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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