Download Measuring the Economy

Measuring the Economy
How and why do we measure things ?
How do we measure the health of
the economy ?
What do these graphs say about the economy ?
What does this say about jobs ?
What does this say about the Stock Market?
But…………………………….
Q. What about housing market ????
What does this graph say about inflation?
Is this recession different from other recessions ?
Here we are ! !
What is the economic story in RI?
Essential/Guiding Question:
How do we know if the U.S.
is economically healthy?
Welcome to the World of
Macroeconomics !
Economic Indicators
• Leading Indicators:
•
Predict the future of the Business Cycle
• Coincident Indicators:
•
Parallel Indicators (happening right now!)
• Lagging Indicators:
•
Tell the past
Why do we measure the economy?
 To
keep a finger on the
economic pulse of the nation
from quarter to quarter
 To keep track of the economy
over time to measure growth
 To formulate policies to
improve economic performance
How do we take the country’s
“temperature”?
 We
take the country’s economic
temperature four big ways:
 Gross Domestic Product (GDP)
 GNP
-Gross National Product (not used
today)
 Leading
Economic Indicators
 Consumer Price Index (CPI)
 Unemployment Statistics
So…what is this GDP ?
GDP IS THE TOTAL RETAIL
OR MARKET VALUE OF
GOODS AND SERVICES
PRODUCED IN THE U.S IN
ONE YEAR
What is the GNP ?
 Almost
the same
thing….used
interchangeably
today.
GNP measures the total
output of human,
capital, natural and
entrepreneurship talent
produced by Americans
– no matter where they
live.
 GNP abandoned by
BLS in 1991

GDP: What Gets Included ?
 Market
or Retail Value of all Goods
and Services produced in U.S in
year
 Spending by Foreigners in U.S
 Exports Sold Abroad
 Final Sales (or valued added)
What Doesn’t Get Included?
Intermediate Sales
 Second Hand Sales
 Financial Transactions


transfer payments (welfare, food stamps)
Stocks and Bonds transactions
 Barter ( trade without money changing hands)
 Non-market Transactions (housework)
 Illegal goods (illegal drug transactions)

Alternatives to the GDP?

If the GDP is Up, Why is America Down?
What are some limitations of the
“Nominal” GDP:

May underestimate the GDP
Does not include trillions of dollars of illegal activity
 Does not include money in underground economy


Does not measure economic “welfare”


Vast amounts of wealth does not necessarily bring
happiness
Nominal GDP doesn’t take inflation into account
Nominal GDP v. Real GDP
How do you, then, compare GDP from year
to year ?
 You use REAL GDP !

NOMINAL GDP
 Nominal
GDP expresses
the actual number of
dollars being spent during
year –regardless of how
many items each dollar can
purchase
 Nominal GDP is expressed
in current dollars
REAL GDP
 Real
GDP expresses the value of dollars
in terms of what they can purchase rather
than the actual number of dollars spent
 Real GDP is calculated in constant dollars
i.e dollars that have been adjusted for
inflation
Constant $$$ vs. Current $$$
Current Dollars express the actual number of
dollars spent – without regard for the
purchasing power. Expresses Nominal GDP
Constant Dollars – express the purchasing power
of the dollar. Expresses Real GDP
Why and how do we compare
growth from year to year?
 Purchasing
power of dollar
fluctuates
 Inflation means our dollar does
not buy what it used to.
 How do we account for this?
 Use REAL GDP instead of
Nominal GDP
What does Per Capita GDP
measure?
 Per
Capita GDP is used
to compare output of
two or more nations in
order to estimate the
standard of living
 Nation’s GDP is divided
by its population to get
Per Capita GDP
Per Capita GDP: Take a Look !
https://www.cia.gov/library/publications/th
e-world-factbook/rankorder/2004rank.html
Are there any other ways of taking
the country’s “temperature”?
Some other economic indicators:

Coincident Indicators



Lagging Indicators


Housing starts – one
of the LEI’s

Parallel indicators – coincide
with downturn or upswing
Personal Income is a
coincident indicator
Occur after an economic
upswing or downturn
Length of unemployment stats
Leading Indicators (10)


Predict what will happen
Most important to economist
How predictive are the Leading
Economic Indicators ? ?


Paul Samuelson
Nobel Prize laureate Paul
Samuelson once joked that
"Economists have correctly
predicted nine of the last five
recessions.” (economics humor !)
The LEI index correctly
forecasted each of the 7
recessions during the 1959-2001
period…but it also forecasted 5
recessions that did not occur !
Inflation:
Measuring the Economy
By Looking at Price Change
HOW CAN COOKIES HELP US
UNDERSTAND INFLATION ?
What is inflation and how many
kinds are there?
 Inflation:
When
prices,in general,
increase
 What does it
mean? Purchasing 50 % Rate of inflation
value of the dollar
means that the
decreases
Purchasing value of the
dollar is cut in half
What indexes measure inflation?
PPI – Producer Price
Index – measures prices
paid by producers
CPI – Consumer Price
Index – measures a
“market basket “ of
goods from year to year
Bureau of Labor Statistics
Weimar Germany Inflation
of U.S Dept of Labor
measures indexes
Historic Look at Inflation: Post
WWI Germany - Hyperinflation

Cost of A Loaf of Bread
1918
 1922
 1923
 1923
 1923
 1923

- 0.63 marks
- 163 marks
Jan - 250 marks
July - 3,465 marks
Sept- 1,512,000 marks
Nov- 201,000,000,000
marks
Why a “Basket of Goods” ?
What is included in the Market Basket?

FOOD AND BEVERAGES
 HOUSING
 APPAREL
 TRANSPORTATION
 MEDICAL CARE
 RECREATION
 EDUCATION AND COMMUNICATION
 OTHER GOODS AND SERVICES
What is Demand-Pull Inflation ?
 Demand
out-distances
supply
 Too many dollars
chasing too few goods
 Government spending
programs often a culprit
 Fiscal & Monetary
policies used to control
demand-pull inflation
What is Cost-Push Inflation ?
Increase in costs of raw
materials and labor forces
sellers/producers to raise
price of goods/services
 Rise in key commodities
often signal rise in inflation
 “Wage-price spiral” is a real
danger; Wage and Price
controls are sometimes used
to combat cost-push inflation

Can too much money be a bad
thing ?
 Yes
! Too much money
in the economy can be
a potential problem
 Why?
If money is created at a
faster rate than the real
GDP can handle,
inflation occurs
Quantity Theory at
work in the Economy
Shaw’s cashiers and grocery clerks
strike for higher wages…....
Workers demands for
higher wages often leads
to wage-price spiral
Result: Increased prices !
Wage and Price Controls
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2002
177.7
178.0
178.5
179.3
179.5
179.6
180.0
180.5
180.8
181.2
181.5
181.8
2003
182.6
183.6
183.9
183.2
182.9
183.1
183.7
184.5
185.1
184.9
185.0
185.5
2004
186.3
186.7
187.1
187.4
188.2
188.9
189.1
189.2
189.8
190.8
191.7
191.7
2005
191.6
192.4
193.1
193.7
193.6
193.7
194.9
196.1
198.8
199.1
198.1
198.1
2006
199.3
199.4
199.7
200.7
201.3
201.8
202.9
203.8
202.8
201.9
202.0
203.1
2007
203.437 204.226 205.288 205.904 206.755 207.234 207.603 207.667 208.547 209.190 210.834 211.445
2008
212.199 212.623 213.441 213.971 215.206 217.470 219.090 218.749 218.872 216.966 213.074 211.401
2009
211.962 212.823 212.561 212.705 212.977 214.744 214.726 215.479 215.883 216.476 217.113 217.330
2010
217.469 217.397 217.440 217.373 217.182 217.206 217.649 218.062 218.364 219.020 219.441 220.414
2011
221.036 222.008 223.193 224.030 224.634 224.837 225.515 226.266 226.870 226.804 227.014 227.033
2012
227.505 228.433
Do Wage and Price Controls Work?
 Only
President Nixon imposed 90 days
of wage and price controls in 1971
to combat inflation
for a limited
time !
 Prices/wages
usually go up as
soon as controls
are lifted
Is it possible to benefit from inflation?


People who get a
mortgage for a new house
are “ buying steak and
paying back with
hamburger 30 years later
Yes: Debtors
(those who owe
money) can benefit
The money they
pay back is “worth
less” than the
money they
borrowed 25 years
ago
Who & what is hurt by inflation?
Savings Accounts - if the
cost of living is higher
than your rate of interest
 Retired Persons and
People on Fixed Incomes
( with no COLA)
Today, Social
Security has COLA  Lenders (creditors..lent
out steak, got paid back
built in by law
with hamburger !

What is “Stagflation”?



Oil Crisis of
1970’s helped
ignite Stagflation


Stagnation + Inflation
Worst of all possible
economic worlds
 0% Economic Growth
 High Inflation
Double Digit Inflation
Double Digit Unemployment
Double Digit Interest Rates
First time in history…..

1970’s ushered in…..
First handheld
calculator
 Birth of the first testtube baby
 First personal
computer….


And for the first time
in history, stagflation.
Unemployment:
Another measure of the
economic health of the country
Full Employment Mandate:
 Humphrey
– Hawkins Act
 Goal:
5% ( However, 5% Unemployment is
Full Employment
 Why
?? ?
 Seasonal
Unemployment
 Frictional Unemployment
 Structural Unemployment
 Cyclical Unemployment -only serious one
Who are the unemployed?
 Over
16 and looking
for a job during the
last month
 Measured by the
BLS (Dept of Labor)
which scientifically
selects 60,000 people
to ask.
Seasonal Unemployment
Lifeguards
Ski Instructors
Del’s Lemonade
Frictional Unemployment
Not
employed
yet…but
will be
getting a job
soon
Structural Unemployment
Problem ? A “mismatch”
between worker and
“skills needed” or
location
Solution: Need to get new
skills
Typist needs to learn
computer skills
Cyclical Unemployment
Signals a
downturn in
the
economy
Can official
unemployment numbers
be misleading ??
The “Underground Economy”
 Bartering
of
service
 “Under the
counter” jobs
 Illegal gambling
 Prostitution
 Drug dealing
How will “underground economy”
impact unemployment statistics?
 Underground
workers ARE
employed…..just not officially !
 Impact
? .......official
unemployment statistics may
actually be inflated !
What about the “underemployed”?
Tom Kirscher lost his job as a software programmer
earning $115 an hour. Today the 57-year-old works for
Publix stocking groceries for $9.50 an hour.
Who is the “discouraged worker” ?



Underemployment often
leads to “discouraged
worker” syndrome.
Will official unemployment
numbers be inflated or
deflated ??
Deflated ! there are really
more people unemployed