Download Measuring unemployment

Topic 14
I. Microeconomics vs macroeconomics
II. GDP
2 methods of calculating GDP
- Expenditure approach
- Income Approach
II. Inflation
- Calculating changes in the price level
- Anticipated vs unanticipated inflation
III. Unemployment
- The 3 types
- Measuring unemployment
Microeconomics The study of how households and firms make
choices, how they interact in markets, and how the government
attempts to influence their choices.
Macroeconomics The study of the economy as a whole
including topics such as:
- inflation (an overall increase in prices)
- the unemployment rate
- the overall level of production
- economic growth
- currencies and exchange rates
GDP stands for:
GDP Total market value of all final goods and services
produced within a nation in one year.
1. A Measure of Total Production in an economy in that year
2. GDP is the most important gauge of the macro economy
Why?
Measures a nation’s output
These are the goods and services produced by a nation to
satisfy human wants
3. GDP measures output by market value
How is market value determined?
Note: Can’t measure 50,000 cases of apples and oranges,
must put in monetary units using their market value
Note: In what currency do we measure GDP?
4. GDP consists of final goods and services
Do not include intermediate goods (a good or service that
is an input to another good or service).
Ex: Don’t include the production of zipper that is put
in final good of jeans
Note: If we included intermediate goods
 double counting
Examples:
5. What do we mean by within a nation?
-within the nation’s borders.
Two approaches to calculating a nation’s GDP:
1. Expenditure Approach
Calculate total amount spent on final goods and services
produced within the economy during the year.
2. Income Approach
Calculate total income generated from final goods and
services produced within the economy during the year.
Calculating GDP using Expenditure Approach
Based on expenditure by: Consumers, Businesses, Government
and Foreigners
GDP = C + I + G + NX
C: Consumption
Personal Consumption Expenditure
- Total amount spent by households for goods and services
Consumption includes
1. durables – goods that last 3 years or more
Ex: autos, refrigerators, stereos
Note: during downturns in the economy (when
unemployment increases) => people reduce the
purchase of durables.
2. Nondurables – goods that last less than 3 years
Ex: food, clothing, entertainment
3. Services
Notes:
Consumption is the largest component of GDP (about 70 %).
I – Investment
Gross Private Domestic Investment (Business Investment in our
country)
G – Government spending (state, federal and local)
– goods and services
NX – Net exports = X – N
X: exports N: Imports
Why add X?
- goods and services made here but consumed by other
countries
- If we are measuring the output of this country based on
what is spent for it => include X, cause spent by consumers
in other countries for our products.
Why subtract N?
- Also subtract out imports (N)
Cause. although we spent our money on it, we did not make
it.
Inflation
The National Price Level (PL): The average level of prices of
final goods & services in the economy, at a point in time.
- To measure PL, use a Price Index.
- The 2 most common Price Indexes:
1. Consumer Price Index (CPI)
2. GDP deflator
CPI : The weighted average of the prices of the final goods &
services contained in the “market basket” purchased by the
typical urban household.
- Calculated by the Bureau of Labor Statistics
A.How is the CPI determined?
- Step 1:
-
- Step 2:
GDP deflator : The weighted average of the prices of the final
goods & services included in a country’s GDP.
-calculated by the BEA.
- Inflation - An increase in the Price Level over time.
- Deflation- A decrease in the Price Level over time.
- Disinflation- The Price Level is rising, but its rate of
increase is slowing down.
- Accelerating Inflation - The Price Level is rising, and
its rate of increase is speeding up.
Note: We measure the annual rate of inflation in the economy
by the %Δ in PL from 1 year to the next.
Ex:
Anticipated vs unanticipated inflation
Anticipated
vs.
Unanticipated


expected
No time to compensate

People compensate
for the price .
Ex: When inflation is anticipated
Workers ask for a raise.
Creditors charge higher interest.
Unanticipated inflation hurts:
1.)
People on a fixed income.
Ex. Retired living on a pension.
2.)
Savers
Ex. Buy $10,000 CD @ 3% interest, but inflation rate is
5%.  loss of 2% purchasing power.
3.)
Creditors:
Creditors are repaid w/ $ that has less purchasing power
Anticipated inflation hurts:
- Menu costs
Real GDP vs Nominal GDP
Nominal – currency or money
Nominal value – monetary value.
Real value – in terms of the goods and services it purchases.
Real GDP is GDP adjusted for inflation
Nominal GDP monetary value of the final goods and services
produced in a country in a year.
- GDP not adjusted for inflation
Year
1997
Nominal
GDP*
8,304.3
Real
GDP*
8,703.5
1998
8,747.0
9,066.9
1999
9,268.4
9,470.3
2000
9,817.0
9,817.0
2001
10,128.0
9,890.7
2002
10,469.6
10,048.8
2003
10,960.8
10,301.0
2004
11,685.9
10,675.8
2005
12,421.9
10,989.5
2006
13,178.4
11,294.8
2007
13,807.5
11,523.9
* in billions
What is the base year?
- the BEA designates a year as the base year.
- Calculates the value of g’ds & s’vcs in that year.
- uses the prices in the base year to calculate the value of g’ds & s’vcs in
all other years.
- The current base year is 2000, so real GDP for each year is measured
in 2000 prices.
Nominal GDP increases for a combo of 2 reasons:
1) Increase final goods and services produced by a nation
2) Increase in the price level (PL)
We are primarily concerned with Real GDP
- Nominal GDP is subject to the distortion of inflation
- Real GDP allows us to examine economic growth
Economic growth is defined by
-Unemployment
3 types:
1. Frictional unemployment: unemployment created by people
between jobs.
Ex: quit, fired.
We want workers who are not good at job (or don’t
like it) to quit, not the most productive person for
job.
2. Structural unemployment: unemployment caused by
structural ’s in the economy.
Ex: downsizing, technology changes, geographic
changes (jobs moving to another area).
a. Ex. Coal (strip mining), need less coal miners
b. Workers need to be re-trained, jobs finding the
cheapest & most productive workers
c. technology advancing, jobs finding the cheapest
and most productive workers
3. Cyclical unemployment: caused by decrease in demand for
goods and services; caused by down turns in the business cycle
What is a business Cycle?
Alternating periods of expansion and recession.
Expansion
Recession
Measuring unemployment
-labor forceincluded:16 yrs+, not institutionalized, employed or have
looked for employment in the last 6 weeks.
not included: house person, students, retirees, discouraged
workers (person who hasn’t looked for a job in last 4 weeks.
Notes:
- Roughly 1/2 of the population over 16 are in the labor
force.
- Each month the Bureau of Labor Statistics does survey
-CPS (Current Population Survey) –used to calculate
the unemployment rate
- unemployment rate = unemployed/ labor force x 100