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Six Key Economic Variables • Real Gross Domestic Product (GDP) – is corrected for changes in the price level (real) – includes the replacement of worn-out and obsolete equipment and structures as well as new investment (gross) – counts economic activity that happens in the United States (domestic) – represents the production of final goods and services (product) 1-1 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • Real Gross Domestic Product – often divided by the number of workers in the economy – measures how well the economy produces goods and services that people find useful – does not indicate the relative distribution of the nation’s economic product – is an imperfect measure of economic well-being 1-2 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.4 - Officially Measured Real GDP per Worker in the United States 1-3 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Unemployment Rate – to be unemployed, a person must want to work and be actively looking for a job (but have not yet found one) – the labor force consists of those who are employed and those who are unemployed – the unemployment rate is equal to the number of unemployed people divided by the labor force 1-4 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.5 - The U.S. Unemployment Rate 1-5 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Unemployment Rate – frictional unemployment occurs because workers and firms spend time searching for the best match – cyclical unemployment occurs during recessions and depressions – the unemployment rate is the best indicator of how well the economy is doing relative to its productive potential 1-6 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Inflation Rate – is a measure of how fast the overall price level is rising – hyperinflation occurs when the price level is rising by more than 20% per month 1-7 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.6 - Inflation in the United States 1-8 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Interest Rate – is important because it governs the redistribution of purchasing power across time – the many different interest rates in the economy vary by duration and degree of risk • often move up and down together 1-9 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Interest Rate – nominal interest rate is the interest rate in terms of money • does not take into account the effects of inflation – real interest rate is the interest rate in terms of goods and services • does take into account the effects of inflation 1-10 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.7 - U.S. Real Interest Rates, 1960-1999 1-11 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Stock Market – is heard about most often (every day) – is an index of expectations for the future • a high value means that investors expect economic growth to be rapid, profits to be high, and unemployment to be low 1-12 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.8 - Real Stock Index Prices 1-13 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Exchange Rate – governs the terms on which international trade and investment take place – nominal exchange rate is the rate at which monies of different countries can be exchanged for one another – real exchange rate is the rate at which the goods and services produced in different countries can be exchanged for one another 1-14 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Exchange Rate – if domestic currency appreciates • its value in terms of other currencies increases • foreign-produced goods are relatively cheap for domestic buyers – imports are likely to be high • domestic-made goods are relatively expensive for foreigners – exports are likely to be low 1-15 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Six Key Economic Variables • The Exchange Rate – if domestic currency depreciates • its value in terms of other currencies declines • domestic-produced goods are relatively cheap for foreign buyers – exports are likely to be high • foreign-made goods are relatively expensive for domestic buyers – imports are likely to be low 1-16 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Figure 1.9 - The U.S. Real Exchange Rate: The Dollar against a Composite Index of Foreign Currencies 1-17 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • The United States - 2001 – economic growth has slowed to a very weak pace • forecast for 2001 is that real GDP will grow by no more than 1.8% – interest rates lowered through Fed policy • due to lags, effects of lower interest rates will not be felt until end of 2001 (at the earliest) – inflation continues to be low 1-18 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • The United States - recent past – from early 1990s to 2000, there was an economic boom – unemployment fell during the 1990s • lowest unemployment rate in two decades (4%) – real wages increased only slightly • helped to keep inflation low 1-19 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • Europe – economic growth in countries belonging to the European Monetary Union slowing – low inflation • less than 2% per year – relatively high unemployment • near 10% 1-20 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The Current Macroeconomic Situation • Japan – slow growth rate • real GDP grew only 1.8% in 2000 • real GDP is expected to grow only by 1.4% in 2001 – deflation is occurring • the overall price level fell by 0.7% in 2000 1-21 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Summary • The key indicators in macroeconomics are – real GDP – the unemployment rate – the inflation rate – the interest rate – the level of the stock market – the exchange rate 1-22 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.