Download Unit 4: Measuring economic performance

Unit 4: Measuring economic
performance
What is Macroeconomics?
Macroeconomics is the study of the large economy
as a whole. It is the study of the big picture.
•
•
Instead of analyzing one consumer, we analyze everyone.
Instead of one business we study all businesses.
Why study the whole economy?
• Macro was created to:
1. Measure the health of the whole
economy.
2. Guide government policies to fix
problems.
2
For all countries there are three
major economic goals:
1. Promote Economic Growth
2. Keep Prices Stable (Limit Inflation)
3. Limit unemployment
In this unit we will analyze how each
of these are measured.
3
Stats used to measure
economic performance:
•
•
•
•
1.
2.
3.
4.
Gross domestic product
productivity
inflation
unemployment
Gross Domestic Product
Most important stat used to measure
5
ECONOMC GROWTH!!!
GDP
• GROSS DOMESTIC PRODUT
(GDP) =
dollar value of all final goods and
services produced within a country’s
borders in one year.
World GDP Distribution
2010 Nominal GDP
7
GDP expenditure approach
• Adds up the value of spending in an
economy in one year
*1. Consumer
Spending/consumption (C)
Goods and services
purchased by
consumers (durable
and nondurable goods)
*largest category of GDP
2. Investment (I)
spending
• When businesses put money back into their
own business
Includes spending on:
Capital resources
Construction
Inventory
Capital resources
Equipment, machinery,
factories etc
Construction
Inventory
• Unsold merchandise
3. Government Spending (G)
Any good or service the government
purchases (military, education, roads etc)
Infrastructure:
roads
bridges
4. Net Exports (Xn) spending
Spending on TOTAL exports
Exports vs. Imports
• Exports
items made in
the US and sold to
another country
• Imports
items made in
another country and
sold to the US
Imports are counted in
The GDP, but
NEGATIVELY!!
Formula for GDP (expenditure
approach)
GDP = C + I + G + XN
For each situation, identify if it is included in GDP the
identify the category C, I, G, or Xn
1 You spend $10.00 for movie tickets
2 The Government spends $5M Increase
in defense spedning
3 Ford builds a new $2M factory
4 You buy $20,000 Toyota that was
produced in Japan
5 A Canadian purchases a U.S. produced
car
6 You spend $10,000 Tuition to attend
college
18
7 A Farmer purchases new $100K tractor
Things excluded in expenditure
approach:
1. intermediate goods
Item that goes into
making a final product
2. Transfer payments
• Money is transferred
from person or
government to another
person
• example: social
security, welfare, tax
refund etc.
3. donations and gifts
4. Financial transactions
Include things like:
Buying and selling of stock
One business buying another
5. used items
6. illegal sales
*Anything in which a record is not kept is NOT
counted in the GDP
Example:
A man builds a deck on his own house;
he does not pay himself to do this
You baby sit your neighbor and are
paid“under the table”
Counted or Not Counted in the
GDP????
1. Sam buys an outfit from Plato’s closet, a
resale clothing store
2. Sue buys a new outfit from Macy’s
3. Bill gets new brakes installed on his car
4. Ford purchases steel from Germany to build
a car
5. France buys computers from the United
States
6. Michael buys stock in Disney
Shortcomings of GDP
1. Non-market (production occurs but no $ is
exchanged) transactions not counted
2. Does not look at quality
3. Tells nothing about who gets goods
4. Does not account for population
Per Capita GDP
• Looks at the GDP per person
total GDP/population
** Better indication of a country’s standard
of living!!!
World GDP Distribution
2010 Nominal GDP
30
Topic 2: Interpreting GDP
Statistics
GDP measures growth or lack of growth of an
economy
Business Cycle
Calculating GDP over several
years results in a Business Cycle
= ups and downs of the economy
THE BUSINESS CYCLE
The national economy fluctuates resulting in periods of
boom and bust.
Recession: decline in GDP for 6 months or more
34
Blue line NOT trend line;
Above 0% = growth
Under 0% = decline
U.S. Business Cycle
36
Predicting Business Cycles
• Economists use Index of
Leading Economic
Indicators (ILEI) to
predict future of the
economy
ILEI includes stats such as:
stock prices, unemployment
claims building permits
Pizza Making Factory
Materials: 1 black marker, 1 red marker, scissors,
sheets of paper, round template
Procedures:
1. Trace the pizza template onto a piece of paper
2. Cut out the circle
3. Draw 5 colored in (size of a quarter)pepperoni pieces on
the circle using the RED marker
4. Draw 5 colored in (size of a dime) black olives on the
circle using the BLACK marker
Circles must be traced and then CUT using scissors,
no tearing!!!! Cut 1 pizza at a time!
Pizza Making Factory
1. What happened to productivity (line 10) from
round 1 to round 3? Why?
2. What happened to the quality of the pizzas from
round 1 to 3? Why?
3. What effect did productivity have on the average
cost of a pizza (line 8)?
Why is this important???
Topic 3: Productivity
Number of goods/ services that a worker can
produce for each hour of work
Productivity and economic
growth
Things that increase a country’s
productivity:
1. Improvement in capital resources
2. Improvement in labor resources
more training/education
Specialization
incentives
3. better technology
Topic 4: Inflation
Increase in the economy’s overall price level
(does not mean all prices are rising, prices rise
unevenly)
What is Inflation?
Inflation reduces the
“purchasing power” of
money
•When inflation occurs, each
dollar of income will buy fewer
goods than before.
Degrees of Inflation:
1. Creeping inflation
Prices grow up to 4%
a year
Prices “creep” up
2. Galloping
Price level DOUBLES in a year
3. Hyperinflation
Prices increase 500% a year or
more
“Ducktales – inflation”
Inflation types: consider a
Polar Pop ($.74)
Next year’s price
Creeping inflation
$.76 (3%)
Galloping inflation
$1.48 (double)
Hyperinflation
$3.70 (500%)
Measuring Inflation
1. Consumer Price Index (CPI)
Index used to measure INFLATION
CPI looks at a consumer market basket of
goods such as food, clothing, transportation,
entertainment & medical care
CPI formula
CPI =
Current price/base price X 100
CPI example
Year
Price of
bread
2000
$1.19
2002
$1.32
2006
$1.49
CPI - using
2000 as
base
Year
Price of
bread
CPI - using
2000 as base
2000
$1.19
1.19/1.19 X 100
= 100
2002
$1.32
1.32/1.19 X 100
= 110.9
2006
$1.49
1.49/1.19 X 100
= 125.2
CPI info.
• To find % rate of change in inflation,
take the CPI and subtract 100 from it
• Base year will always have a CPI of 100
Adjusting numbers for inflation
• To be able to compare the value of
items or statistics, they must be
adjusted for inflation
– WHY?? Prices increases over the years; a
2012 statistic would always be more than a
2011, 2005 1990 etc. statistic because
prices have increased during that time
period
Example of adjusting for
inflation (highest grossing
movies in U.S. history)
How can you figure out which is the most
popular movie of all time?
What is the problem with this method?
Nominal Box Office Receipts
63
How can you figure out which is the most
popular movie of all time?
Real Box Office Receipts (adjusted for inflation)
Did the economy below
actually grow???
If apples are the only thing being
produced
Year 1: 10 apples at $1 each; GDP = $10
Year 2: 10 apples x $2.00; GDP = $20
65
• Real GDP - GDP adjusted for price
increases
• best indicator of economic growth, uses
a BASE year to make comparisons
• More accurate statistic when trying to
determine growth of an economy
• GDP deflator
removes the effects of inflation
from the GDP
REAL GDP = Nominial GDP
GDP deflator
X 100
Did this economy really grow?
Year
GDP
GDP
deflator
Real
GDP
1
$450
100
450/100 X
100 =
2
$452
106
452/106 X
100 =
Example of Real GDP
Year GDP
GDP
Real
deflator GDP
1
$450
100
$450
2
$452
106
$426
Once real GDP
is calculated it
shows the
economy did
not really grow
from year 1
Rule of 70
Can find the # of years it will take for
prices to double
Take % increase in prices and divide into
70
How long will it take for prices to double if
prices increase by 3% a year:
70/3 = 23 years
Does GDP accurately measure
standard of living?
Real GDP per capita is the best measure of a
nation’s standard of living.
Real GDP per capita is real GDP divided by
the total population.
73
4. Real Income
Income adjusted for inflation;
DETERMINES
PURCHASING POWER
Purchasing Power = how
much stuff $ will buy
Cost of Living in U.S.
Highest cost of living
New York, NY
Honolulu, Hawaii
San Francisco, CA
San Jose, CA
Stamford, Conn.
Washington DC
Fairbanks, AL
Boston, Mass
San Diego, CA
LA, CA
Lowest cost of living
Brownsville, TX
Pueblo, Co
Ft. Hood, TX
Fort Smith, Ark
Sherman, TX
Springfield, Ill
Waco, TX
Fayetteville, Ark
Austin, TX
Springfield, MO
Formula for Real income
Real income =
nominal income/ CPI X 100
* Shows purchasing power
Example of real income
Year Income
CPI
Real
income
1
$30,000
100
30,000/100
x 100
= ??
2
$30,900 105
(3%raise)
30,900/105
X 100
= ???
Example of real income
Year Income
CPI
1
$30,000
100
2
$30,900 105
(3%raise)
Real
income
$30,000
$29,428.57
Person
made more
$
But …..
purchasing
power
actually
went down
Reasons for Inflation
1. Cost push inflation
IT COST COMPANIES MORE TO
PRODUCE - They PUSH this price
increase on to consumers
Example: the price of beef goes up, so
McDonalds raises the price of their
hamburgers
2. Demand Pull inflation
Caused by demand exceeding supply or a
rapid increase in the money supply
spending PULLS price level up
Zimbabwe 2008
Inflation rate
79,600,000,000%
Amount of time for price to
double: 24.7 hours
Inflation practice
Item
Year 1
Year 2
Food
$5000
$5400
Clothing
$2250
$2700
Gas
$3200
$3000
CPI = Current price/ Base price X 100
What is the CPI for food in year 2 using year 1 as a
base?
What is the CPI for gas in year 2 using year 1 as a
base?
• Food CPI = 108
• Gas CPI = 93.8
Did the economy in the chart
below grow from year 1 to
year 2? Why or why not?
Year
Nominal GDP
GDP deflator
1
$5,000
100
2
$6,600
125
Find REAL GDP for each year and compare
Real GDP = actual GDP/GDP deflator X 100
• Real GDP year 1 = $5,000
• Real GDP year 2 = $5,280
– YES economy did grow
In which of the cities below will
you earn the MOST REAL
income?
Real income = Actual income/ CPI X 100
City
Income
CPI
Cleveland
$30,000
101
Atlanta
$30,000
103
Chicago
$30,000
110
• You receive a 2% raise at your job. Inflation
increases by 3%. Does your purchasing power
increase, decrease or stay the same?
_______________________
• You receive a 4% raise at your job. Inflation
increases by 2%. Does your purchasing power
increase, decrease or stay the same?
_______________________
write CP is the statement refers to cost push
inflation and DP if the statement refers to DP
inflation.
____The price of sugar increases. As a result, bakeries
charge more for a cake.
____ Americans have more money. As a result their
demand for items is higher which causes prices to go
up
____ The auto workers union is successful in
negotiating pay raises – as a result, the price of cars go
up
Effects of Inflation
• Anticipated inflation
• inflation that is
expected
• Able to plan for
• Unanticipated
Inflation
• Inflation whose full
extent was not
expected; not
planned for
1. Fixed Income Groups
- elderly living on fixed retirement funds
- landlords receiving fixed payments
- minimum wage workers
* are hurt by inflation because the amount of $
being received is FIXED for a number of years.
Prices go up, but income stays the same = decrease
in purchasing power
2. Savers
• *depends on interest rate given and what happens
to price level.
• For example: if you earn 1% interest on a savings
account but inflation goes up 1.5%, your $ will
buy less; If you earn more interest than the
inflation rate purchasing power will go up
3. Lenders
• * depends on interest rate charged and what
happens to price level.
• For example: if a bank charges a 6% interest rate
and inflation goes up 7%, the $, once it is paid
back will be worth less than when it was borrowed
4. Borrowers
* Depends on interest rate charged and what
happens to price level.
Helped or hurt by inflation??
• 1. A man lends $100 to his friend in
2010. The friend pays him back today.
• 2. A tenant signs a one year lease to
rent an apartment for $800 a month?
• 3. An elderly couple lives off fixed
retirements payments $2,000 a month
• 4. A woman who is saving money in a
savings account earning 1% a year.
Inflation is going up by 3% a year.
Topic 5: Unemployment
The % of people who are not
working, but actively seeking
employment
Unemployment rates
Highest rates:
Lowest rates:
Yuma, AR
27.5%
Bismark, ND
2.6%
El Centro, CA
26.6%
Fargo, ND
3%
Yuba City CA
15.8%
Lincoln, Neb
3%
Merced, CA
15.7%
Midland, TX
3%
Ocean City, NJ
14.5%
Ames, Iowa
3.1%
Lafayette, LA
3.1%
Modesto, CA
14.5%
Types of Unemployment
99
1. Frictional Unemployment
“Temporarily unemployed”
Skills are present
• Results from “normal” changes in the
labor market
Reasons for frictional unemployment
•Graduating from school
•In between jobs
•Re-enter workforce
100
2. Seasonal Unemployment
•Due to time of year and the nature of the
job.
•These jobs will come back
Examples:
Life Guards
101
3. Structural Unemployment
•Changes in the organization of the labor force
or the structure of a company
•Workers DO NOT have skills needed and these
jobs will not come back OR skill of worker is
obsolete
•Workers must learn new skills to get a job.
Examples:
•VCR repairmen
•Carriage makers
102
Reasons why structural unemployment
occurs:
Change in technology
Company relocates
Merger takes place
103
4 Cyclical Unemployment
•Unemployment that results from
a RECESSION
- the company doesn’t have $ to keep the
worker
Examples:
•Steel workers laid off during recessions.
•workers laid off due to people not spending $
104
Practice
1. Joe just graduated from school and is
looking for his first management job
2. Sally lost her job at Sears due to declining
sales
3.
Tim was replaced by a robot on the
assembly line
4. Kim just graduated from school and
cannot find a job in her field so she is
working as a waitress
5. Jim lost his job when his company
consolidated and moved to another
state
Video clip
• “unemployment benefits - the 99ers”
The Natural Rate of Unemployment
•This is the normal amount of unemployment
that we SHOULD have.
108
Full employment means NO Cyclical
unemployment!
Unemployment rate of around 4-6% =
FULL EMPLOYMENT
109
Criticisms of the Unemployment Rate
What is wrong with the unemployment rate?
It can misdiagnose the actual unemployment rate
because of the following:
Discouraged workers-
• Some people are no longer looking for a job
because they have given up.
Part-Time Workers-
• Someone who wants more shifts but can’t get
them is still considered employed.
110
Cost of Unemployment
GDP GAP - potential production is lost
Okun’s Law
• For every 1% point by which the actual
unemployment rate exceeds the natural rate, a
GDP gap of about 2% occurs
• Example: The unemployment rate is 8% (2% over
acceptable)
GDP gap 2 X 2 = 4
Tradeoff between inflation and
unemployment.
In general, there is an inverse relationship
between unemployment and inflation
114
• When UNEMPLOYMENT is low (more $
circulating in the economy) the value of the dollar
goes down INFLATION is higher
• When UNEMPLOYMENT is high (less $
circulating in economy) INFALTION is lower