ul><li>Indicator Performance During Business Cycle: </li></ul><ul><li>During expansion: </li></ul><ul><ul><li>Unemployment decreases </li></ul></ul><ul><ul><li>Inflation increases </li></ul></ul><ul><ul><li>Real GDP increases </li></ul></ul><ul><li>During contraction: </li></ul><ul><ul><li>Unemployment increases </li></ul></ul><ul><ul><li>Inflation decreases </li></ul></ul><ul><ul><li>Real GDP decreases </li></ul></ul>
  33. 37. Other Economic Problems <ul><li>GDP Gap – difference between actual GDP & Potential GDP </li></ul><ul><li>Misery Index – sum of the monthly unemployment & inflation rate </li></ul><ul><li>Stagflation – stagnant growth and inflation </li></ul>