Unit 2

Macroeconomic IndicatorsGDP, 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

What is the value of the monthly production of this coffee shop?

This is like calculating GDP…

JANUARY FEBUARY

# of coffees

25 $3.00# of

coffees30 $3.00

# of lattes

25 $2.50# of

lattes30 $2.50

# of scones

50 $1.50# of

scones40 $1.50

Gross Domestic Product

Aggregate spendingC + 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 IncomeRESOURCE 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

lattesPrice

per cupNominal GDP

Real GDP

Price Index

2000 1000 $2

2001 1200 $3

2002 1800 $4

2003 1600 $5

Price Index = Price in current year* 100 Price in base

year

2000 is the base year

Keepin’ it Real

Year# of

lattesPrice

per cupNominal GDP

Real GDP

Price Index

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 = % Nominal GDP - % Price Index

Long Run Economic Growth

Increase in Real GDP

or Real GDP/capita

SwitzerlandC

onsu

mer

goods

Capital goods

A

Deflationary gap: when the economy is producing below full-employment. Low aggregate demand and high unemployment puts downward pressure on prices

BFull-employment output: The economy is producing just inside its PPC, the NRU prevailes

CInflationary gap: The economy is producing beyond full-employment at less than NRU. Competition for workers puts upward pressure on prices.

D

Economic growth: A point beyond the nation's PPC represents what could be attained through economic growth

MacroeconomicsMeasuring Economic Goals

PPC analysis of Macroeconomic goals: The simple production possibilities curve can be used to illustrate three of the economic goals

Real GDP/capita 2005

US Real GDP per Capita

YearReal 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%

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 = 70Annual 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. A computer programmer is laid off because of recession.2. A literary editor leaves her job in New York to look for a new job in

San Francisco.3. An unemployed college graduate is looking for his first job.4. Advances in technology make the assembly-line worker’s job

obsolete.5. Slumping sales lead to the cashier being laid off.6. An individual refuses to work for minimum wage.7. A high school graduate lacks the skills necessary for a particular job.8. Workers are laid off when the local manufacturing plant closes

because the product made there isn't selling.9. 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

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)

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)

Figure 1:  U.S. Real GDP Growth Rate2007-2009

Year Quarter Growth Rate*

2007 Q1 1.2%

 Q2 3.2%

 Q3 3.6%

 Q4 2.1%

2008 Q1 -0.7%

 Q2 1.5%

 Q3 -2.7%

 Q4 -5.7%

2009 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.]

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

January BEA announcement

detailed the Q4 2009 GDP data

U.S. Standard of Living

U.S. GDP Q4 2009 (current dollar)                 $14,463.4 (billion)Q4 2009 (chained dollar)                 $13.155.0 (billion)

U.S. Population (2009 est.)                             308,000,000

Nominal GDP  Per capita               $46,959.09 Real GDP  Per capita                      $42,711.04