Download Unit 4: Macroeconomic Statistics and Analysis

Unit 4: Macroeconomic Statistics and Analysis
M. Welch- CHS
This is the first unit that deals with macroeconomic topics. Macroeconomics is the study of the
economy as a whole, unlike microeconomics which is the study of individual businesses or industries.
One of the major things to understand about macroeconomics is that in a market economy there seems
to naturally be ups and downs in economic activity. Economists refer to this cycle of ups and downs as
the business cycle. The business cycle includes 4 stages. Those stages include:
Peak-
Which is the highest point of economic activity during the cycle
Recession-
Which is characterized by a decline in economic activity
Trough-
Which is the lowest point of economic activity during the cycle
Recovery-
Which is characterized by an improvement in economic activity
How can we tell where we are in a business cycle?
There are several statistics that can be used to gauge how the economy is doing. The three most
important statistics include:
GDP- Gross Domestic Product
Unemployment- The percentage of people who are considered to be unemployed
Inflation-The percentage change in price level
Usually (remember ceteris paribus) these statistics move in a predictable manner through the business
cycle.
During a recession:
GDP declines, unemployment increases and price level declines.*
During a recovery:
GDP increases, unemployment declines and price level increases.*
However, in the late 1970s, we experienced an economy where this relationship did not hold true. At
that time there was an increase in prices combined with a decline in GDP and an increase in
unemployment. This situation where the economy experienced stagnant growth combined with
inflation became known as stagflation. We’ll learn more about this in a later unit.
*Understanding these relationships is very important to having an understanding of macroeconomic
trends.
Now let’s learn more about each of these statistics:
GDP
GDP is probably the most important statistic used to determine the strength of an economy. It gives us
the total amount of output in the economy. As a matter of fact, the technical definition for a recession
is a decrease in GDP for two or more consecutive quarters. (A quarter is a quarter of a year- or 3
months)
Let’s breakdown the definition of GDP.
Gross means total
Domestic refers to within a country
Product refers to goods and services
But, there is a little more to the definition. The official definition of GDP is:
The total value of all final goods and services produced in a country during a given year.
We need to make sure what this definition means:
Total value refers to a dollar amount- So GDP is refers to an amount of money
Final goods and services refers to finished products. This means that we do not count intermediate
goods. Intermediate goods are purchased as a part of a particular item. For example, Ford Motor
Company may buy tires from Goodyear. The purchase of the tires is not included in GDP because the
price of the tires will be included in the final sale price of a car, which would be included in GDP.
Basically we want to make sure that there is no double counting.
Produced in a country refers to the fact that we count any good or service produced in a country
regardless of where the ownership of the company is located. For example if a U.S. company like Apple
manufactures an i-phone in China, the production of the i-phone is calculated in the GDP of China, not
the GDP of the U.S.
In a given year is self- explanatory. Technically this can be during a given period of time, but usually
GDP calculates production for a period of one year. Also, growth rates are usually presented as a rate of
yearly growth.
So how is GDP actually added up? There are a few methods, but we will focus on the most common:
The expenditure (spending) method- Here is the equation:
Y=C+I+G+NX
In this equation:
Y= GDP
C= Consumer Spending
I= Business Investment (This refers to the products that businesses buy. This
can also be thought of as economic capital)
G= Government Spending
NX= Net Exports or exports-imports
Another method to determine GDP is known as the income method. The income method adds together
total income in the economy including the following:
Wages
Interest earned
Rents
Profits
Limits to using GDP as a statistic
Using GDP to tell us a country’s standard of living can be limited. GDP only tells us the total value of
production. It does not tell us the degree to which how the GDP is spread out. A country like China has
a high level of GDP, but when that number is divided by the number of people in the country it is not
quite so high. That is why economists often look at GDP per capita- GDP divided by the county’s
population. GDP is also limited in that it does not tell us the distribution of wealth in an economy. The
United States has a high GDP and many wealthy individuals; it also has a lot of poor people as well.
Lastly, some economists believe that GDP tells us very little about quality of life. Living in a poorer
country that might have beautiful views, no pollution, many required weeks of vacation, or a vibrant
culture might be better than living in a country with a higher level of GDP.
Unemployment
The unemployment rate tells us the percentage of people in the labor force who do not have a job. It
is important to know the definition of the labor force. The labor force includes all people who are
willing and able to work. So if a person is not seeking work (a stay at home parent, a retired person, a
full time student, even a person who has given up looking for a job) that person would not be
considered part of the labor force, and thus would not be considered unemployed.
Because of the way that the unemployment rate is figured, some people criticize the statistic.
Some people say the numbers are too low. They argue that discouraged workers who may have
given up trying to find a job, part time workers who want a full time job, and people who have
accepted jobs with lower wages out of necessity are not figured into the percentage and
therefore undercount the actual rate of unemployed workers.
Others argue that the numbers are too high. These people argue that many people work in
what is known as the underground economy. Workers who work “under the table” may be
counted as unemployed because they may want to hide their work situation from the
government. Therefore there will be an over counting of unemployed workers.
Types of Unemployment
It is also important that we understand why people might be unemployed. Because of this, economists
have created different classifications for the unemployed. They include:
Cyclical Unemployment-
This type of unemployment occurs when a person losses their job due
to a recession. A person in this situation is considered to be a laid-off
worker. A person who lost their job due to the recession of 2008 would
be considered cyclically unemployed. The impact of this unemployment
varies with the level of economic activity, and to a certain extent can be
positively impacted by government actions.
Structural Unemployment-
This type of unemployment occurs because a job has become obsolete,
or is no longer in demand in the nation’s economy. Structural
unemployment occurred in the early 1980s when many U.S. steel plants
closed due to international competition. This tends to be the most
difficult type of unemployment to deal with. The most common
approach to dealing with it is to educate and retrain workers.
Frictional Unemployment-
This is when a person is considered to be “between jobs” and it is
temporary. A person who quits their job or is fired would be considered
to be frictionally unemployed. Because this type of unemployment
occurs due to choice and is temporary, the government does not tend
to be concerned about this type of unemployment.
Seasonal Unemployment-
Some jobs do not provide year-round employment. A landscaper or a
beach lifeguard in the winter would be examples of this type of
unemployment. Because of the nature of this type of unemployment, it
is not a concern for policy makers, and reported unemployment is
usually “seasonally adjusted” to account for it.
Full Employment
It is also important that you know the definition of full employment:
You might think that full employment would be when there is 0% unemployment, but economists
believe that there will always be some level of unemployment. They believe that the “natural rate of
unemployment” includes both structurally and frictionally unemployed workers. It is cyclically
unemployed workers that bring the unemployment rate below the rate of full employment. Economists
disagree over what the actual unemployment rate at full employment is, but most would agree that it is
around 5% to 5.5%.
Inflation
In order to determine the rate of inflation- the percentage increase in price level, we need to
understand how the price level is determined. It is also important to know that there can be a decrease
in the price level. That would be called deflation.
The most common method to determine the price level is by calculating the Consumer Price Index (CPI)
The CPI is calculated by determining the changes in prices of selected consumer goods over time. These
selected items make up what is known as the market basket. The market basket includes food, items of
clothing, etc. that represent an average consumer. The percent changes in the overall price of the
market basket from a selected base year to another year tell us the price level
Just so you know there are other methods of determining the price level and inflation. Another
common method is called the Producer Price Index or the PPI. This measures the change in wholesale
prices.
Types of Inflation
Now that we know how to calculate inflation, it is important to understand the causes of inflation.
Demand Pull Inflation
Sometimes there is an increase in overall demand in the economy. When this occurs, price level
increases. We call inflation caused by an increase in demand demand pull inflation. This type of
inflation can be caused by things such as a rapidly growing economy, and by actions taken by the
government. These government actions could include an in increase in government spending or an
increase in the supply of money (we’ll learn about these in a later unit)
Cost Push Inflation
Sometimes the costs of inputs for businesses increase. When this occurs, producers produce less and
price level increases. We call inflation causes by an increase in the price of inputs cost push inflation.
This type of inflation can be caused by an increase in wages or when there is an increase in the price of
an important natural resource like oil.
Real GDP
Now that we have learned about GDP and price level we can have a better understanding of real GDP.
Many economists would consider Real GDP to be a good indicator of economic growth. Why? Because
Real GDP removes the effects of inflation from GDP. How does this work?
If we have a 5% increase in GDP, and the inflation rate is 2%; then we know the real GDP grew by 3%.
Indicators
There are other forms of data that can be collected by economists to either predict or tell economists
what has happened in the economy. These indicators can be leading indicators, coincident indicators or
lagging indicators.
Leading indicators are statistics that help economists determine the direction an economy is heading in.
An example of a leading indicator is the change in prices in the stock market.
Coincident indicators tell economists where the economy is at a particular time. Personal income is an
example of a coincident indicator.
Lagging indicators indicate where the economy has been and they tend to trail the direction of the
economy. The most common example of a lagging indicator is the unemployment rate.
The ADAS Graph
Now that we have covered Price Level and Real GDP, we can draw a graph that depicts the marcoeconomy. The graph below shows us the equilibrium level of the aggregate economy. Aggregate refers
to the entire economy. So the graph below shows the total level of demand in the economy as AD or
aggregate demand. The graph also shows the total level of supply in the economy as AS or aggregate
supply.
Price
Level
AS
PL
AD
0
Y
Real
GDP
As you can seePrice level (usually CPI) is on the vertical axis. Real GDP (also referred to as output) is placed on the
horizontal axis.
The AD curve shows an inverse relationship between Price Level and real GDP.
The AS curve shows a positive relationship between Price Level and Real GDP.
The equilibrium price level is referred to as PL on the vertical axis.
The equilibrium level of output is referred to as Y (remember the earlier symbol for GDP was Y)
The ADAS Graph can show the relationship between Price level and GDP that we described earlier.
Remember a decrease in GDP goes along with a decrease in price level during a recession.
How can we show this on the graph?
Price
Level
AS
PL
PL1
AD
AD1
0
Y1
Y
Real
GDP
Let’s assume that people believe that the economy is going to decline and consumer confidence
decreases. (FYI- consumer confidence is a determinant of AD)
When this happens, people get nervous about the future and start to buy less.
This leads to a decline in aggregate demand
We show this with a leftward shift of the AD curve (kind of like our earlier demand curves)
- from AD1 to AD2
This leads to a decrease in Price Level from PL to PL1 and a decrease in GDP from Y to Y1.
To recap: The decrease in consumer confidence leads to people buying less which leads to a decrease in
prices and the amount produced. All of this can be described with the graph above.
Big Things to Remember in This Unit:
-What is a business cycle?
-What is GDP and how is it calculated?
-How is unemployment determined and what types of unemployment are there?
-What is full employment?
-What is the CPI and what types of inflation are there?
-What is the relationship between the business cycle, GDP, unemployment and price level?
-How can the relationship between GDP and price level be demonstrated graphically?
Homework:
Videos and Quizzes
Business Cycle
Unemployment
Inflation
GDP
AD
AS
Growth
Accelerated Homework
Go to the following to learn about calculating CPI: Calculating CPI
Print, Complete and Pass- In the following sheet: Accelerated CPI Worksheet
Unit Quiz:
Unit 4 Quiz