Download Macroeconomic Measurements

Macroeconomic
Measurements
Full Employment Act - 1946

Ensure economic stability
Maintain low unemployment
Keep prices stable
Promote economic growth
How
do we measure progress?
Macroeconomic Goals
Inflation: 3 percent
 Unemployment: 4 percent
 Economic growth: 4 percent

Bureau of Labor Statistics
BLS Chart for latest
unemployment.
Unemployment Rate 2011 to
2012
GDP 1007 to 2012 Q3
GDP Growth to March, 2013
Now- was that a bad
recession????
Gross Domestic Product (GDP)

The dollar (market) value of all final
goods and services produced within the
nation’s borders in one year.
 total
production
 total expenditures
 total income
Transactions Not Included in GDP

Transfer payments
 Entitlement
programs
 Transfers in kind
 Cash payments

Unreported income
 Legal

and illegal
Work for which no money changed hands
 Production

within household
Sale of used goods
Basic Circular Flow

This shows the interactions between
households (income earners and resource
owners) and businesses (resource buyers)
Figure 8-1. Basic Circular Flow
Business Sales
Revenues
Product
market
Business
firms
Business
Costs
Consumer
Spending
Consumers in
Households
Resource
market
Income
Expenditures

The components of total spending are:
– Consumption spending
 I – Investment spending
 G – Government spending
C
X – Exports
 From which we subtract
 M – Imports to get

 NX
= Net exports (exports – imports)
C – Consumption spending

Three kinds:
 durable
goods
 non-durable goods
 services

Determining factors:
 income
 expectations
about the future
I – Investment spending

Three kinds:
 new
or replacement capital goods
 inventory changes
 new housing construction

Determining factors:
 interest
rates
 expected return on investment
 expectations about the future
G – Government spending

Three kinds:
 Federal
 state
 local

Determining factors:
 Politics
- goals
 unexpected external events
X – Exports and M - Imports

Exports - Determining factors:
 income
of foreign customers
 comparative advantage of American goods

Imports – Determining factors:
 income
of American customers
 comparative advantage of foreign goods
Macro Equilibrium




Total spending = total output = total income
No unexpected changes in inventories
Full-employment equilibrium is the goal:
 total spending = total production at the
economy’s capacity to produce
Total Income = Total Spending
 For every transaction, when someone spends
money, it is income to someone else
Macro Equilibrium

Equilibrium with high unemployment:
 total
spending is less than the economy’s
capacity to produce
 recession
 underperforming economy
 idle labor and capital goods
Macro Equilibrium

Equilibrium with low unemployment:
 total
spending is greater than the economy’s
capacity to produce
 inflation
 overheated economy
 shortages of labor and capital goods
Leakages
Leakages – funds leaving the circular flow
 Households do not spend all of their
income on American goods

 The
following leak out of the circular flow:
saving (S)
 taxes (T)
 imports (M)

Injections
Injections – funds entering the circular flow
 Not all American made products are
bought by US households.

 The
following are injected into the circular
flow:
investment spending (I)
 government spending (G)
 exports (X)

Basic Circular Flow
Business
Revenues (GDP)
I
+
G
+
X
Product
market
Business
firms
Business
Costs
Consumer
Spending (C)
Consumers in
Households
Resource
market
Income (Y)
S
+
T
+
M
Leakages and Injections

For equilibrium:
 leakages
= injections
S + T + M = I + G + X

It is not necessary that S = I and T = G
and M = X to have equilibrium
Recessions

Usually caused by a decrease in total
spending
 Spending
< production
 Inventories rise
 Investment spending falls
 Unemployment rises
 Income falls
 Tax collections fall and transfer payments rise
Recessions
Real GDP decreases
 To be called a recession, real GDP must
decrease two quarters (six months) in a
row.

Recessions

Possible causes:
 Decreases
in injections (I, G, X)
 Increases in leakages (S, T, M)

Result:
 injections
< leakages
 spending < production
 ultimately reach an equilibrium in an
underperforming economy
Real GDP

Terminology:
 “nominal”
means ‘as measured’ – current $ or
rate
 “real” means with ‘the effects of inflation
removed’
Is the Growth of GDP real or inflated?
This is the real test!!!!!!!
Was there actual increase in production and
services or did the prices just skew the
GDP statistics when C+I+G was added?
Have to correct GDP for price changes so
we can measure actual production.
CPI tells the consumer if they have to spend
more dollars to get that loaf of bread… but
other measures have to be evaluated.
Still another way to test the health of the
U.S. economy
The GDP Deflator…. The broadest price index and
covers all output including consumer goods,
investment goods and government services. (C+I+G)
The GDP deflator isn’t a pure measure of price change.
Its value reflects both price changes AND market
responses to those price changes as reflected in
new expenditure patterns.
The GDP deflator typically registers a lower inflation
rate than CPI and the government watchdogs use
this barometer more readily than current CPI
Historical Record Graph
20
Inflation
16
A
12
8
4
B
0
4
8
Deflation
12
1920
1930
1940
1950
1960
1970
1980
1990
2000
Real GDP
A change in Nominal GDP can include
changes in both prices and quantities.
 Economic growth wants to consider only
the change in quantities

 Remember

– GDP measures production.
Thus, the change in prices must be
removed from the data.
 Convert
Nominal GDP to Real GDP
GDP Deflator
GDP Deflator = Nominal GDP x 100
Real GDP
Real GDP = Nominal GDP x 100
GDP deflator
Nominal GDP is GDP measured at current prices
Real GDP is GDP measured at base year prices
Year
Price of good Quantity
(base
GDP
Real GDP
1
$10
100
$1,000
$1,000
2
$12
120
12x120
10 x 120
= $1,440 = $1,200
3
$14
140
14 x 140 10 x 140
= $1,960 = $1,400
GDP Growth Rates
Growth economy – increases 3% or more
 Stagnant economy – grows less than 3%
 Declining economy – growth is negative

Business Cycle
The long run trend in economic growth is
positive, 3 to 3.5 percent per year
 Short run, there are periods of greater
growth and of decline

 this
variation is called the business cycle
Business Cycle

Four phases:
 peak
 recession/contraction
 trough
 recovery/expansion/prosperity
Figure 8-3.
A Stylized Business Cycle
real
GDP
peak
prosperity
(“boom” times)
recession
peak
long-run
trend of real
GDP
recovery
recession
trough
time
Peak
economic activity at its highest
 unemployment is low
 income is at its highest

 tax
collections are high
 transfer payments are low

danger of inflation
Recession/Contraction
economic activity slows
 inventory levels rise unexpectedly
 sales fall off
 production decreases
 unemployment rises
 incomes fall

 tax
collections fall and transfer payments rise
Trough
economic activity is at its lowest
 unemployment is high
 incomes are at their lowest

 tax
collections are low and transfer payments
are high
Recovery/Expansion/Prosperity





economic activity increases
sales rise
production rises
unemployment falls
income rises



tax collections rise and transfer payments fall
when real GDP increases beyond the previous peak,
prosperity sets in
in the late stages, inflation may become a problem
Inflation
A rising general/average level of prices
 Measured monthly similar to the GDP
deflator

 Special
basket of goods urban consumers
buy
 Consumer Price Index (CPI)

Inflation then is the %change in the CPI
from year to year
How to measure rate of inflation
Measuring the Rate of Inflation
 Market Basket
 Representative

bundle of goods and services
Base Year
 The
point of reference for comparison of
prices in other years
Macroeconomic Measures - Prices
Base Year - The year chosen as a point of
reference or basis of comparison for prices
in other years; a benchmark year. (82-84)
Computing the Consumer Price
Index
Consumer Price Index (CPI)

By observing the extent of price increases,
we can calculate the inflation rate.
n
The inflation rate is the annual
percentage rate of increase in the
average price level.
Percentage change in prices = Current year - later year
later year
x100
In 2005 the CPI was 195.3; in 2006 the index was
201.6. What was the percentage change in prices
from 2005-2006?
Click below for answer.
3.22 %
Changes in Prices
Here’s a little hint if you forget…C-L/L
CPI determined
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Calculates the inflation rate
Market basket of goods and
services (same each year.)
Bureau of Labor Statistics
determines cost in 85 cities by
shopping 184 items.
19,000 stores visited and 60,000
landlords,renters and
homeowners surveyed each
month
Statistics released each
month.(3.15- .7%)
Yearly average compiled.
CPI expressed in base
year ’82-84
Constructing the CPI
 The base period is the
time period used for
comparative analysis
— the basis of
indexing, for example,
of price changes.

Shopping for CPI
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CPI is constructed by identifying a typical bundle of
goods that the average consumer buys. This bundle
stays the same each year.
The base year is changed periodically. The base year
used is ’82-’84 and prior to that it was ’63.The price
level in the base period is designated as 100.
The market basket (bundle) can be changed if BLS
research shows that the “average” consumer no
longer is purchasing that good or service.
Each item in the bundle is weighted percent-wise in
the market basket figures.
The Market Basket
Transportation
19.0%
Housing
32.6%
Food
13.6%
Insurance and pensions 9.3%
Clothing 4.7%
Entertainment 5.1%
Miscellaneous 10.5%
Health care 5.3%
Inflation’s Harmful Effects
Purchasing power falls
 Redistribution of income and wealth
 Savings rate tends to fall
 Businesses plan only in very short time
horizons
 Interest rates rise – business investment
falls

Bottom Line
CPI is designed to measure the impact of price changes on
the cost of a typical bundle of goods purchased by
households(remember, market basket and only for urban
purchasers.)
GDP deflator is a broader price index and is designed to
measure the change in the average price of the market
basket of goods included in GDP (in addition to consumer
goods it includes capital goods, & g & s by government.)
CPI measures money income of consumers in relation to
rising prices (only consumer goods.)
GDP deflator measures economy wide inflation- more g & s
included in measurement.
Types of Inflation

Monetary
supply rapidly increases – ‘too many
dollars chasing too few goods and services’
 Money

Demand-pull
 Total
spending exceeds production of goods
and services

Cost-push
in production – may be caused by
rising production costs/external shocks
 Decrease
Unemployment

Definitions:
 labor
force = those at least 16 years old who
are working or are actively seeking work

Labor Force = # E + # UE
 Employed
(#E) = those in the labor force who
are working
 Unemployed (#UE) = those in the labor force
who are not working but are actively seeking
work
Unemployment

Unemployment rate =


# unemployed / labor force x 100
Types:
 seasonal
 cyclical
 frictional
 structural
Full Employment
No cyclical unemployment exists.
 Only frictional and structural
unemployment exists.

 Full
employment exists when the
unemployment rate is 4 to 6 percent.
 Occurs at or near the peak of the business
cycle.
Macroeconomic
Measurements
Study Questions
1. What is Gross Domestic Product
(GDP)?
 2. Why must Nominal GDP be corrected
for inflation?
 3. How is economic growth calculated?
 4. What is the difference between growth,
stagnation, and decline?

Study Questions





5. What are the phases of the business cycle?
6. What are the three types of inflation?
7. What are the four types of unemployment?
8. Which is the one of most concern to policy
makers?
9. What is the full employment goal?