MACRO ECONOMIC TERMS
CH. 7,8, + 9 - GDP, UNEMPLOYMENT, INFLATION AND
GROWTH
IMPACT OF UNEMPLOYMENT
For individuals extended periods of unemployment can lead
to lower incomes, poverty, as well a variety of social
problems such as alcoholism, divorce, etc.
At a macroeconomic level unemployment means that the
there is an underutilization of resources and a decreased
output (goods and services) for the entire society.
Lowest rate of unemployment was at end of WW II at 1.2%
Highest rate of unemployment was in Great Depression at
almost 25%
DEFINITION OF UNEMPLOYMENT
Unemployment is defined as those people in the civilian
labor force who are looking for work, but cannot find a
job.
Therefore, the definition of the civilian labor force
becomes very important. Let’s look at who is counted
in and out of this concept.
WHO IS IN AND WHO IS OUT OF THE CIVILIAN
LABOR FORCE?
IN
People working in
private sector jobs
People working in
public sector jobs
Unemployed people,
seeking work
OUT
People in military (not
counted in civilian labor
force)
People taking care of the
home if unpaid (e.g.
house wife)
High school students
under 18, working part
time
People “working under
the table”
THE UNEMPLOYMENT RATE
Unemployment rate is determined by the
number of people in the civilian workforce
actively seeking work, but unable to find jobs.
Unemployment rate = unemployed/civilian
workforce x 100
For example 9,000,000/100,000,000 = .09
.09 x100 = 9% unemployment rate
YOU CALCULATE THE UNEMPLOYMENT RATE
WITH THE FOLLOWING STATISTICS:
Labor force is 2000 workers
Unemployed is 120 workers
What is unemployment rate?
120/2000 = .06 and .06 x100= 6 or 6%
Your turn: make up an unemployment problem and have
your neighbor solve it.
THE UNDEREMPLOYED AND DISCOURAGED
WORKERS
The underemployed are those people who have jobs,
but who work part time or below their skill level
Discouraged workers are those people who have
given up looking for jobs. Their numbers not
included in the labor force or unemployment
statistic.
The over employed are people working two jobs or
over 40 hours per week.
CALCULATE THE UNEMPLOYMENT RATE
Population
Military
Employed
Unemployed
500
50
200
50
CALCULATE THE
UNEMPLOYMENT RATE
Total population 300 million
Employed persons 180 million
Unemployed persons 20 million
What is the unemployment rate?
20/200 = .1 x 100 = 10%
CALCULATE THE
UNEMPLOYMENT RATE
Total population 300 million
Civilian Labor Force 180 million
Unemployed persons 20 million
What is the unemployment rate?
20/180 = .11 x 100 = 11%
TYPES OF UNEMPLOYMENT
Frictional unemployment is temporary unemployment of
workers moving from one job to another.
Seasonal unemployment is linked to seasonal work (e.g. farm
workers)
Structural unemployment is due to the decline of industries,
so that workers no longer have necessary job skills. (Steel
workers laid off due to decline of Steel industry don’t have
computer skills for new jobs)
Cyclical unemployment has to do with job loss due to a
recession.
“Full Employment”
Economists do not assume 0% unemployment as full employment
They argue that there will always be a certain level of frictional
unemployment as people move between jobs in a free market place
The government currently describes “full employment” as between 4 and 6
percent.
THE NATURAL RATE OF UNEMPLOYMENT
Economists argue that there is a natural rate of
unemployment once the labor market is fully
adjusted in the long run.
The natural rate is calculated to exclude the cyclical
unemployment created by the business cycle, but
does include frictional and structural
unemployment.
Economists have not been able to agree what this
“natural rate” should be. It has been estimate to
be as high as 6.5% or as low as 4%
WHY DID THE PRICE OF THE CANDY RISE IN THE
SECOND ROUND?
What was the price of candy in the first round?
What was the price of candy in the second
round?
Why did the price of candy rise in the second
round?
Was the DaveDollar worth more or less in the
second round?
What can you deduce from this activity is the
impact of price rises on consumers?
PRICES AND INFLATION
Inflation is a general rise in prices.
A short term rise in a specific commodity like oil
may lead to inflation.
However, economists also look at many other
products. In some cases the drop in some
product prices may mean that there is not a
net increase in prices to the consumer.
Deflation is the general drop in prices.
IMPACT OF PRICE CHANGES
The main problem with inflation is that it decreases
the purchasing power of consumers.
A price rise means that the dollars that people hold
are worth less.
Falling prices may benefit consumers, however
deflation can hurt owners and producers. For
example, a drop in housing prices decreases the
equity in a person’s home.
HOW IS THE PRICE INDEX AND INFLATION IS
CALCULATED
The government has a number of indexes, but the
most common is the Consumer Price Index or CPI
The CPI measures the changes in basic consumer
prices over time using an imaginary “market
basket.”
The simple equation for calculating the CPI (Price
index) is: cost of market basket today/cost of
market basket in base year x 100 For example:
120/100 x 100 = 120
YOUR TURN
The cost of a market basket in the current year is 125
The cost of a market basket in a base year was 100
Calculate the price index and the rate of inflation
125/100 x 100 = 125
125-100= 25% rate of inflation
What if the current market basket was 150 and the base year
was 100
150/100 x 100 = 150 price index
150-100= 50% rate of inflation.
Now make an inflation problem for your partner.
CALCULATING THE RATE OF INFLATION
Simple: The rate of inflation is the new price
index minus 100. For example 125-100= 25 %
inflation rate
Proof: (new mkt basket- base mkt basket)/base
mkt basket x 100
E.g. (125-100)/100 x 100 = 25/100 x 100
=25%
CALCULATING A TWO-MARKET BASKET ECONOMY
Product Quant- Base
ity
Yr.
Price
Lattes
10
Bagels 5
Current Current
Price
Total
$2
Total
Base
Yr.
$20
$4
$ 40
$2
$10
$4
$ 20
$30
$60
ANTICIPATED AND UNANTICIPATED INFLATION
Anticipated inflation is the rate of inflation that
consumers, the government and businesses
believe will occur.
Unanticipated inflation causes more problems if
prices rise or decline more than people
anticipate.
Unanticipated inflation helps debtors who
borrow money,but hurts banks and money
lenders.
NOMINAL AND REAL INTEREST RATES
The nominal interest rate is the price of borrowing
money in today’s dollars. For example, your bank
account may pay a nominal rate of 5%.
The real interest rate = nominal rate minus the
anticipated rate of inflation. For example if the
nominal rate is 5% and the anticipated rate of
inflation is 3%, then the real interest rate is 2%.
OTHER INDEXES
The Producer Price Index measures the general price changes of producer goods
The GDP deflator is most often used to compare the GDP of different years. The
measure takes out price level changes in measuring the total number of goods
and services in the economy.
GROSS DOMESTIC PRODUCT (GDP)
GDP equals the total amount of goods and services
produced in an economy over one year.
If GDP goes up then an economy is growing, if GDP
goes down then it is shrinking.
GDP is calculated as total consumption +
investment + government spending + (exports imports) or C+I+G+NX=GDP
This is the single most important statistic used by
economists to measure economic growth
CONSUMPTION COMPONENT OF GDP
Consumption consists of consumer spending on goods
and services including:
Durable items such as cars, furniture and appliances
Non-durable goods such as food and clothes
Services
INVESTMENT COMPONENT OF GDP
Investment consists of non-residential fixed investment
including:
The creation of tools and equipment
The building of new homes or apartments
Inventory changes (stocks of products held by business)
GOVERNMENT COMPONENT OF GDP
Government spending consists of federal, state, and
local government spending on goods and services
However, the government component of GDP does not
include transfer payments such as social security or
unemployment insurance
THE NET EXPORT COMPONENT OF GDP
Net Exports is equal to total US exports minus total
US imports
Exports are goods and services purchased by people
in foreign nations
Imports are foreign goods purchased by US
consumers
In years where the value of exports is higher than
the value of imports, the GDP number is higher.
In years, such as the last few years, where the value
of export is lower than the value of imports, the
GDP number is lower.
What’s not counted in GDP
Buying and selling securities (stocks and bonds)
Government transfer payments, like social
security
Private transfer payments between individuals
(e.g.. Purchasing a used car from a neighbor)
Housework and childcare (if it done outside the
market)
Illegal activities
PER CAPITA GDP
Per capita GDP is the amount of GDP produced in a
country per person.
The calculation is GDP/population
Per capita allows economists to compare nations
with very different populations and GDP numbers
with eachother (e.g. India and Denmark)
Per capita GDP, however, does not tell us about
income distribution within a particular society.
REAL VS NOMINAL GDP
The nominal GDP is the current GDP in today’s
prices.
When economists want to compare GDP for two
different years, they need a way take out the price
level changes from year to year. This gives them a
real GDP measurement.
The tool they use to create constant dollars is the
GDP deflator. A base year is chosen for prices and
years before or after that year are calculated
CALCULATION OF DEFLATOR
You can derive the deflator if you have the nominal and
real GDP’s for a year
GDP deflator = nominalGDP/RealGDP x 100
E.g. GDP deflator = (110/100) x 100
Deflator is 110 = 1.1 x 100
CALCULATION OF REAL GDP
The calculation of real GDP = nominal GDP/GDP deflator
x 100
For example if GDP = 200 and GDP deflator is 133 then
Real GDP = (200/133) x 100
150 real GDP = 1.5 x 100
EXPENDITURE AND INCOME APPROACHES TO
GDP CALCULATION
C+I+G+NX calculates the value of goods and
services in the product market for a year.
Economists also calculate the total of income
accrued to the factors of production. In the Gross
Domestic Income (GDI) economists add up wages,
profits, and rents.
There is an identity between the two methods,
meaning that if calculated properly GDP should
equal GDI.
ISSUES RELATED TO GDP
Critics of the GDP argue that a single measure cannot
adequately measure the welfare and well being of a
country.
Growth may bring negative externalities like pollution, which
adversely effects the quality of life of a people.
Economic growth may not be fairly distributed to poorer
sectors of society.
Economic growth does not always bring happiness.
Societies with a different mix of market and non-market
activities are not easily compared with GDP as measure.
WHAT IS ECONOMIC GROWTH?
Economic growth is defined as increases in per
capita real GDP.
Growth can be shown by an increase in the
production possibilities curve for a nation.
Economic growth leads to the possibility of
increasing the standard of living for a nation’s
citizens, however increases in real per capita GDP
don’t tell us specifically about income distribution.
WHAT CAUSES ECONOMIC GROWTH?
Productivity increases in labor - real GDP growth
divided by the number of workers (e.g. more
output per worker)
Saving is important to growth. If you want more
future growth a nation must save today.
Growth and improvements in technology
Research and development and innovation
human capital - education of labor
Open economy (e.g. free market)
Population growth and immigration
THE BUSINESS CYCLE
EXPANSIONS AND CONTRACTIONS
During periods of expansion GDP grows, unemployment
falls, and prices tend to rise
During periods of contraction GDP falls, unemployment
rises, and prices often fall.
Two quarters of GDP decline is termed a recession. A
severe recession is called a Depression.
PUZZLING UNEMPLOYMENT STATISTICS
Wednesday’s Chronicle said that employment in the
service sector expanded in September for the
ninth straight month
This morning the TV news said that there was a fall
in unemployment claims from 470,000 to
450,000 this month.
Tomorrow the new unemployment percentage will be
released. Do you think that these numbers
indicate that the unemployment rate will fall, or is
it possible that the new rate could increase or stay
the same? Explain.
COST PUSH AND DEMAND PULL INFLATION
When resources and factors of production rise in prices this is called cost push
inflation.
When increased demand pushes up price levels, this is called demand pull inflation.
PUZZLING PRICES
Question: Can you explain how the prices of gasoline
and food could be going up but the economy is
still having deflation?
Answer:The general price level could be falling,
despite the fact that some prices are going up.
The CPI measures the general level of prices in a
market basket.
Question:Do you know what the term is for when
prices are going up, but at a slower rate than
previously?
Answer: Disinflation