Download AP Macro - Sect. 3 PP no bkgd

Sect. 3 - Measurement of Economic Performance
Module 10 - The Circular Flow & GDP
What you will learn:
• How economists use aggregate measures to track the
performance of the economy
• The circular flow diagram of the economy
• What gross domestic product, (GDP) is and the three ways of
calculating it
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Sect. 3 - Measurement of Economic Performance
Module 10 - The Circular Flow & GDP
National Accounts -
The Bureau of Economic Analysis keeps track of consumer
spending, producer sales, investment, govt. spending, etc.
Circular Flow Diagram -
Representation of the Macro-economy showing the flow of
money, goods & services, and factors of production
Households Person or group who share income & purchase goods
Firms Business that produces goods and services
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Product Markets Where goods and services are bought and sold
Factor Markets -
Where factors of production (resources) are bought and sold
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Product Markets Where goods and services are bought and sold
Factor Markets -
Where factors of production (resources) are bought and sold
- Expanded Circular Flow Model includes the 4 sectors of
Households, Firms, Government, World
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Circular Flow Video
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Product Markets Where goods and services are bought and sold
Factor Markets -
Where factors of production (resources) are bought and sold
- Expanded Circular Flow Model includes the 4 sectors of
Households, Firms, Government, World
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Gross Domestic Product (GDP) Total Value of all final goods and services produced in the
economy during a given year (currently about $16 trillion)
Does not include intermediate goods
Example: - Car or computer are final goods
- Steel or computer chip are intermediate goods
1) GDP as value of Final Goods and Services Total value of all final goods and services produced by firms
Value Added - The value of a good minus the cost of inputs to
produce it
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2) GDP as Spending Total of all domestic spending on final goods and services
GDP = C + I + G + X - IM
(Consumer + Investments + Government + Net Exports)
3) GDP as Factor Income Total income earned by factors of production
= Labor + Interest + Rent + Profit of shareholders
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2) GDP as Spending Total of all domestic spending on final goods and services
GDP = C + I + G + X - IM
(Consumer + Investments + Government + Net Exports)
3) GDP as Factor Income Total income earned by factors of production
= Labor + Interest + Rent + Profit of shareholders
GDP
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Module 11 - Real Gross Domestic Product
What you will learn:
• The difference between Real GDP and Nominal GDP
• Why Real GDP is the appropriate measure of economic activity
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Module 11 - Real Gross Domestic Product
Aggregate Output The total quantity of final goods and services produced in the
economy
- as aggregate output rises, GDP rises
Nominal GDP -
GDP measured in current prices to show current year output
- Can be misleading due to inflation
Real GDP -
GDP adjusted for changing prices by using prices of a base
year
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Basketballs
Year
Price
Gallons of Milk
Haircuts
Number
Number
Number
Price
Price
sold
sold
sold
+ $3.10 x
600
100
$3.30
850
$11
270
110
$4.10
900
$15
300
2000
$56.00 x 70
2004
$59.00
2008
$64.00
+
$10 x 220
Nominal GDP: 2000 _______
$7980 2004 _______
$11,675 2008 _______
$15,230
$7980 2004 _______
$10,935 2008 _______
$11,950
Real GDP: 2000 _______
Basketballs
Gallons of Milk
Haircuts
Number
Number
Number
Price
Price
sold
sold
sold
Year
Price
2004
$59.00
100
$3.30
850
$11
270
2008
$64.00
95
$4.10
840
$15
265
Nominal GDP:
$13,499
2004 $11,675
_______ 2008 _______
Real GDP:
$10,574
2004 $10,935
_______ 2008 _______
Module 11 - Real Gross Domestic Product
Aggregate Output The total quantity of final goods and services produced in the
economy
- as aggregate output rises, GDP rises
Nominal GDP -
GDP measured in current prices to show current year output
- Can be misleading due to inflation
Real GDP -
GDP adjusted for changing prices by using prices of a base
year
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Top GDPs (Trillions)
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Bottom GDPs (Millions)
GDP Per Capita GDP per person (GDP divided by population)
- Used to compare nation to nation GDP
Real GDP per Capita
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RFK on GDP
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Module 12 - The Meaning and Calculation of Unemployment
What you will learn:
• How unemployment is measured
• How the unemployment rate is calculated
• The significance of the unemployment rate for the economy
• The relationship between the unemployment rate and economic
growth
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Module 12 - The Meaning and Calculation of Unemployment
Unemployed Those who are not currently employed but are looking
Labor Force All people that are employed and unemployed
- Does not include all people
Bureau of Labor Statistics (BLS) compiles information on the labor
force
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Who are NOT part of the Labor Force?
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Under 16
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Have given up looking for work
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Full time students
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Stay at home parents
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Retirees
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Military personnel
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Module 12 - The Meaning and Calculation of Unemployment
Unemployed Those who are not currently employed but are looking
Labor Force All people that are employed and unemployed
- Does not include all people
Bureau of Labor Statistics (BLS) compiles information on the labor
force
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Unemployment Rate % of the Labor Force that is unemployed
- good indicator of job market condition
increases during recession - decreases during expansion
7 million
150 million
= .046 x 100 = 4.6%
Number of unemployed
X 100
Labor force (Empl. + Unempl.)
Labor Force Participation Rate % of working age population that is in the labor force
Labor Force
Population over 16
X 100
150 million
200 million
= .75 x 100 = 75%
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Discouraged Worker -
Those that have given up looking for work
- Do not count in unemployment rate
Underemployed -
When workers are working part time when they desire full time
- or in a job for which they are overqualified
Discouraged Worker Those that have given up looking for work
- Do not count in unemployment rate
Underemployed When workers are working part time when they desire full time
- or in a job for which they are overqualified
Growth and Unemployment Relationship between unemployment and economic growth
- GDP up = unemployment down
Discouraged Worker Those that have given up looking for work
- Do not count in unemployment rate
Underemployed When workers are working part time when they desire full time
- or in a job for which they are overqualified
Growth and Unemployment Relationship between unemployment and economic growth
- GDP up = unemployment down
Module 13 - Causes and Categories of Unemployment
What you will learn:
• Three different types of unemployment and their causes
• The factors that determine the natural rate of unemployment
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Module 13 - Causes and Categories of Unemployment
Frictional Unemployment Unemployment that occurs when people are looking for work
- laid off, changing jobs, just out of school, returning to work
Structural Unemployment When workers’ skills do not match those needed as the job
market changes
- new technologies, consumer demand shift,
outsourcing / offshoring, lack of proper education
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Structural Unemployment
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Module 13 - Causes and Categories of Unemployment
Frictional Unemployment Unemployment that occurs when people are looking for work
- laid off, changing jobs, just out of school, returning to work
Structural Unemployment When workers’ skills do not match those needed as the job
market changes
- new technologies, consumer demand shift,
outsourcing / offshoring, lack of proper education
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Minimum Wage Fair Labor Standards Act - 1938 - Established minimum wage
Minimum price an employer can pay a worker for one hour of labor
- Adds to Unemployment
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Minimum Wage
10
$8.00
Wage $
$6.00
4
2
0
10
30
40
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Quantity of Workers
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Minimum Wage Fair Labor Standards Act - 1938 - Established minimum wage
Minimum price an employer can pay a worker for one hour of labor
- Adds to Unemployment
Labor Unions Organization of workers that use “Collective Bargaining” to
gain higher than equilibrium wages
- Adds to Unemployment
Collective bargaining
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Minimum Wage Fair Labor Standards Act - 1938 - Established minimum wage
Minimum price an employer can pay a worker for one hour of labor
- Adds to Unemployment
Labor Unions Organization of workers that use “Collective Bargaining” to
gain higher than equilibrium wages
- Adds to “Structural Unemployment”
Natural Rate of Unemployment -
Unemployment rate caused by Frictional + Structural
unemployment
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Cyclical Unemployment Unemployment that follows phases of “business cycle”
- Actual Unemployment Rate = Natural + Cyclical Unemployment
Full Employment is when there is no cyclical unemployment
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Quick Check:
Frictional Unemployment - B
Structural Unemployment - C
Cyclical Unemployment - A
A) Unemployment that follows phases of “business cycle”
B) Unemployment that occurs when people are looking for work
C) When workers’ skills do not match those needed as the job
market changes
Module 14 - Inflation
What you will learn:
• The economic costs of inflation
• How inflation creates winners and losers
• Why policy makers try to maintain a stable rate of
inflation
• The difference between real and nominal values of
income, wages, and interest rates
• The problems of deflation and disinflation
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Module 14 - Inflation
Inflation
http://boxofficemojo.com/alltime/adjusted.htm?sort=gross&order=D
ESC&adjust_yr=2013&p=.htm
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Module 14 - Inflation
Real Wages In past 20 yrs. “real wages” have actually fallen due to inflation
Real Income Income divided by the price level *(mod. 15)
- level of prices doesn’t matter - rate of change of prices does
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Inflation Rate The percent increase in the level of prices per year
Inflation Rate =
Difference in Price Level
X 100
Original Price level
- Avg. U.S. inflation is around 3 - 4% per year
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Inflation Rate The percent increase in the level of prices per year
Inflation Rate =
Difference in Price Level
X 100
Original Price level
- Avg. U.S. inflation is around 3 - 4% per year
Shoe Leather Cost Increased cost of transactions caused by inflation
- not a significant issue in U.S.
Menu Costs Cost to change posted prices frequently during period of
High inflation
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Unit of Account Costs Costs due to inflation making money a less reliable unit
of measure
Ex: Landlord loses money if your rent stays the same as
inflation increases
Taxes due on capitol gains that were less than inflation
Nominal Interest Rate Interest rate actually paid for a loan or received in interest
Real Interest Rate Nominal interest rate adjusted for inflation
- Nominal Interest Rate minus Inflation Rate
Ex: NIR of 8% - Inflation Rate of 5% = Real Interest of 3%
Module 15 - Measurement and Calculation of Inflation
What you will learn:
• How the inflation rate is measured
• What a price index is and how it is calculated
• The importance of the consumer price index
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Module 15 - Measurement and Calculation of Inflation
Aggregate Price Level A measure of the overall level of prices in the economy
Market Basket A group of goods and services in eight categories purchased
by “typical” family - updated every ten years
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Module 15 - Measurement and Calculation of Inflation
Aggregate Price Level A measure of the overall level of prices in the economy
Market Basket A group of goods and services in eight categories purchased
by “typical” family - updated every ten years
Consumer Price Index - (CPI)
Measure of the cost of the “market basket” of goods
- Calculated each month by the Bureau of Labor Statistics
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Calculating CPI Current cost of “market basket” X 100
base period cost
- Current base period is 1982-1984 (CPI = 100)
Example:
2014 - $360 = 1.80 x 100 = 180
Base - $200
Inflation Rate Inflation rate is percent change from year to year
difference in CPI x 100
original CPI
Example: 80 divided by 100 = .80 X 100 = 80%
Avg. annual Inflation rate = 80% divided by 30 yrs. = 2.6%
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Quick Check ✔
1) Calculate 2012 CPI
CPI = Current cost of “market basket” X 100
base period cost
2012 - $350
Base - $200
1.75 X 100 = 175
2) Calculate Inflation rate from 2012 to 2013
(2013 CPI = 180)
Inflation Rate = change in CPI X 100
original CPI
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175 = .028 X 100 = 2.8
Quick Check ✔
1) Calculate 2011 CPI
2011 - $340
Base - $200
1.70 X 100 = 170
2) Calculate Inflation rate from 2011 to 2012
(2012 CPI = 175)
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170 = .029 X 100 = 2.9
Producer Price Index - (PPI)
Cost of a typical basket of goods purchased by producers
- electricity, steel, coal, raw materials, etc.
- used as an early warning sign of inflation
GDP Deflator Another price measure -
Nominal GDP
Real GDP
X 100
The End
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