GDP, Unemployment Rates and Inflation Explained

1. Economic Indicators
GDP, Unemployment and
Inflation

2. Gross Domestic Product
•The market value of all final
goods and services produced
in a country in a given year.

3. • The market values of all final goods and services
produced in a country within a given year.
• Market – what the good sells for
• Final – no resale or intermediate goods
• Produced in - no matter who owns company
• Given – annual figure

4. Divide into four categories
• C – Consumption by households
• I – Investment by businesses, incl R&D
• G – Government spending
• (X-M) – (Exports – Imports)
• GDP = C + I + G + (X-M)
• Change usually more interesting than actual number.

5. Mostly consumer-driven:
• http://blogs-images.forbes.com/mikepatton/files/2014/12/Table-US-GDP-Components-2011.jpg

6. Write C, I, G or (X-M) and or
• Due to a tax cut, consumers decide to buy more
new cars.
• C up and GDP up
• Worried about an increasing budget deficit, the
government decides to buy fewer military planes
• G down and GDP down
• Increasing prices in the US encourage Americans
to buy more foreign goods.
• M up and (X-M) down thus GDP down

7. Write C, I, G, or (X-M) and or
• Due to a tax increase, consumers decrease
purchases on vacation travel
• C down and GDP down
• Due to increased incomes, Europeans buy more
US goods
• X up making (X-M) up thus GDP up
• Businesses are optimistic about the future and
increase the construction of new factories
• I up and GDP up

8. Some economic activity is left out
• Informal Work
▫ (Shadow Economy)
• Subsistence Work
• Care Work

9. If we measure it, it must matter
• GDP measures economic activity, not well-
being…. What is the effect of
• Cutting down all of our forest’s and selling the
wood
▫ Increase C and X thus increasing GDP
• Doubling government spending because of war
Increase G thus increasing GDP
Effect of BP Oil Spill, link

10. Measures of Economic Well-being
• SPI ted talk

11. Measures of Economic Well Being
• Green GDP – account for environmental damage
• Video Example
• This would not be
Included, lighting

13. Unemployment Rate

14. In Civilian Labor Force if
Over 16
Not in military
Have a job
Actively looking for work
Not in labor force if,
-Retired,
-Discouraged
Workers those
who have
given up –
looking, or
-Full-time
student

15. • Unemployed if
▫ Over 16
▫ Actively looking for work
in last 4 weeks
▫ Available to work
▫ And, do not have a job
 Not Unemployed if
 Given up looking
 U1-U6 definitions

16. Unemployment rate tends to
undercount unemployment because of
▫ Underemployed
▫ Reduced Hours
▫ Discouraged
Job Seekers
Source: MSN

17. Types of Unemployment
• Cyclical Unemployment
▫ Due to recessions
• Seasonal Unemployment
▫ Due to seasonal changes, teachers & lifeguards
• Structural Unemployment
▫ Due to skills becoming obsolete
• Frictional Unemployment
▫ Due to transition to better or equal job

18. What happens to the UR, if
• In May, there is a surge of college graduates looking
for work
• A number of workers give up looking for work
• Most construction workers take off Nov-Feb because
of weather conditions
• After a particularly touching Dr Phil episode people
unhappy with their bosses quit to find a better job
• With the invention of solar cars, gas stations all over
the country go out of business

20. A dollar doesn’t buy what it used to
• In Zimbabwe, video
▫ Hyperinflation
 Prices changing by the hour

21. How it is measured
• Percentage change in the CPI
• Consumer Price Index
• Cost of a constant
market basket of goods each
time period.

22. Find the Cost of the market basket
• Done every year

23. How it is done
• Calculate CPI
Basket Cost 2012/Basket cost 1984 =
CPI 2012 with
base year of 1984
• Calculate Inflation with percent change in CPI
▫ CPI 2012 – CPI 1984
------------------------------ * 100
CPI 1984

24. Problems with measure
Inaccuracy Over or Under
Estimate Inflation
Market basket changes every ten
years
Over
Quality Improvements Over
We change our point of purchase Over
We look for substitutes Over

25. Using the inflation rate
• COLA – Cost of Living Adjustment
• Over time dollar comparisons
▫ Real vs Nominal
 Nominal – in current dollars
 Real - inflation adjusted dollars

26. Go from Nominal to Real Dollars
• Nominal is the change on the price tag or
paycheck
• Real dollars accounts for inflation

27. Real vs Nominal Stamp Prices

28. Real vs Nominal Gallon Gas

29. Real vs Nominal Minimum Wage

30. Costs of (unexpected) inflation
• Hurts Savers
• Hurts Retirees and those on fixed income
• Hurts Lenders

31. Causes of Inflation
• Too much money in circulation relative to
amount of goods
• Inflation, Bubbles and Tulips
• Demand-pull
• Cost-push
• Wage-price spiral

32. Misery Index
• Unemployment rate plus inflation rate
• http://www.miseryindex.us/indexbyyear.aspx?
type=IR

33. Additional Indicators
• Consumer Spending (approx 70%)
• Manufacturing
• Stock Market
• International Markets current/capital

34. Consumer Spending
• Consumer Confidence & Consumer Sentiment
• Retail Sales
• Durable Goods orders
▫ Goods that last more than 3 years
• Housing:
▫ New Home sales, Construction
• Personal Income & Spending

36. Manufacturing
• PPI
▫ Predicts CPI changes
• Factory Orders
▫ Leading indicator
• Wholesale trade
▫ Value of business inventories
▫ I/S ratio lagging indicator

38. Stock Markets
• S&P 500
▫ 75% of equities traded tracked by Standard & Poor
• Dow Jones Industrial Average
▫ Tracks 30 of the largest companies on the stock
market. Picked by the WSJ
• NASDAQ Composite Index
▫ Electronic stock market, US and non-US tech
companies

40. International
• Trade Balance
• Current account
• Capital account

41. Timing of indicators
Leading Coincident Lagging
• Manufacturing Hours
• New unemp claims
• Consumers new
orders
• ISM index new orders
• MFR new orders,( excl
defense and aircrafts)
• Bldg permits
• S&P 500
• Leading Credit Index
• 10yr Int rate spread
• Consumer
expectations
• GDP • Income
• Employment
• Sales-Inventory ratios
• Labor costs
• Prime rate