ECONOMIC INDICATORS
The Business Cycle
What are economic indicators?
• Article: identify indicators
GROSS DOMESTIC PRODUCT
The Expenditure Approach:
Measures GDP by using data on consumption
expenditure, investment, government
expenditure on goods and services, and net
exports.
What is included? What is not
included?
GROSS DOMESTIC PRODUCT
• The Income Approach
–Measures GDP by adding the incomes that
firms pay households for the factors of
production they hire.
–The U.S. National Income and Product
Account divide incomes into two big
categories:
• Wages
• Interest, rent, and profits
Comparing Income Approach and
Expenditure Approach
Taxes, subsidies, and depreciation affect the
value of items when they are counted.
Each of these issues must be considered
when adjusting the income measurement.
After making adjustments the income
approach almost gives the same estimate of
GDP as the expenditure approach.
REAL GDP VS. NOMINAL GDP
Table 3. Gross Domestic Product and Related Measures:
Level and Change From Preceding Period
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
GROSS NATIONAL PRODUCT
The market value of all the final goods and
services produced anywhere in the world
in a given time period by the factors of
production supplied by residents of the
country.
U.S. GNP = U.S. GDP + Net factor income from abroad
CAUSES OF INFLATION
• DEMAND-PULL
• COST-PUSH
• WAGE-PRICE SPIRAL
• EXCESSIVE MONETARY
GROWTH
EFFECTS OF INFLATION
• PURCHASING POWER DOWN
• SPENDING HABITS
• SPECULATION INCREASE
• DISTRIBUTION OF INCOME
CONSUMER PRICE INDEX
Consumer Price Index (CPI)
–A measure of the average of the
prices paid by urban consumers
for a fixed market basket of
consumer goods and services.
The Market Basket
Simplified CPI Calculation.
22.1 THE CONSUMER PRICE INDEX
CPI =
Cost of CPI basket at current period prices
Cost of CPI basket at base period prices
For 2000, the CPI is:
$50
x 100
= 100
x 100
= 140
$50
For 2003, the CPI is:
$70
$50
x 100
22.1 THE CONSUMER PRICE INDEX
• Measuring Inflation
– Inflation rate
– The percentage change in the price level from one
year to the next.
Inflation rate =
CPI in current year  CPI in previous year
CPI in previous year
Inflation rate =
140  120
120
x 100
= 16.7 percent
x 100
THE CONSUMER PRICE INDEX
In part (b), the inflation rate was high during the early 1980s, but
low during the 1990s.
THE CPI AND THE COST OF LIVING
– New Goods Bias
• New goods do a better job than the old goods that they
replace, but cost more.
• The arrival of new goods puts an upward bias into the
CPI and its measure of the inflation rate.
– Quality Change Bias
• Better cars and televisions cost more than the versions
they replace.
• A price rise that is a payment for improved quality is
not inflation but might get measured as inflation.
THE CPI AND THE COST OF LIVING
– Commodity Substitution Bias
• If the price of beef rises faster than the price of chicken,
people buy more chicken and less beef.
• The CPI basket doesn’t change to allow for the effects
of substitution between goods.
– Outlet Substitution Bias
• If prices rise more rapidly, people use discount stores
more frequently.
• The CPI basket doesn’t change to allow for the effects
of outlet substitution.
NOMINAL AND REAL VALUES
• Dollars and Cents at Different Dates
– To compare dollar amounts at different dates, we
need to know the CPI at those dates.
– Convert the price of a 2-cent stamp in 1905 into
its 2005 equivalent:
Price of stamp in 2005 dollars =
Price of stamp in 1905 dollars
x
CPI in 2005
CPI in 1905
= 2 cents x
195.6
9.4
= 42 cents
• http://www.bls.gov/cpi/tables.htm
Inflation Calculator
• http://www.bls.gov/data/inflation_calculator.htm
International CPI Data
• http://global-rates.com/economicindicators/inflation/consumerprices/cpi/cpi.aspx
UNEMPLOYMENT
The survey counts as unemployed all persons who,
during the week before the survey:
– 1. Had no employment
– 2. Were available for work,
and either:
– 1. Had made efforts to find employment during the
previous four weeks, or
– 2. Were waiting to be recalled to a job from which
they had been laid off.
SOURCES AND TYPES OF
UNEMPLOYMENT
• Types of Unemployment
– Frictional unemployment
– The unemployment that arises from normal labor
turnover—from people entering and leaving the
labor force and from the ongoing creation and
destruction of jobs.
– Structural unemployment
– The unemployment that arises when changes in
technology or international competition change
the skills needed to perform jobs or change the
locations of jobs.
SOURCES AND TYPES OF UNEMPLOYMENT
– Seasonal unemployment
– The unemployment that arises because of
seasonal weather patterns.
– Cyclical unemployment
– The fluctuating unemployment over the business
cycle that increases during a recession and
decreases during an expansion.
• http://www.bls.gov/web/laus/lauhsthl.htm
Current rates and historic high/low rates by state
National Unemployment rates
•
http://data.bls.gov/timeseries/LNS14000000
LABOR MARKET INDICATORS
• Two Main Labor Market Indicators
• The unemployment rate
• The labor force participation rate
– Unemployment rate
– The percentage of people in the labor force who
are unemployed.
Unemployment rate =
Number of
people unemployed
Labor force
x 100
LABOR MARKET INDICATORS
– Labor force participation rate
– The percentage of the working-age population
who are members of the labor force.
Labor force
participation rate =
Labor force
Working-age population
x 100
LABOR MARKET INDICATORS
• Discouraged Workers
– Discouraged worker
– A person who does not have a job, is available to
work, but has not made efforts to find a job within
the previous four weeks.
LABOR MARKET INDICATORS
– Full-time workers -People who usually work
35 hours or more a week.
– Part-time workers - People who usually
work less than 35 hours a week.
– Involuntary part-time workers/
Underemployed workers - People who
work 1 to 34 hours per week but are looking
for full-time work.
The Human Development Index
The figure shows the
relationship between real
GDP per person and the
Human Development Index
(HDI).
Each dot represents a
country.
The small Africa country of Sierra
Leone has the lowest HDI and the
second lowest real GDP per person.
The Human Development Index
The United States has the third highest
real GDP per person but has the eighth
highest HDI.
Why is the United States not ranked
higher on the HDI?
Because the people who live in seven
countries live longer, have better access to
health care and education than do
Americans.
The Great Depression