Unit 2
Macroeconomic Indicators
GDP, CPI, unemployment rate
Circular Flow
Total Production
JANUARY
FEBUARY
# of
coffees
# of lattes
# of
scones
# of
coffees
# of lattes
# of
scones
25
25
50
30
30
40
What is the monthly production of this coffee shop?
Value of Production
JANUARY
FEBUARY
# of
coffees
25
$3.00
# of
coffees
30
$3.00
# of
lattes
25
$2.50
# of
lattes
30
$2.50
# of
scones
50
$1.50
# of
scones
40
$1.50
What is the value of the monthly production of this
coffee shop?
This is like calculating GDP…
Gross Domestic Product


Aggregate spending
C + I + G + Xn = GDP
What’s not counted?






Intermediate goods
Used goods
Non-market transactions
Underground economy
Transfer payments
Sale of financial investments (stocks or bonds)
Consumption or C


Largest component of GDP
Durable goods, non-durable goods, and
services
Investment or I




New machinery purchased by firm
New construction for firm or consumer
Unsold inventory
Most volatile component
Government or G


All levels purchases of final goods & services
Investments in infrastructure
Net Exports (X-M) or Xn


Add any domestically produced goods
bought by foreigners (exports = X)
Subtract any spending by our citizens on
foreign made goods (imports = M)
National Income

Aggregate Income
RESOURCE
SUPPLIED
INCOME RECEIVED
Labor
Wages
Entrepreneurial Talent Profit
Capital
Interest
Land
Rent
W + P + I + R = GDP
Real GDP v. Nominal GDP


Nominal GDP is the value of current
production at the current prices.
Real GDP is the value of current
production using prices from a fixed point in
time. (base year) aka constant-dollar or real
Keepin’ it Real
Year
# of
lattes
2000
1000
$2
2001
1200
$3
2002
1800
$4
2003
1600
$5
2000 is the base year
Price per Nominal
cup
GDP
Real
GDP
Price Index = Price in current year * 100
Price in base year
Price
Index
% Real GDP = % Nominal GDP - % Price Index
Keepin’ it Real
Year
# of
lattes
Price per Nominal
cup
GDP
2000
1000
$2
$2000
100
2001
1200
$3
$3600
150
2002
1800
$4
$7200
200
2003
1600
$5
$8000
250
Real GDP = Nominal GDP * 100
Price index
Real
GDP
Price
Index
Increase in Real GDP
or Real GDP/capita
Long Run Economic Growth
Macroeconomics
Measuring Economic Goals
PPC analysis of Macroeconomic goals: The simple production possibilities curve can be
used to illustrate three of the economic goals
Consumer goods
Switzerland
D
B
Full-employment output: The
economy is producing just
inside its PPC, the NRU
prevailes
C
Economic growth: A point beyond the
nation's PPC represents what could be
attained through economic growth
Inflationary gap: The economy is
producing beyond full-employment
at less than NRU. Competition for
workers puts upward pressure on
prices.
A
Deflationary gap: when the economy is
producing below full-employment. Low
aggregate demand and high
unemployment puts downward pressure
on prices
Capital goods
Real GDP/capita 2005
US Real GDP per Capita
Real GDP/capita
% of 1900 real
GDP
% of 2000 real
GDP
1900
$5,219
100%
14.5%
1920
$7,083
136%
19.7%
1940
$8,943
171%
24.9%
1960
$14,452
277%
40.3%
1980
$23,700
454%
66.0%
Year
2000
$35, 887
600%
100%
Rule of 70, mathematical formula that tells how long it takes real GDP/capita, to double
Number of years to double =
70
Annual growth rate
The US annual growth rate over the last century is 1.9%
Sources of Economic Growth

Productivity or labor productivity










Output/worker
Human capital improvements
Physical capital improvements
Progress in technology
Savings and Investment Spending
Foreign Investment
Education
Infrastructure
Research & Development
Political stability, property rights, and excessive
government intervention
True/False Clues

Employed people are people with jobs.

Unemployed people are people without
jobs.

The civilian labor force is the number of
people aged 16 years and older who are
not in the armed forces.
Employment Definitions




The Bureau of labor Statistics is the government
agency that tracks the number of people who
are employed and unemployed.
The civilian labor force is the number of people
aged 16 years and older who are not in the
armed forces and who are employed or are
seeking employment.
Employed people are people with jobs.
The unemployment rate is the percentage of the
civilian labor force that is unemployed.
Unemployment





Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Natural Rate of Unemployment
Full Employment
Types of Unemployment
1.
2.
3.
4.
5.
6.
7.
8.
9.
A computer programmer is laid off because of recession.
A literary editor leaves her job in New York to look for a new job in
San Francisco.
An unemployed college graduate is looking for his first job.
Advances in technology make the assembly-line worker’s job
obsolete.
Slumping sales lead to the cashier being laid off.
An individual refuses to work for minimum wage.
A high school graduate lacks the skills necessary for a particular
job.
Workers are laid off when the local manufacturing plant closes
because the product made there isn't selling.
A skilled glass blower becomes unemployed when a new machine
does her job faster.
Employment, Unemployed and
Unemployment Rate





Employed =
everyone currently working,
including part-time workers
Unemployed = people looking for work or
temporarily laid off from work
Labor force = employed + unemployed
Unemployment rate =
unemployed
labor force
Labor force
=
labor force
Participation rate
population aged 16 and older
Inflation & Price Index








Inflation is a rise in the general level of prices.
Price Index
·
Fix the basket
·
Find the prices
·
Compute the basket cost
·
Choose the base year and compute the index
Price Index = Current year/Base year * 100
Inflation reduces the purchasing power of money
Inflation


CPI Consumer Price Index ~ Most commonly reported
Overall cost of goods/services bought by typical consumer






Fix the basket
Find the prices
Compute the basket cost
Choose the base year and compute the index
Compute inflation = % change in price index
CPI assigns a value of 100 to the base year.
Inflation rate
For comparison of prices to base year:
(CPI year 2 – CPI year 1)/CPI in year 1 *
100 =
% change in prices or inflation rate
Wages & Income
Nominal income is the money earned in current dollars.
Real income is the purchasing power of nominal income.
Income has been adjusted for inflation
Real income = Nominal income
Price index (hundredths)
SUMMARY Use price index to compare dollar figures
from different points in time and to adjust for inflation.
Inflation and Interest Rates



Banks lend at nominal interest rate
Calculate real interest rate to determine the
purchasing power of their loan
Real i = Nominal i – inflation rate
Impact of inflation

Helped

Hurt
Quiz
U.S. Economy
"Happy days are here again,
The skies above are clear again
Let us sing a song of cheer again -Happy days are here again"*
Is it time to sing this old song again? The size of the
US. economy increased at an annual rate of 5.7
percent in the fourth quarter of 2009. The economy
is growing and prosperity just around the
corner. Right? Read more about the Q4 2009
GDP data and decide for yourself.
Current Key Economic Indicators
as of February 5, 2010
Inflation On a seasonally adjusted basis, the CPI-U
increased 0.1 percent in December 2009 after rising 0.4
percent in November. The index for all items less food
and energy rose 0.1 percent in December after being
unchanged in November. (January 29, 2010)
Federal Reserve The FOMC will maintain the target
range for the federal funds rate at 0 to 1/4 percent
and continues to anticipate that economic conditions,
including low rates of resource utilization, subdued
inflation trends, and stable inflation expectations, are
likely to warrant exceptionally low levels of the federal
funds rate for an extended period. (January 27, 2010)
Current Key Economic Indicators
as of February 5, 2010
Real GDP U.S. real gross domestic product increased
at an annual rate of 5.7 percent in the fourth quarter
of 2009, according to the "advance" estimate
released by the Bureau of Economic Analysis. In the
third quarter, real GDP increased 2.2 percent.
(January 29, 2010)
Employment and Unemployment The U.S.
unemployment rate fell from 10.0 to 9.7 percent in
January, and nonfarm payroll employment was
essentially unchanged (-20,000). Employment fell in
construction and in transportation and warehousing,
while temporary help services and retail trade added
jobs. (February 5, 2010)
Figure 1: U.S. Real GDP Growth Rate
2007-2009
Year
2007
2008
2009
Quarter
Growth Rate*
Q1
1.2%
Q2
3.2%
Q3
3.6%
Q4
2.1%
Q1
-0.7%
Q2
1.5%
Q3
-2.7%
Q4
-5.7%
Q1
-6.4%
Q2
-0.7%
Q3
2.2%
Q4
5.7%
[NOTE: The 2007 and 2008 Real GDP estimates have been adjusted since
their original publication to reflect analysis of more accurate and detailed
lagging economic data.]
January BEA announcement
detailed the Q4 2009 GDP data
Sector
Current $
Chained $
Change
Q3 to Q4
C
10,250.5
9,298.5
+45.9
I
1,522.8
1,601.8
+12.4
G
2,566.4
2,584.4
-1.1
Xn
-353.8
-341.1
+16.3
GDP
14,463.4
13,155.0
+182.0
Billions of dollars
U.S. Standard of Living



U.S. GDP
Q4 2009 (current dollar)
Q4 2009 (chained dollar)
U.S. Population
(2009 est.)
Nominal GDP Per capita
Real GDP Per capita
$14,463.4 (billion)
$13.155.0 (billion)
308,000,000
$46,959.09
$42,711.04