Measuring the Economy
Unemployment
Questions:
1. Employed people are people with jobs?
2. Unemployed people are people without
jobs?
3. The civilian labor force is the number of
people aged 16 years and older who are
not in the armed forces?
Employment Definitions
Bureau of Labor Statistics—government agency that
tracks the number of people who are employed or
unemployed
 Civilian Labor Force—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

Undercounted Unemployment
U3—people w/out work actively looking
 U4—U3+discouraged workers
 U5—U3+U4+marginally attached
 U6—U3+U4+U5+part-timers looking for
full time work

Types of Unemployment
1. Frictional unemployment
Temporary condition that occurs when an
individual is out of their current job and looking
for another job or looking for their first job.
Examples:
2. Structural unemployment
a)Workers who cannot find jobs because
the structure of the economy has
changed
b) New technology is introduced or the
company relocates and the worker does
not want to move Examples:
3. Cyclical unemployment
a) Workers who are laid off due to a
downturn in the economy.
b) They expect to be rehired when the
economy improves
4. Seasonal Unemployment
a) Occurs due to the seasonal nature of
jobs
b) What industries are affected by seasonal
unemployment?
Examples of unemployed workers
Recent college graduate seeking her first
job
 Worker who has quit his job to move to
be with his family
 Carpenter is laid off because housing
construction has declined
 Ski resort closes as the Spring approaches

A labor market mystery?

In January of 2001 the BLS reported that:
◦ Unemployment increased in January
◦ The number of unemployed rose by about
300,000 to nearly 6 million, pushing the
unemployment rate from 4 to 4.2 %
◦ Payroll employment rose by 268,000 jobs
◦ Construction employment alone rose by 145,000
◦ How can the unemployment rate increase
when more people are getting jobs?
Inflation
TRUE OR FALSE
 If I have more money, I am better off.
Therefore, if everyone has more money,
everyone is better off.
 FALSE: More money for everyone causes
inflation unless the economy can produce
more goods and services.
 Inflation
 FALSE:
hurts everyone.
Some people benefit
from inflation despite its
generally harmful effects.
Inflation: increase in the average price level
of all the goods and services produced in
the economy
 During inflation, the purchasing power of a
dollar decreases
Problems of Inflation
Money becomes worthless
 People lose faith in the Government
 Happened in 1920’s in Germany which
eventually allowed Adolph Hitler to come
to power
 High Inflation occurred in the US after
the Revolutionary War, almost led to the
collapse of the new nation

Inflation’s Winners
 Borrowers—the
money they
pay back is worth less than
the money they borrowed
 Homeowners—fixed interest
mortgages mean they pay
back their loans with cheaper
$
 Farmers whose crops rise
in price and pay back their
loans with cheaper $
Inflation’s Losers
Savers—money earns a
lower interest rate than the
inflation rate
 Creditors(Banks)—loans
are paid back with cheaper
money
 People who are on fixed
incomes

◦ Retirees whose pensions do
not keep up with inflation
Deflation: a decrease in the average price
level of all the goods and services
produced in an economy
 The purchasing power of a dollar
increases during deflation

Problems of deflation
Reduces the value of people’s assets
 Decreases consumer spending
 Decreased demand affects businesses
 Leads to higher unemployment

Consumer Price Index
 Measures of the average change in prices
paid by urban consumer for a “market
basket” of goods and services
 These goods and services include food,
clothing, shelter, transportation and
prescription drugs
Changes in the CPI are used to measure
inflation
Why is the CPI important?

Determines the inflation rate which is
used by:
◦ Manufacturers and retailers in predicting
future price increases
◦ Employers in calculating salaries and pensions
◦ Government in determining Cost of living
adjustments for Social Security recipients
CPI’s limitations
The overall CPI may not match one’s own
household’s budget
 Identify two of the CPI’s basket that the
following households would spend the most
on:

◦
◦
◦
◦
A family with 4 children under the age of 10
A retired couple in their 70’s
A person in their 20’s with a full time job
A family with 2 children in college
GDP
Gross Domestic Product
is a measure of the total value of all
finished goods and services produced in a
nation in one year
This production includes whether the
company is owned by a foreign or
domestic corporation
GDP is the MOST important barometer
of national economic health
How to measure GDP
GDP= C + I + G + (X-M)
Consumption (C)
 Spending by households on goods and
services
 Makes up two-thirds of GDP spending
Investment (I)
 Spending by businesses on machinery,
factories, tools and construction of new
buildings
Government (G)
 Spending by all
levels of
government on
goods and
services
 Includes
military,
schools and
highways
Net Exports (X-M)
 X—exports of goods and services
 M—imports of goods and services
 (X-M) is spending abroad on a nation’s goods
and services minus spending by people in the
country on foreign goods and services
The US GDP in 2012 (trillions of dollars)
GDP = C
+ I + G +
(X-M)
$15.68=$11.11 + $2.06 + $3.06 + ($2.18-$2.70)
When C, I or G increase, GDP increases
 When C, I, or G decrease, GDP decreases
 When exports (X) go up, GDP goes up
because it means more is produced in the US
 When imports (M) go up, GDP goes down
because it means people in the US are buying
what is produced in other countries

Importance of GDP
Increase in GDP
 means that the economy experiences
economic growth and unemployment goes
down
 people are spending more money and feeling
more confident about the future
Decrease in GDP
 Indicates the economy is contracting and
usually seen by an increase in unemployment
 Confidence in the economy decreases and
people spend less
Gross domestic product 2012
Ranking
Economy
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
United States
China
Japan
Germany
France
United Kingdom
Brazil
Russian Federation
Italy
India
Canada
Australia
Spain
Mexico
Korea, Rep.
Indonesia
Turkey
Netherlands
Saudi Arabia
Switzerland
(millions of
US dollars)
15,684,800
8,358,363
5,959,718
3,399,589
2,612,878
2,435,174
2,252,664
2,014,776
2,013,263
1,841,717
1,821,424
1,520,608
1,349,351
1,177,956
1,129,598
878,193
789,257
772,227
711,050
632,194
GDP Per Capita
GDP Per Capita is GDP divided by the
size of the population: it is equal to the
average GDP per person.
 Not an end in itself does not address how
a country uses that output to affect living
standards.

GDP Per Capita 2012
Ranking
Economy
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Qatar
Liechtenstein
Bermuda
Macau
Luxembourg
Monaco
Singapore
Jersey
Norway
Falkland Islands
Brunei
Isle of Man
Hong Kong
United States of America
United Arab Emirates
Switzerland
Guernsey
Cayman Islands
Canada
Australia
US dollars
103,900
89,400
86,000
82,400
81,100
70,700
61,400
57,000
55,900
55,400
55,300
53,800
52,300
50,700
49,800
46,200
44,600
43,800
43,400
43,300
Shortcomings of GDP
GDP does not measure happiness, nor does
it measure economic welfare.
 Production that is excluded

◦ Household production
◦ Illegal production
◦ The underground economy
GDP gives us a ballpark idea of how much we
produce, not necessarily how well off we are
The Underground Economy
Consists of two parts:
◦ “black markets”
 Drug dealing, video and music piracy
◦ “Off-the-books activities”
 Any job where taxes are not withheld, cash
 In 2012 the UE in the USA was $2 trillion

Costs and Benefits of UE

Costs
◦ Loss of tax revenue ($400 billion gap in the
amount that was owed minus what should be
collected)
◦ This loss reduces what government can spend
on public goods and services

Benefits
◦ Money earned in UE is spent in the formal
economy
◦ UE increases employment which increases
consumer spending and therefore it increases
economic growth
The Business Cycle
The Business Cycle is the natural rise and
fall of the economy over time
 Expansion

◦ Demand for goods and services increases
◦ Employment increases
◦ People have money and they are spending!

Contraction
◦ Economy shrinks as the demand for goods and
services decreases
◦ Workers lose their jobs
◦ No money to spend on stuff!
How are growth and Recession
determined?

Growth—6 consecutive months of
increasing GDP

Recession—6 consecutive months of
decreasing GDP
Which component of GDP would
each of these fit into?
1.
2.
3.
4.
5.
A mechanic fixes a transmission
A business purchases laptops and software
A local library purchases new audio books
A retailer purchases tennis shoes from a
manufacturer in China and sells them
Mother purchases those tennis shoes from
the retailer
How Much is a trillion?
 One
thousand = 10 one hundreds =
1,000
 One million = 1,000 one thousands =
1,000,000
 One billion = 1,000 millions =
1,000,000,000
 One trillion = 1,000 billions =
1,000,000,000,000