Objectives:
1. Determine how economists calculate gross
domestic product (GDP) and the limitations of GDP
2. Examine the four phases of the business cycle and
factors that influence the business cycle
3. Identify 3 leading indicators used to determine the
current phase of the business cycle
4. Explain why economic growth is important and the
requirements for economic growth
5. Describe the relationship between economic growth
and productivity
Governor Brown, while posing
with you, I’d like to know: What is
a NIPA?
Nathan, it’s a National Income and Product
Account—used to track production, income and
consumption in a nation’s economy?
They provide information about a nation’s economic
activities.
Simoncini, as lieutenant governor, I’d like to
add that the most widely used NIPA is Gross
Domestic Product. So, what is that?
Lieutenant Governor
Newsome, GDP is
the total dollar value
of all final goods
and services
produced within a
country during one
calendar year.
And the three components of GDP are: Final Output—
econo- mists include only the value of final goods and
services when calculating GDP;
Current year—only count goods made in that year—
not secondhand goods;
Output Produced Within National Borders, like
Toyotas produced in the USA. Hershey bars
produced in Mexico don’t count.
The output-expenditure model
C + I + G + (X-M) = GDP
C: Personal consumption expenditures—
consumer purchases of durable goods (lifetime
more than 1 year), nondurable goods (short
useful lifetime, i.e. food or cosmetics) and
services
The output-expenditure model
C
+ I + Ginvestment—the
+ (X-M) = GDP total value of all capital
I: Gross
goods produced in a given nation during one year
as well as changes in the dollar value of business
inventories
Fixed investment (residential and nonresidential structures, capital goods (machinery and
office equipment))
Inventory investment: increase or decrease
in total dollar amount of the stock of raw
materials, intermediate goods and final goods of
domestic businesses during a given period
The output-expenditure model
C + I + G + (X-M) = GDP
G: Government purchases of goods and
services—total dollar value that federal, state and
local governments spend on goods and services
The output-expenditure model
C + I + G + (X-M) = GDP
X-M: net exports (total exports minus total
imports)—GDP includes the value of goods and
services produced domestically but sold in other
countries (exports) and does not include goods
and services produced in other countries but
purchased locally (imports)
Nominal GDP and Real GDP
Nominal—current GDP is expressed in the
current prices of the period being measured
Real—GDP adjusted for price changes
Billions of dollars
10,000
9,500
9,000
8,500
8,000
7,500
1996
1997
1998
1999
2000
Master,
what’s a
price index
and how is it
created?
Woman, a price index is a
set of statistics that allows
economists to compare
prices over time.
But Master,
how is it
created?
Well, to create a price index, economists
first select a base year against which to
measure changes in prices.
Second, they assign the base year an
index number of 100.
Third, they calculate index numbers for
other years to indicate the amount prices
are higher or lower relative to the base
year.
OK, now I’m really confused. So, what
are the limitations of GDP?
I, Richard Nixon, will answer that,
Savannah! Initial figures are often
inaccurate. GDP does not include
nonmarket activities (activities like you
washing your parents’ car for free) or the
underground economy (illegal and nonreported legal activities—under the
table.) GDP does not accurately
measure a nation’s well-being.
So President Nixon, Colonel
Sanders here. How does
GDP differ from GNP?
Colonel, GNP is the final output produced
with factors of production owned by the
residents of a given country. GDP is the
final output produced within a nation’s
borders.
The four stages or phases of the business cycle
Expansion and growth or recovery
Peak—the economy is at its strongest and most
prosperous
Contraction—business slowdown aka recession
Recession is a decline in real GDP for 2 or
more consecutive quarters
Trough—when demand, production and
employment reach their lowest levels (1933)
OK, then, Mr. President.
What are three signs that
the business cycle is
entering a period of
expansion?
Ms. Bacon, high levels of business
investment, low interest rates, and
increased consumer spending.
You see, investment creates
a demand for goods, which
encourages further increases
in production; businesses use
new capital to moderate
production methods and
promote efficiency; third,
increased business
investment (particularly in
R&D) tends to stimulate
technological change and
generally results in higher
output at lower production
costs.
Leading indicators
…anticipate the direction in which the economy is
headed (changes in building permits issued,
orders for new capital and consumer goods, price
of raw materials, stock prices)
Coincident indicators
…change as the economy moves from one phase
of the business cycle to another and tell
economists that an upturn or a downturn in the
economy has arrived (personal income, sales
volume, industrial production levels)
Lagging indicators
…change months after an upturn or a downturn in
the economy has begun and help economists
predict the duration of economic upturns or
downturns (use of consumer installment credit,
number and size of business incomes)
My question is, what
does the term “Real
GDP per capita” mean?
OOOOH!! I know that! It’s an
increase in the real dollar value of
all final goods and services that are
produced per person for a specified
period of time
Relationship between economic growth and a
nation’s standard of living
A nation’s standard of living increases when its
real GDP per capita grows. Said another way,
the standard of living improves
when production per person
increases faster than the total
population.
“For a nation to increase its long-term output and
income, it must either increase its inputs . . . or
increase the productivity of these inputs.” What
are examples of inputs that should be increased?
OK: Natural resources,
human resources, capital
resources and
entrepreneurs.
What is labor productivity?
A measure of how much each worker produces in
a given period of time, usually one hour.
What factors have significant affects on
productivity growth?
Level of available technology
Quantity of capital goods available per worker—
capital deepening means an increase in the
amount of capital goods available per worker;
occurs when the amount of a nation’s capital
goods increases faster than the size of that
nation’s workforce
Education and skill level of the labor force
Objectives:
1. Define the unemployment rate
2. Identify the 4 major types of unemployment
3. Discuss the main economic costs of unemployment
4. Explain how economists evaluate price changes
over time
5. Describe what causes inflation
6. Identify the main two price indexes that economists
use to measure inflation
7. Analyze how inflation affects the economy
8. Explain how economists determine the number of
poor people in the U. S. and how they measure the
distribution of income
9. Identify U. S. government policies to reduce the
income gap and decrease poverty
Rats! I just lost my job
and now I’m unemployed.
I wonder how high rates of
unemployment hurt the
nation’s economy.
Well, Trevor, the nation loses the
goods and services that the
unemployed would produce if they
were working and businesses lose
sales because the unemployed
cannot buy as many products.
The government must decide
how and to what extent to
support the unemployed and
their dependents.
Definition of employed people
During the week surveyed, people who:
Worked for pay or profit one or more hours
Worked without pay in a family business 15 or
more hours
Have jobs but did not work as a result of illness,
weather, vacations or labor disputes
Okun’s Law (Arthur Okun)
For every one percent rise in the
unemployment rate, real gross
domestic product (GDP) drops 3
percent. The reverse is also true.
Three shortcomings of unemployment rate
Does not indicate the differences in intensity with
which people look for jobs
Three shortcomings of unemployment rate
The conditions for being included among the
unemployed exclude
Marginally attached workers (people who
once held productive jobs but have given up
looking for work)
Discouraged workers
Three shortcomings of unemployment rate
Does not indicate the number of underemployed
workers—workers who have jobs beneath their
skill level or who want full-time work but are only
able to find part-time jobs
Four types of unemployment
Frictional—workers moving from one job to
another
Four types of unemployment
Structural—changes in technology or the way the
economy is structured
Four types of unemployment
Seasonal
Four types of unemployment
Cyclical—unemployment resulting from
recessions and economic downturns
This type of unemployment harms the economy
more than any other type of unemployment
Price Level
Price level influences aggregate supply—the total
amount of goods and services produced
throughout the economy—and aggregate
demand—the total amount of spending by
individuals and businesses throughout the
economy
Inflation
Inflation is an increase in the average price level
of all products in an economy.
Usually, inflation occurs when aggregate demand
increases faster than aggregate supply. As prices
increase, the amount that a dollar buys
decreases. Thus inflation reduces the real
purchasing power of the dollar.
Federal Reserve Board is
responsible for monetary policy
Determines how much money is available
to businesses and individuals from
financial institutions; can increase or
decrease the money supply
More money: lower interest rates & more
consumer spending—aggregate demand
increases as more goods purchased
Spending outpaces available supply of goods
and demand-pull inflation results
Cost-Push Inflation
…when producers raise prices to cover higher
resource costs (crop failures, natural disasters,
political problems abroad)
The relationship between wages and prices can
also lead to cost-push inflation. Higher wages will
cause prices to increase (wage-price spiral)
Consumer Price Index
CPI is a measure of the average change over
time in the price of a fixed group of products
The Bureau of Labor Statistics (BLS) selects a
base year against which to measure price
changes—still 1982-1984
Consumer Price Index
Second, the BLS selects a representative sample
of commonly purchased consumer items, called
the market basket—items that the typical urban
consumer might buy. Each item in the market
basket is weighted based on its importance in
consumers’ budgets. The BLS then samples the
prices of those goods and
services in selected areas
across the nation.
Consumer Price Index
Economists set the index price for the base year at 100.
To calculate the CPI for another year, the BLS
determines the price of the market basket for that year,
divides the amount by the cost of the market basket in
the base year, and multiplies the result by 100
If the market basket cost $4,000 in 1982-1984 and
$7,000 in a later year, the CPI for the later year would be
175: ($7,000 / $4000) x 100 = 175. The average price
level in the later year is 75% higher than it was in 19821984—purchasing power has declined and consumers
must spend 175% of the cost in 1982-1984
How does the U.S.
government
calculate the
inflation rate using
the CPI?
Inflation rate =
[(CPI year B – CPI year A) divided by CPI
Year A] times 100
Say, in that regard,
what are things in
which inflation
causes changes?
Changes caused by inflation
Purchasing power of the dollar—particularly hurts
people on fixed incomes
Changes caused by inflation
Decreased value of real wages—when pay
increases fail to keep pace with rising prices
(teachers in Oakdale: a pay cut plus increase in
medical insurance)
Changes caused by inflation
Increased interest rates—as prices increase,
interest rates increase particularly on goods that
are usually purchased on credit or through loans
(but the Fed can keep them low)
Changes caused by inflation
Decreased saving and interest plus increased
production costs in business
Poverty threshold
Or poverty level, is the lowest income—as
determined by the government—that a family or
household of a certain size or composition needs
to maintain a basic standard of living. In 2000 the
poverty threshold for a family of 4 was $17,603.
The Social Security Administration bases
thresholds on economical food plans (1955 study,
family of 3 or more spent 1/3 of after-tax income
on food.) Today poverty thresholds are adjusted
annually based on changes in the CPI.
Percent Distribution of Aggregate Household
Income in 1978, by Fifths of Households
Lorenz CurveHouseholds
Percent of Income
Lowest Fifth
(under $6391)
4.3
Second Fifth
($6392 - $11955)
10.3
Third Fifth
($11956 - $18122)
16.9
Fourth Fifth
($18122 - $26334)
24.7
Top Fifth
($26335 and over)
43.9
Gini Index
But what are the main causes of
the widening disparity in income
within the U.S.?
Causes of U.S. Income Disparity
Changes in households—many more single
parent
Changes in labor market—corporate downsizing,
sending jobs overseas
Changes in technology
Growth of a global economy