January 4th
Agenda
• Welcome Back !!
• CBM
• In the News
• Measuring the Economy Power-point
• Chapter 13 - Guided Reading
In the News:
• Dec 16 – Federal Reserve hikes interest rate by .25%
• Fed Chair Janet Yellen projects rate climb of 3% over next 3 years.
• Why is that important? What does it mean for you?
Bad for Homeowners
- Won’t rock market but people with adjustable rate
mortgages will take a hit.
- Budgets for new homeowners won’t go as far
- Might stall new housing building/market
Bad for People with Credit Card Debt
- Rates will go up – making it more expensive to hold
balances
Good for Savers
- Savings and Time Deposits will make a little more
money
Unclear for Stock Investors
- Historically higher rates mean falling equities market
- Stock evaluations tend to drop 10% within a year of
rate hike
- A hike usually accompanies stronger economy and
increased corporate earnings
Other Stuff…
• Quizzes back on Thursday
• 1 Month left of the Semester
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Measuring the Economy
Monetary Policy
Globalization
Stock / Investment Briefs
Measuring the Economy
Chapter 13
Measuring the Macroeconomy
The Business Cycle & Economic Indicators
- Gross Domestic Product
- Unemployment
- Inflation
Macro – v - Micro
Macroeconomics :
The Study of the behavior of the
economy
As a whole.
Microeconomics:
The study of how and why
individuals make
Economic decisions
How do we asses our economy’s health?
•We examine economic
indicators –
Data / statistics gathered about
the economy
Indicator #1 – Gross Domestic Product
• Market value of all final goods and services produced during a given period
of time
• Always want steady growth
• Final goods – goods ready for consumption (cereal, cars)
• Market Value – what people are willing to pay
• Can be adjusted to take inflation into account
• Market Value = price x quantity produced
• Final Goods = any NEW good that is ready for use by a consumer
• GDP excludes intermediate goods (ones used to make others)
• GDP excludes secondhand sales (sale of used goods)
• Produced within a country = foreign owned firms that produce within the borders
COUNT towards GDP
• Given time period = looked at quarterly GDP & annually
• Most important is the growth rate of GDP
Issues with GDP:
• Some limitations to the GDP as
economic factor
• Leaves out unpaid or volunteer
workers
• Ignores illegal activities
• Ignores income distribution
• Counts some negatives as positive
(natural disasters)
• Benefits by higher literacy and
health rates
The White House &
Congress
For
The Federal Budget
The Federal
Reserve for
Monetary
Policy
GDP
Is Used
By:
Businesses to prepare forecasts of
economic performance for production,
investment, and employment planning
Wall Street
As an
indicator of
economic
activity
Significance of GDP Analysis
Measurement of the economy’s
performance and it’s general health
It allows us to determine how we are
doing and where we are going
The overall trend of the GDP in the
United States has been GROWTH
Adjusting GDP
•Let’s say:
•2006 GDP was $13.2 Trillion ... and
•2007 GDP was $13.8 trillion
Was this good for the U.S. Economy?
Real GDP – v – Nominal GDP
Nominal GDP
measures the output
of an economy valued
at TODAY’s prices
Real GDP
measure the output of
the economy at prices
that are fixed over time
Problem:
Nominal GDP will go up if
prices go up – even if the
actual output of the
economy does not !!
Solution:
Real GDP allows us to
compare the total output
of an economy from year
to year as if prices have
never changed !
Another Income Measure
• Per Capita GDP –
• GDP per person where the GDP is divided by the population (measure the
standard of living from country to country)
Economic Indicator #2 - Unemployment
• Measured by taking general survey of
people
• Survey 60,000 people monthly
• Employed – has a job currently
• Unemployed – no job, but actively
looking for one
• Not in labor force – those not looking
for jobs
• Does not include involuntary part time
workers
Unemployment Rate:
• The Unemployment Rate shows
the percentage of unemployed
people divided by the total
number of people in the civilian
labor force
Unemployment rate =
9.5 Million
154.8 Million
# Unemployed Workers
Total # Workers in Workforce
x 100 = 6,1%
Problems with the Unemployment Rate
Counts part-time workers
as employed
Leave out “Discouraged
Workers”
Doesn’t count
“underground” / illegal
economy
Causes Underestimation
Causes Underestimation
Causes Overestimation
Four Types of Unemployment
• Frictional: workers are in between jobs – seeking first job or looking
for a new one
• Structural: advances in technology reduces demand for certain skills
• Seasonal: results from changes in weather
• Cyclical: related to the health of the economy – THIS IS BAD
UNEMPLOYMENT
Full Employment
(aka…the “Natural Rate of Unemployment)
• Frictional, Structural, and Seasonal Unemployment types are all
acceptable – goal is minimizing cyclical unemployment.
• Full Employment occurs when jobs exist for everyone who wants to
work and the economy is healthy and growing
• 4-6% unemployment is considered healthy
• This rate may be changing….
• Cost of unemployment is huge
• Costs in potential output, drain on societal funds, loss of potential income
taxes
Economic Indicator #3: Inflation
• Increase in prices in a specific time period
(month/year)
• Tracking also referred to as cost of living index
• Nominal cost – cost in actual dollars
• Real cost – percentage of wages compared to
past
• Uses a “market basket” to track products
Consumer Price Index (CPI)
• Price index for the “market basket”
consumer goods & services
• Called the “cost of living” index
• Primary measure of inflation in the U.S.
• Market basket based on thousands od
surveys of households about spending
habits and then tracks price changes of
these items each month
Severity of Inflation
Creeping Inflation – 1 – 3 % Annually
– very gradual rise in the price levels
Hyperinflation – over 500% annually,
the most severe inflation
Types
Deflation – decrease in the general
level of prices in the economy
(opposite of inflation)
Why could this be good or bad?
Hyperinflation: Germany, 1923
• A German woman feeding a stove
with German Marks which
burned longer than the amount
of firewood people could buy
with them.
• In other words – it was cheaper
to heat your house burning
money – than buying wood!
Causes of Inflation
Demand-Pull
• People in the economy try
to buy MORE than what is
being produced
• High Demand causes
shortages… and prices go
up
• Large increases in the
money supply causes this
Wage – Price Sprial
Cost- Push
Rising
production costs
cause an
increase in
prices
• Higher prices force workers to
request higher wages
• Higher wages force producers to
increase prices to cover wages/
costs
… the spiral begins…
What are the costs of inflation?
• The dollar buys less (loss of
purchasing power)
• People with fixed incomes can’t afford
goods & services
• People SPEND rather than SAVE
• Without savings and investment the
economy cannot grow
• Lenders are hurt (getting repaid at less
purchasing power)
• Lenders charge Higher Interest Rates
• Demand for loans decreases when
interest rates increase
WITHOUT LENDING THE ECONOMY CANNOT GROW
Business Cycles –
Measuring the Economic Activity (Real GDP)
• Businesses go through a
general trend (cycle)
• Expansion – company
growing
• Peak – hits its highest
point
• Contraction – business
begins to shrink
• Trough – business hits a
low point
Recession & Depression
•Recession – downward turn in economy for
a period of 6 months (2 quarters)
•Depression – downturn in an economy for a
prolonged period of time
(plummeting GDP, High Unemployment, Bank/Business Failures etc…)
Business Cycles Continued….
• The Great Depression
Worst and most prolonged economic downturn
• Marked by the Stock Market Crash on “Black Tuesday” Oct 29, 1929
• Between 1929 and 1933, GDP declined nearly 50%
• Unemployment peaked at 24.9% (1933)
• Decade long Depression ended by 1940
• World War II
U.S. Economy returned to its growth trend
• Spending on wartime goods helped stimulate the economy
• Since then the OVERALL trend has been GROWTH.
Indicator Performance During the
Business Cycle:
During Expansion:
• Unemployment Decreases
• Inflation Increases
• Real GDP Increases
During Contraction:
• Unemployment Increases
• Inflation decreases
• Real GDP decreases
Phase of Business Cycle
Real GDP
Unemployment Rate
Inflation Rate
Expansion: Period of
growth
Increasing
Generally Decreasing
Generally Increasing
Peak: Highest level of
economic activity
Stops Increasing
Stops Decreasing
Stops Increasing and may
start Decreasing
Contraction: Period of
Economic Decline
Decreasing
Generally Increasing
Generally Decreasing
Trough: Lowest Level of
Economic Activity
Stops Decreasing
Stops Increasing
Stops Decreasing and may
start Increasing
Questions?
Next:
Guided Reading on Chapter 13