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Macroeconomics
Macroeconomics
• The study of how countries work
How do we measure our economy?
• Three ways:
– Gross domestic product (GDP)
– Consumer Price Index (CPI)
– Unemployment
How do we measure the size of our
economy?
• Gross domestic product (GDP)
– Adds total value of all final goods and services
produced in the economy in one year.
GDP Around the World
• Guess—put these in
order from highest
GDP to lowest
–
–
–
–
–
–
–
1.
2.
3.
4.
5.
6.
7.
Australia
United States
Mexico
Germany
Japan
Russia
China
• 2, 7, 5, 4, 6, 3, 1
Prices in our country and the CPI
• Everything gets more expensive over time
• But not everything raises the same amount at
the same time…
How do we measure how much prices
change in our economy?
• The consumer price index (CPI)
– Look at change in prices for a basket/set of goods
What should the CPI’s Basket Include?
• The CPI includes a set of goods that
“everyone” buys.
– What do you think should be included in the CPI
basket???
Examples of Stuff Included in CPI
• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full
service meals, snacks)
• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil,
bedroom furniture)
• APPAREL (men's shirts and sweaters, women's dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle
insurance)
• MEDICAL CARE (prescription drugs and medical supplies, physicians'
services, eyeglasses and eye care, hospital services)
• RECREATION (televisions, toys, pets and pet products, sports equipment,
admissions);
• EDUCATION AND COMMUNICATION (college tuition, postage, telephone
services, computer software and accessories);
• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts
and other personal services, funeral expenses).
So what is the problem with rising
prices?
• When prices rise, it is called inflation.
• It reduces the value of money.
How do you calculate inflation?
• Inflation Rate = [Current Year's Price Level –
Previous Year's] divided by (Previous Year’s
Price Level) x 100
• Let's try an example. If the CPI was 212 in
2010 and 200 in 2009, what was the inflation
rate?
– Inflation Rate = [212 – 200] /(200) x 100 = 6%
How do we measure unemployment in
this country?
• The unemployment rate
– The percentage of the labor force (16 and up) who
are not working, but are looking for work.
Unemployment in our country
How do you calculate unemployment?
• Unemployment Rate = [Number of
Unemployed] ÷ (Labor Force) × 100
• For example, suppose 7 million people are
unemployed in a labor force of 140 million
people. What is the unemployment rate?
– Unemployment Rate = [7 million] ÷ (140 million) ×
100 = 5%
Problems measuring unemployment
• Does not include workers who have given up
looking for work
Problems measuring unemployment
• Does not include “under-employed”—people
who are part-time who want to be full-time
So what is the problem with
unemployment?
• When unemployment is high, the economy
will not produce as much as it could.
So what is the problem with
unemployment?
• Unemployment is often higher for certain
groups