Personal Finance
Scott Wentland
wentlandsa@longwood.edu
434-395-2160
Longwood University
201 High Street
Farmville, VA 23901
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Macroeconomic Indicators
Part 1: GDP
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Overview of Macroeconomics
• What do we mean by “the economy”?
– How do we measure the national economy’s health?
• GDP
• Unemployment
• Inflation (CPI)
• What is the source of economic booms and busts?
– Business cycle
• Strategies for achieving national economic goals
– Laissez faire vs. intervene with government policy?
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The Economy
• What is “the economy”?
– To this point, we’ve talked about “markets”
• From a “micro” standpoint, talking about specific
markets
– “The economy” generally refers to the
“macroeconomy,” which is all market activity
within a country
– How might we measure this?
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Gross Domestic Product
• Gross domestic product (GDP)— the market
value of all final goods and services produced
within a country in a year.
– Real GDP: the measure has been adjusted for
inflation (more on inflation in a later lecture)
• GDP per capita is GDP divided by a country’s
population.
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GDP
• GDP is a Market Value measure…
– Market value solves two problems:
• How do you add up different goods and services
and get a number that makes sense?
• Some goods are more important than others;
e.g., producing two houses is more important
than producing two packs of gum.
– Solution: Multiply the quantities of final goods and
services by their market prices and add up these
values.
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GDP: Why is it important?
• GDP is a measurement of the entire economy
– the market value of all final goods and services
produced within a country in a year.
– It is also a measure of the entire income of a
country
• Why? For every good or service purchased, there is
someone on the other end of that transaction receiving
that money as income
Measuring all purchases = measuring all income
• GDP per capita is like “income per person”
– Helps us understand the health of the economy
• Is it growing? Shrinking?
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Unemployment
• Is GDP the only measure of our economy’s
health?
– We care about our nation’s income (and our own
income!), but don’t we also care about who has
job?
• Next part: We also measure employment and
unemployment
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Macroeconomic Indicators
Part 2: Unemployment and the
Business Cycle
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Unemployment & Recessions
• The macroeconomy is most on our minds when
times are tough
– Slow or even negative GDP growth
– People lose their jobs  unemployment
– If this occurs for a prolonged period of time, we call
this a recession
• The economy eventually recovers…
– Economists have noted that this tends to be cyclical,
calling this process a business cycle
• This lecture: unemployment, recessions, and the
business cycle
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Unemployment
• Measuring Unemployment
– In the US, measured by the Bureau of Labor Statistics
– A person is counted as unemployed if they…
•
•
•
•
Are 16 years of age or older.
Are not institutionalized (e.g., not in prison).
Are not in the military.
Are looking for work.
– The unemployment rate is the % of the labor force without
a job, given by:
Unemployed
100
Unemployed  Employed
Unemployed

100
Labor force
Unemployme nt rate (%) 
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Unemployment: How Good Is It?
• How Good an Indicator Is the Unemployment Rate?
– Does not account for discouraged workers.
• These are workers that have given up looking for work who
would still like to have a job.
• For long recessions the number of discouraged workers will
be higher.
– Implication: In recessions that last a long time, the unemployment
rate is not as good an indicator.
– Doesn’t measure the quality of jobs or how well people
are matched to their jobs.
• Examples:
– A taxi driver with a PhD in chemistry is counted as
fully employed.
– A worker with a part-time job who wants to work fulltime is counted as fully employed.
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The Business Cycle
• In the US, usually our economy (GDP) grows
by 2-3% each year
• Usually our unemployment rate around 5% or
6% or so
• Both GDP and the unemployment rate tend to
fluctuate (usually around the same time)
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The Business Cycle
• When GDP and unemployment are around
“normal” rates, we call this a “boom” or
economic expansion
• When GDP falls and unemployment rises
(usually together), we call this a “bust” or
recession or contraction
• The “booms and busts” our economy
experiences is called the business cycle
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The Business Cycle
• Recessions, as a rule of thumb, are generally two
quarters (6 months) of negative GDP growth
• Officially, the dating of a recession is done by the National
Bureau of Economic Research (NBER), which has a
group of expert economists studying all kinds of
macroeconomic data (not just GDP and unemployment)
– The average duration of the 11 recessions between 1945 and 2001
is 10 months,
– Compared to 18 months for recessions between 1919 and 1945,
and 22 months for recessions from 1854 to 1919
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What Causes the Business Cycle?
• Most of the macroeconomics field is concerned with
exactly this question, what causes fluctuations in
unemployment, inflation, and reduced economic
growth?
– May vary depending on the nature of the recession
– Supply-side explanations (referring to aggregate supply
conditions)
– Demand-side explanations (referring to aggregate demand
conditions)
• Economists have different models, or ways of thinking
about the economy
– Depending on which model you use, you may see the data
differently
– More on this in a full Principles of Macroeconomics
course…
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What to do?
• Economists not only view the causes of
recessions differently, but we also disagree about
what to do about them
– Laissez faire approach
• The government leaves the market alone, more or less
• Lets markets find a new equilibrium and self-correct
– Interventionist approach
• The government should actively try to “smooth out” the
business cycle
• How?
– Fiscal policy (Congress, the President, and the federal budget)
– Monetary policy (the Federal Reserve)
» More on all of the above in later lectures
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What to do?
• Critiques
– Laissez faire approach
• The correction process may take too long (or not occur)
• There may be too much suffering, and something should be
done
• May not be equitable
– Interventionist approach
• There is a lot of disagreement about how to intervene (e.g. how
much? And in what ways? Fiscal policy? Monetary policy?
Which policy?)
• What if the cure is worse than the disease?
– Macroeconomics is complex, how do we know we can get it right?
• Most economists advocate some form of intervention, the
difference is usually what and how much
– There can be very large differences
– More on this in a Principles of Macroeconomics course…
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Thank You
http://en.wikipedia.org/wiki/Macroeconomics
http://en.wikipedia.org/wiki/Gdp
http://en.wikipedia.org/wiki/Unemployment
http://en.wikipedia.org/wiki/Unemployment_in_the_United_States
http://en.wikipedia.org/wiki/Business_cycle
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