Download Ch. 10-11 GDP, CPI, Unemployment PP

Measuring a
Nation’s Economic
Health
GDP
Gross Domestic Product
(measures national growth)
CPI
Consumer Price Index
(measures inflation)
UNEMPLOYMENT
Problems measured in Macroeconomics
We will cover the following:
1) Economic Growth (measured by looking at GDP)
2) Unemployment (measured by US Census)
U.S. Department of Labor
Bureau of Labor Statistics
3) Inflation (measured with the CPI)
4) Deficits (means a negative amount)
 International Trade Deficit (more imports than
exports)
 Federal Budget Deficit (government debt for
spending on social programs and military)
Measuring Economic Health
When you go for a checkup, the doctor looks at
several indicators:
• heart rate, blood pressure, and body temperature - to
help determine your basic level of health.
The general economic health of a nation can also be
judged by looking at several economic indicators,
which include:
1. the Gross Domestic Product (G.D.P.)
"economic heartbeat of a nation"
2. the Consumer Price Index (C.P.I.)
3. the Unemployment Rate.
Gross Domestic Product
Gross domestic product (GDP) is the
aggregate (total) market value of all final
goods and services produced within a
country in a given period of time.
Sometimes the measurement is looked at on a
per person scale, which is known as…
Real GDP per capita (per person)
 It is the GDP divided by the population.
 Example: When a country has a low GDP per
person, it tells us a lot about conditions in that
country.
How to measure GDP?
1) Output of the products/services is always
valued at market prices. (not sale/discounted prices)
2) It records only the value of final goods, not
intermediate goods.

Intermediate goods: those goods used to
produce a finished good.



No double counting of goods: the value of a good
is counted only once.
Example: fuzz used in Fuzzy Wuzzy would NOT be
counted in GDP, but the toy would be.
Let’s see another example of this…
Fuzzy Wuzzy
How to measure GDP?
 Golden Rule: No double counting of goods: such as
used goods, intermediate goods (goods used in
production process), money spend on depreciation
(replacing old worn-out items)
Example of the correct way to count a good into GDP:
A wooden desk sold to you for $200.
You would figure $200 into the GDP?
Example of Double Counting a desk (the wrong way):
Timber sold to a mill:
After it was milled it was sold to manufacture:
Manufacture built the desk and sold to a retailer:
Retailer marks it up and sells it to you:
If all transactions were added up then total would be:
$20
$50
$120
$200
$390
How to measure GDP?
3) It includes goods and services currently
produced, not transactions involving
goods produced in the past or money
spent on replacing old goods.
 NO USED GOODS ARE COUNTED BECAUSE THEY
HAVE ALREADY BEEN COUNTED IN A PREVIOUS
YEAR (OR QUARTER)
4) It measures the value of production
within the geographic confines of a
country.
ONLY WITHIN A NATION’S BORDERS

Example: A Wal-Mart in Mexico, would its sales
be counted in the U.S. GDP?
NO
How to measure GDP?
5) It excludes government TRANSFER
PAYMENTS (social security & Welfare).
COUNTING THIS WOULD NOT INDICATE
GROWTH IN OUR NATION’S ECONOMY!
“Now that I’ve gotten
my welfare check, I can
get an iPhone”
How to measure GDP?
6) GDP includes all items produced in
the economy and sold legally in
markets
 NO BLACKMARKET TRANSACTIONS
7) GDP excludes items that are produced
and consumed at home and that
never enter the marketplace.
Example: growing crops for your own use.
The Formula for GDP
"economic heartbeat of a nation"
GDP (Y ) is the sum of the following:




Consumption (C) all consumer spending
Investment (I) investment in new capital
Government Purchases (G) spending
Net Exports (X-N) (Exports – Imports)
Y = C + I + G + (X-N)
The Components of the GDP Formula
1.) Consumption (C):
 The
spending by households on goods and
services (except the purchases of new housing).

New homes are considered under Investment ( I )
2.) Investment (I):
 Only
counts the spending on NEW capital (i.e.
equipment, company inventories, and structures),
including new housing.
The Components of the GDP Formula
3.) Government Purchases (G):
 The spending on goods and services by local, state,
and federal governments.
 Remember: GDP Does not include transfer payments
(such as Welfare and Social Security to the people).
 These people will in turn spend the money on goods
so it will be counted only once as consumption.
THINK ABOUT IT!
NEVER VIOLATE THE DOUBLE COUNTING RULE!
4.) Net Exports (X-N):
 Exports minus Imports
 ONLY COUNT WHAT IS MADE HERE!
Economic Growth in the United States
Real GDP per year
Peak
Peak
Trough
Time
One Cycle
(Have averaged five years)
Peak: real GDP reaches its maximum.
Recession: real GDP declines.
Trough: real GDP reaches its minimum.
Recovery: an upturn - real GDP rises.
Review:
• What is GDP?
• What is the GDP formula?
Other Measures of a
Nation’s Health
Other Measures of a Nation’s Health
1.) National Household Income:

is the total income earned by a nation’s
permanent residents.
2.) Disposable Personal Income:
 is the income that household and non-corporate
businesses have left after satisfying all their bills.
 It is basically a measurement of “free cash”
Measuring a
Nation’s Economic
Health
CPI
Consumer Price Index
(measures inflation)
Problems with GDP
GDP is not a perfect measurement
Some things that contribute to economic
well-being are not included in GDP.




The value of a clean environment.
The value and amount of leisure time.
The amount of debt levels for families.
The value of almost all activity that takes
place outside of markets, such as the value
of the time parents spend with their children
and the value of volunteer work.
 The effects of inflation.
Inflation Terms
 Inflation is a sustained increase in the
average price level
 Hyperinflation: Extremely high inflation
 A sustained decline in the average price
level is called deflation
 A period of inflation combined with high
unemployment is called stagflation (can be
referred to as a recession or depression)
Causes of Inflation
Two sources of inflation:
1) Demand-Pull Inflation
2) Cost-Push Inflation
Sources of Short-term Inflation
1) Demand-Pull Inflation: inflation
caused by an increase in demand or
Price
the supply of $
Level
AS
The increase in the
aggregate demand curve
pulls up the price level.
(CPI)
Basically this type of
inflation is caused by
consumers’ increased
need for goods and
services.
P'
P
AD'
AD
0
GDP
Sources of Short-term Inflation
Price
Level
(CPI)
2) Cost-push inflation: inflation
caused by a decrease in supply
which pushes prices up.
AS'
AS
The increase in costs
of production
push up the price
level.
Basically, inflation is
caused by increased
costs that suppliers
have to pay to
produce their
products.
P'
P
AD
0
GDP fell: unemployment went up!
GDP
Real versus Nominal GDP
How does inflation affect GDP?
*We need to adjust the GDP for inflation to
see if growth has actually occurred.
Nominal GDP:
 values the production of goods and
services at current prices.
Real GDP:
 adjusts the values of the production of
goods and services for inflation
An accurate view of the economy requires adjusting
Nominal GDP to Real GDP by using the CPI.
Real vs Nominal GDP
Inflation is not factored into GDP: Why is that a bad thing?
 Let’s say there is a 4% increase in GDP between
Year 1 and Year 2.
This appears good, but what is inflation?
 Based on the CPI (a tool used to measure inflation),
inflation has increased 4% as well.
Bummer! This means that our economy
did not grow at all.
Measuring the Price Level and Inflation: CPI
"economic blood pressure of a nation"
Consumer Price Index
(CPI):
 Measures inflation
 Looks at prices of the goods and services that a
typical urban family buys over time.
 It is used to monitor changes in the cost of
living over time.
How the Consumer Price Index Is Calculated?
1) Fill the Market Basket: Determine what
prices are most important to the typical
consumer.
 The Bureau of Labor Statistics (BLS) identifies a market
basket of goods and services the typical family buys
through the Consumer Expenditure Surveys.
 7,000 families from around the country provided
information each quarter on their spending habits in
the interview survey.
Goods and
Services
How the Consumer Price Index Is Calculated?
2) Compute the Market Basket’s Cost:
Use the data on prices to calculate the
cost of the basket of goods and
services.
2011
=
$
How the Consumer Price Index Is Calculated?
3) Choose a Base Year and Compute
the Index:


Designate one year as the base year,
making it the benchmark against which other
years are compared.
Compute the index (% change) by using a
simple % change formula.
2011
2012
=
$
=
$$
Measuring a
Nation’s Economic
Health
Measuring
Unemployment
(Temperature of the nation)
Types of Unemployment
1) Frictional Unemployment
 Arises from normal labor turnover:
people entering and leaving the labor
force
 People are in-between jobs
 Generally short-term and voluntary
 People choose to do this because there
are other jobs available
 THIS TYPE OF UNEMPLOYMENT IS
NOT BAD.
Types of Unemployment
2.) Seasonal Unemployment
 Unemployment caused by seasonal
changes in labor demand during the
year.
 For example, during the winter
months the demand for farm hands
declines
 Christmas/ Holiday
Types of Unemployment
3.) Structural Unemployment
 Arises when changes in technology or
international competition change the skills
needed to perform jobs or change the
locations of jobs
 Exists because unemployed workers often:
1)
2)
DO NOT have the skills demanded by employers, or
DO NOT live where their skills are in demand
 That is, there is a mismatch of skills or
geographic location.
EXAMPLE: As the older generation ages then
they struggle to keep up with technology. They
can lose there jobs to a younger generation that
is familiar with technology.
Types of Unemployment
4.) Cyclical Unemployment
 Arises from the fluctuations of the
business cycle.
 Increases during a recession and
decreases during an expansion.
 The ONLY ONE DIRECTLY related to the
BUSINESS CYCLE.
EXAMPLE: Ford lays off
employees because sales
have plummeted over the
pass two quarters.
How is
Unemployment
Measured?
How is Unemployment Measured?
Unemployment is measured by the Bureau
of Labor Statistics (BLS).
 It surveys 60,000 randomly selected
households every month.
 The survey is called the Current
Population Survey.
How is Unemployment Measured?
Based on the answers to the survey
questions, the BLS places each adult
into one of three categories:
1) Employed
2) Unemployed
3) Not in the labor force
Unemployment Rate
According to the Bureau of Labor Statistics:
• An Unemployed Worker is:
 One who is 16 years or older (but not retired),
 not currently employed,
 AND is actively seeking employment.
•People are Not in the Labor Force if they are:
 not actively seeking (wealthy or lazy),
 under 16,
 in the military, institutionalized (prison),
retired, or in school.
Natural Rate of Unemployment
The Natural Rate of Unemployment is
unemployment that will not go away.
 It is the amount of unemployment that the
economy normally experiences, even in the
good times.
 So, how do we know what is a healthy
unemployment rate?
 According to the Bureau of Labor Statistics:
in-between 4% and 5%
How does the Government
help the Unemployed?
1) UNEMPLOYMENT INSURANCE is a government
program that partially protects workers’ incomes
when they become unemployed.
 Offers partial payment of former wages for a
limited time to those who are laid off.
 NOT ENTITLED TO THIS IF YOU GET FIRED.
2) Government-Run Employment Agencies: give
out information about job vacancies in order to
match workers and jobs more quickly.
Problems with the Unemployment Rate:
It does not measure:
1) Those that are UNDEREMPLOYED:
 Their skills are above
the job they have.
 EXAMPLE: Someone with
a Ph.D working at
McDonalds
2) Those that are falsely reporting that they are not
seeking employment (or get paid under the table)
only to get WELFARE.
Summary
 Gross Domestic Product (GDP)
…measures an economy’s total
expenditure on newly produced goods and
services @ their market value.




Does not count products made overseas.
Does not count used goods.
Does not count depreciation.
Indirectly counts transfer payments.
Summary
GDP is divided among four components of
expenditure:
1. Consumption (only market prices)
2. Investment (net only, no depreciation)
3. Government Purchases (no Trans Pay)
4. Net Exports (Ex - Im)
Y = C + I + G + (X-N)
Consumer Price Index is the tool we use to
measure inflation and reduce Nominal GDP
to Real GDP by using CPI.