Read Econ Alive pages 252-254 and complete notes in section III (A – D)
Each quarter, the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, releases an estimate of the level and growth of U.S. gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States.What Does / Does Not Count Towards GDP: 2) Includes those goods produced in the USA, even if the company is owned by foreign firms or U.S. owned companies elsewhere do not countJapanese cars made in Ohio count 3) Intermediate Products aren’t countedProducts used in making other products (like new tires on a car) but replacement tires do count (flour, sugar, salt bought as end product counts but not what goes in bakery items) 4) Excludes Secondhand Sales- Sale of used goods (does not accumulate new wealth)5) Informal economy –operates without gov’t regulation - babysitters, drug dealers, mowing lawns etc. 6) unpaid work – volunteer firefighter & stay at home parents provides value but no $ is exchanged so can’t count in GDPOther GDP limitations 1. Reporting delays - too much info to report on present 2. tells nothing about the composition of output (up usually is good but what if it is creating nerve gas instead of public works, down usually bad but could be new drug that saves on medical costs 3. or the impact of production on quality of life. 4. Excludes non-market transactions - mowing lawn or housekeepingGDP is still the best measure of overall economic health because it only measures production within a nation’s borders! = want more production
"U.S. Economy Grows at a 5.9% Rate"The Bureau of Economic Analysis' announcement about real GDP growth in late 2009 seemed like very good news. The U.S. economy grew at an annualized rate of 5.9 percent from October through December. Given the real GDP declines of much of the previous two years, was this evidence that the recession is over? Using GDP as an indicator that some people feel identifies a recession, maybe it is over. Then again, the National Bureau of Economic Research uses much more than simple GDP growth to identify the beginning and end of a recession.
Purchase of steel by a car manufacturer for the production of new Jeeps.Milk the consumer purchases from WAWA.Milk purchased by WAWA to be resold to its customers. The sale of Mia’s flute that she bought in 1995.The sale of sneakers imported to the U.S. by an American owned company in Columbia, South America.Income Tara makes her job as a salesperson at Best Buy.The sale of ILLEGAL drugs.Income (under the table) Kevin earned from doing the landscaping at his father’s new house.
Switched from GNP to GDP in 1991= GDP + all payments that Americans receive from outside the United States minus all payments made to foreign-owned resources inside the United States.Personal Income (PI) is the total amount of income received by individuals before taxes.Disposable Personal Income (DI) is PI less taxes (personal income taxes).What’s the difference between GDP & GNP? Not equal (GDP is measure of all final goods & services produced in U.S. no matter who & GNP is all goods & services produced by U.S. citizens no matter where they are from
CPI -This is one way the government measures inflation. It is termed as the “market basket of consumer good and services.” or-changes in the average prices of this basket changes overall cost of living – COL index-surveys thousands of households about their spending habits to create market basket then visits 25,000 retail stores to get price changes The BLS measurement of the CPI-U includes all urban consumers, representing about 87 percent of the total U.S. population. "It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural non-metropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals." With a few exceptions, these price indexes are seasonally adjusted. According to the BLS, "many economic series, including the CPI, are adjusted to remove the effect of seasonal influences-those which occur at the same time and in about the same magnitude every year. Among these influences are price movements resulting from changing weather conditions, production cycles, changeovers of models, and holidays."Calculating the CPI-U"The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 25,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments. All taxes directly associated with the purchase and use of items are included in the index.""Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other reas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives.""In calculating the index, price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local data are then combined to obtain a U.S. city average."
Price level – magnitude of prices at one point in time (used in comparison over time)The inflation rate is determined by comparing the price level at the beginning and end of a period.Deflation can occur when there is a decrease in the general price level.Types describing severity of inflation –Creeping inflation is inflation in a range of 1 to 3 percent annually.Galloping inflation is when inflation can go as high as 100 to 300 percent annually.Inflation of more than 500 percent a year is known as hyperinflation. (record 828 octillion worth of one prewar pengo)We can also end up with situations where the general price of goods falls throughout the marketThis results in deflationCalculated the same way as inflation, BUT results in a negative number
Demand-Pull : consumers/business converge to buy up goods & services so merchants have to raise prices (lose customers though)Cost-Push : example – union wins large wage contract = increased cost of producing goods & then pass price to customers = rise in pricesWage-Price Spiral : higher prices = people ask for higher wages creates spiral, if workers get higher wages then merchants increase pricesExcessive monetary growth – any extra money given & then spent will cause demand-pull
The dollar buys less – today our dollar buys 5 cents worth of goods & services bought in 1900 (prices rise & purchasing power decreases)Spending habits changeDisrupts economy – interest rates increase too so less spending on housing & durable goods (businesses stop expanding & cut back inventories/production)Speculation increasesRisky spending – people who usually invest in safe options now buy condos, diamonds, works of art or things that increase in price (don’t invest in normal things) people don’t want savings to go worthless so SPEND now to take advantage of lower pricesLenders are hurt; negative effect on economy loans made earlier are repaid with inflated dollars (ones with less purchasing power) – loan of $100 to buy 200 loaves of bread but once inflation sets in price doubles to $1 a loaf = only 100 loaves for lender
Read Econ Alive pages 258-261 and complete notes in section VI (B-D)
Each month, the Bureau of Labor Statistics (BLS) releases data from the monthly "Household Survey" conducted by the Bureau of the Census, providing a comprehensive body of information on the employment and unemployment experience of the U.S. population, classified by age, sex, race, and a variety of other characteristics.The BLS also conducts the Current Employment Statistics (CES) program, surveying about 150,000 businesses and government agencies, representing approximately 390,000 individual work sites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls.The BLS compiles information from these sources and announces the monthly "Employment Situation," reporting the current U.S. employment and unemployment data estimates. The monthly announcement reports employment data from the previous full month.Education matters. Those with less education tend to be unemployed at higher rates. The group with the lowest identified unemployment rate in March was people with a Bachelors Degree or higher, at 4.9 percent. Those without a high school diploma had an unemployment rate almost 3 times higher, at 14.5 percent. Figure 2: U.S. Unemployment Rates, March 2010U.S. Unemployment Rate by Demographic Group Civilian Non-institutionalized Population 9.7% Men (20 years and over) 10.0% Women (20 years and over) 8.0% Teenagers 26.1% Whites 8.8% Black/African Americans 16.5% Hispanics/Latino Ethnicity 12.6% Asians 7.5% U.S. Unemployment Rates by Educational Attainment All adults, 25 years and over 8.3% Less than HS Diploma 14.5% HS Graduates, no college 10.8% Some College, Associate Degree 8.2% Bachelors Degree and Higher 4.9% Additional Unemployment Data “The number of long-term unemployed (those jobless for 27 weeks and over) increased by 414,000 over the month to 6.5 million. In March, 44.1 percent of unemployed persons were jobless for 27 weeks or more.” As the recession continues, larger numbers are unemployed for a longer time. Those analysts concerned that this will be a “jobless recovery” believe that many of the long-term unemployed will not find jobs in their old industries, as investments in technology replace employees. “The civilian labor force participation rate (64.9 percent) and the employment-population ratio (58.6 percent) continued to edge up in March.” “The number of persons workingpart time for economic reasons (sometimes referred to as involuntary part-time workers) increased to 9.1 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.” “About 2.3 million persons were marginally attached to the labor force in March, compared with 2.1 million a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.” “Among the marginally attached, there were 1.0 million discouraged workers in March, up by 309,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.3 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.” Many have simply given-up looking for work. Others are working only part-time, not by choice.
Frictional – between jobs for one reason or another such as looking for a better job or a first time workerStructural – consumer tastes make some goods & services not in demand (horses, whips, saddles to U.S. automobiles & then to foreign made automobiles) gov’t closes military bases, occurs with fundamental change in operations of the economy Cyclical – people are laid off during recession (cut back production), = people stop buying cars, fridges, washers, dryersSeasonal – resulting in changes of weather or demand for certain produts – carpenters work less in winter (seasonal takes place every year but cyclical may last 3-5 years)Technological – workers with less skills, talent, education are replaced by machinesDIFFERENCE BETWEEN STRUCTURAL & TECHNOLOGICAL - factors unrelated to efficient means of production can cause structural unemploy. But in your laboring days, you'll want to make sure not to choose a job that is going to be made obsolete by technology. There's not much need anymore for telegraph operators or horse-and-buggy drivers; the telephone and automobile did those jobs in.A few jobs that are likely to go down as the horse-and-buggy drivers of the 21st century, probably sooner than later:Bank teller, Telephone operator, Photo processor, Video store clerk, Newspaper classifieds salesperson
Incomes in manufacturing had dropped by 70 percent, and incomes in construction had dropped by more than 80 percent. Government was the only industry that had grown over the period.
What Does Composite Index of Leading Indicators Mean?An index published monthly by the Conference Board (Conf. Board Leading Economic Index) used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. These variables have historically turned downward before a recession and upward before an expansion. The single index value composed from these ten variables has generally proved capable of predicting recessions over the past 50 years The Composite Index of Leading Indicators is a number that is used by many economic participants to judge what is going to happen in the near future. By looking at the Composite Index of Leading Indicators in the light of business cycles and general economic conditions, investors and businesses can form expectations about what's ahead, and make better-informed decisions.1. the average weekly hours worked by manufacturing workers2. the average number of initial applications for unemployment insurance3. the amount of manufacturers' new orders for consumer goods and materials4. the speed of delivery of new merchandise to vendors from suppliers5. the amount of new orders for capital goods unrelated to defense6. the amount of new building permits for residential buildings7. the S&P 500 stock index8. the inflation-adjusted monetary supply (M2)9. the spread between long and short interest rates10. consumer sentiment
Unit 4 student
UNIT 4: Measuring the Macroeconomy<br />The Business Cycle & Economic Indicators such as GDP, Unemployment, & Inflation<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</li></li></ul><li>
Significance of GDP Analysis<br />BUT<br />We have seen a decline in GDP and a decrease in growth recently…<br />
Sectors of Spending“The circular flow of economic activity”<br /><ul><li>The economy is made up of several different components called “spending sectors”</li></ul>GDP =<br />Total Spending =<br />C + I + G + (NX)<br />
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 />
Adjusting GDP<br />Let’s say this:<br />2006 GDP was $13.2 trillion<br />2007 GDP is $13.8 trillion<br />Is this good for the U.S. economy?<br />
Real vs. Nominal GDP<br /><ul><li>Nominal GDP measures the output of an economy valued at today’s prices (current dollars)
Real GDP measures the ouput of an economy valued at prices that are fixed over time (constant dollars)</li></li></ul><li>Other Income Measures<br /><ul><li>Per capita GDP
GDP per person where the total GDP is divided by the population (measures standard of living from country to country)
Market basket based on thousands of surveys of households about spending habits and then BLS tracks price changes of these items each month</li></li></ul><li>
Price Index<br /><ul><li>A price index is a statistic that measures changes in prices over time of goods/services in a market basket
A market basket is a group of goods/services that are representative of purchases made over time (quantity of items remains fixed)
A price index always has a base year (starting point to track price changes)
Over time, the value of the market basket changes (because of price changes of particular items)</li></li></ul><li>Current dollars (nominal)- the value of a dollar in the year it is spent (doesn’t take inflation into account)<br />Constant dollars (real)- the value of the dollar fixed at a specified base year (adjusted for inflation to reflect purchasing power over time)<br />
Creeping Inflation - 1-3 % annually , very gradual rise in the price level
Hyperinflation – over 500% annually, the most severe inflation
Deflation – decrease in the general level of prices in the economy (opposite of inflation)
Why could this be good or bad?</li></li></ul><li>A German woman feeding a stove with German Marks, which burned longer than the amount of firewood people could buy with them.<br />In other words, it was cheaper to burn a stove with German Marks ($) than buying wood!<br />Source: http://en.wikipedia.org/wiki/Image:Inflation-1923.jpg#file<br />
The economic crisis has destroyed Zimbabwe's currency and made it difficult for Zimbabweans to buy basic commodities, electricity, fuel, and medicines. Many Zimbabweans have left the country amid rising unemployment and deepening poverty.<br />Source: CNN.com/worldbusiness<br />
Causes of Inflation…<br />Demand-Pull<br /><ul><li>People in the economy try to buy more than what is being produced
High demand causes shortages … and prices go up
Large increases in the money supply causes this!</li></ul>Wage-Price Spiral<br /><ul><li> Higher prices force workers to request higher wages
Higher wages force producers to prices (to cover costs)</li></ul>...the spiral begins<br />Cost-Push<br /><ul><li>Rising production costs cause an increase in prices</li></li></ul><li>TASK! What are the costs of inflation?<br />
What are the COSTS of INFLATION?<br /><ul><li>The dollar buys less (loss of purchasing power)
To calculate purchasing power change:</li></ul> % Raise - % Inflation = PURCHASING POWER CHANGE<br />(if answer is negative = lost PP)<br /> (if answer is positive = gained PP)<br /><ul><li>Fixed incomes suffer
Causes overestimation</li></li></ul><li>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 />
Are they unemployed or not?<br />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 />
Are they unemployed or not?<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 />
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 />
Business Cycles – Measuring Our Nation’s Economy Through Real GDP Changes<br />
Business Cycles in the U.S. <br />The Great DepressionWorst and most prolonged economic downturn<br /><ul><li>Marked by the stock market crash on “BLACK TUESDAY” - October 29, 1929
Between 1929 and 1933, GDP declined nearly 50%.
How do we predict economic activity?<br />Index of Leading Indicators<br /><ul><li>Series of statistics used to predict future economic activity.
Typically, consecutive changes in the same direction suggest a turning point in the economy.
Ex- consecutive negative readings would indicate a possible recession.
Downturn occurs 12-15 months before a recession BUT it did predict 3 recessions that never happened.</li></li></ul><li>Other economic indicators<br />Coincident Indicators – measures that rise or fall along with business cycles<br />Ex: inflation rate & real GDP<br />Lagging Indicators – measures that rise or fall several months after expansion or contraction<br />Ex: unemployment rate<br />
Indicator Performance During Business Cycle:<br /><ul><li>During expansion:
Real GDP decreases</li></li></ul><li>Other Economic Problems<br />Increasing GDP Gap – difference between actual GDP & Potential GDP<br />Rising Misery Index – sum of the monthly unemployment & inflation rate<br />Stagflation – time period of stagnant growth and inflation<br />