Measuring a Nation’s Economic Health GDP Gross Domestic Product (measures national growth) CPI...

Measuring a Measuring a Nation’s Economic Nation’s Economic

HealthHealthGDPGDP

Gross Domestic Product Gross Domestic Product (measures national growth) (measures national growth)

CPICPIConsumer Price Index Consumer Price Index

(measures inflation)(measures inflation)

UNEMPLOYMENTUNEMPLOYMENT

Problems measured in MacroeconomicsProblems measured in Macroeconomics

We will cover the following:We will cover the following:

1) Economic Growth 1) Economic Growth (measured by looking at GDP)(measured by looking at GDP)

2) Unemployment 2) Unemployment (measured by US Census)(measured by US Census)

3) Inflation 3) Inflation (measured with the CPI)(measured with the CPI)

4) Deficits 4) Deficits (means a negative amount)(means a negative amount)

International Trade DeficitInternational Trade Deficit ((moremore imports than imports than exports)exports)

Federal Budget DeficitFederal Budget Deficit (government debt for (government debt for spending on social programs and military)spending on social programs and military)

U.S. Department of LaborBureau of Labor Statistics

When you go for a checkup, the doctor looks When you go for a checkup, the doctor looks at several indicators:at several indicators:• heart rate, blood pressure, and body heart rate, blood pressure, and body

temperature - to help determine your basic temperature - to help determine your basic level of health. level of health.

The general economic health of a nation can The general economic health of a nation can also be judged by looking at several also be judged by looking at several economic indicators, which include:economic indicators, which include:

1.1. thethe Gross Domestic ProductGross Domestic Product (G.D.P.) (G.D.P.)

2.2.thethe Consumer Price IndexConsumer Price Index (C.P.I.) (C.P.I.)3.3.thethe Unemployment RateUnemployment Rate..

"economic heartbeat of a "economic heartbeat of a nation"nation"

Measuring Economic HealthMeasuring Economic Health

Gross Domestic ProductGross Domestic ProductGross domestic product (GDP)Gross domestic product (GDP) is the is the

aggregateaggregate (total) (total) market value market value of all of all finalfinal goods and services produced goods and services produced withinwithin a a country in a given period of time.country in a given period of time.

Sometimes the measurement is looked at on a Sometimes the measurement is looked at on a per person scaleper person scale, which is known as…, which is known as…

Real GDP per capita Real GDP per capita (per person(per person))

It is the GDP It is the GDP divideddivided by the population. by the population. Example:Example: When a country has a low GDP per When a country has a low GDP per

person, it tells us a lot about conditions in that person, it tells us a lot about conditions in that country.country.

How to measure GDP?How to measure GDP?1)1) Output of the products/services is always Output of the products/services is always

valued atvalued at market prices.market prices. (not sale/discounted prices)(not sale/discounted prices)

2)2) It records It records onlyonly the value of the value of final goodsfinal goods,, notnot intermediate goodsintermediate goods..

Intermediate goods:Intermediate goods: those goods used to those goods used to produce a finished good.produce a finished good.

No No double countingdouble counting of goods: the value of a good of goods: the value of a good is counted only once.is counted only once.

Example:Example: fuzz used in Fuzzy Wuzzy would fuzz used in Fuzzy Wuzzy would NOTNOT be be counted in GDP, but the toy would be. counted in GDP, but the toy would be.

Let’s see another example of this…Let’s see another example of this…

Fuzzy WuzzyFuzzy Wuzzy

Golden Rule:Golden Rule: No No double countingdouble counting of goods: such as used of goods: such as used goods, intermediate goods (goods used in production goods, intermediate goods (goods used in production process), money spend on depreciation (replacing old worn-process), money spend on depreciation (replacing old worn-out items)out items)

Example of the correct way to count a good into GDP: Example of the correct way to count a good into GDP:

A wooden desk sold to you for $200.A wooden desk sold to you for $200.You would figure You would figure $$200200 into the GDP?into the GDP?

Example of Double Counting a desk (the wrong way):Example of Double Counting a desk (the wrong way):

Timber sold to a mill:Timber sold to a mill:After it was milled it was sold to manufacture:After it was milled it was sold to manufacture:Manufacture built the desk and sold to a retailer: Manufacture built the desk and sold to a retailer: Retailer marks it up and sells it to you:Retailer marks it up and sells it to you:

If all transactions were added up then total would be:If all transactions were added up then total would be:

$20$20$50 $50

$120$120$200$200

$390$390

How to measure GDP?How to measure GDP?

3)3) It includes goods and services It includes goods and services currently currently producedproduced,, not transactions involving not transactions involving goods produced in the past or money goods produced in the past or money spent on spent on replacing old goodsreplacing old goods..

NO NO USED GOODSUSED GOODS ARE COUNTED BECAUSE THEY ARE COUNTED BECAUSE THEY HAVE ALREADY BEEN COUNTED IN A PREVIOUS HAVE ALREADY BEEN COUNTED IN A PREVIOUS YEAR (OR QUARTER)YEAR (OR QUARTER)

4)4) It measures the value of production It measures the value of production within the geographic within the geographic confinesconfines of a of a country.country.

ONLY WITHIN A NATION’S BORDERSONLY WITHIN A NATION’S BORDERS Example:Example: A Wal-Mart in Mexico, would its sales A Wal-Mart in Mexico, would its sales

be counted in the U.S. GDP? be counted in the U.S. GDP?


NONO

5)5) It excludes It excludes government TRANSFER government TRANSFER PAYMENTSPAYMENTS (social security & Welfare).(social security & Welfare).

COUNTING THIS WOULD NOT INDICATE COUNTING THIS WOULD NOT INDICATE GROWTH IN OUR NATION’S ECONOMY!GROWTH IN OUR NATION’S ECONOMY!


“Now that I’ve gotten my welfare check, I can get an iPhone”

6)6) GDP includes all items produced in GDP includes all items produced in the economy and sold the economy and sold legallylegally in in marketsmarkets

NO BLACKMARKET TRANSACTIONSNO BLACKMARKET TRANSACTIONS

7)7) GDP GDP excludesexcludes items that are produced items that are produced and consumed at home and that and consumed at home and that never enter the marketplace.never enter the marketplace.

Example:Example: growing crops for your own use. growing crops for your own use.


The Formula for GDPThe Formula for GDP

GDP GDP ((Y Y )) is the sum of the following: is the sum of the following: ConsumptionConsumption (C) (C) all consumer spendingall consumer spending

InvestmentInvestment (I) (I) investment in new capitalinvestment in new capital

Government PurchasesGovernment Purchases (G) (G) spendingspending

Net ExportsNet Exports (X-N) (X-N) (Exports – Imports)(Exports – Imports)

Y = C + I + G + (X-N)Y = C + I + G + (X-N)

"economic heartbeat of a "economic heartbeat of a nation"nation"

The Components of the GDP FormulaThe Components of the GDP Formula

1.) 1.) ConsumptionConsumption (C)(C):: The spending by The spending by householdshouseholds on goods and on goods and

services services (except the purchases of new housing).(except the purchases of new housing). New homes are considered under New homes are considered under InvestmentInvestment ( ( II ) )

2.) 2.) InvestmentInvestment (I)(I):: Only counts the spending on Only counts the spending on NEWNEW capital (i.e. capital (i.e.

equipment, company inventories, and structures), equipment, company inventories, and structures), including new housing.including new housing.

3.) 3.) Government PurchasesGovernment Purchases (G):(G): The spending on goods and services by local, state, The spending on goods and services by local, state,

and federal governments.and federal governments. Remember: GDP Does Remember: GDP Does notnot include include transfer paymentstransfer payments

(such as (such as WelfareWelfare and and Social Security Social Security to the people). to the people). These people will in turn spend the money on goods These people will in turn spend the money on goods

so it will be counted so it will be counted only onceonly once as as consumptionconsumption..

THINK ABOUT IT!THINK ABOUT IT!

NEVER VIOLATE THE NEVER VIOLATE THE DOUBLE COUNTING RULEDOUBLE COUNTING RULE!!

4.) 4.) Net ExportsNet Exports (X-N):(X-N): Exports Exports minusminus Imports Imports ONLY COUNT WHAT IS MADE HERE!ONLY COUNT WHAT IS MADE HERE!

The Components of the GDP FormulaThe Components of the GDP Formula

PeakPeak

TroughTrough

One CycleOne Cycle

Rec

over

y

Rec

over

y

Real G

DP

per year

Real G

DP

per year

Peak:Peak: real GDP reaches its maximum.real GDP reaches its maximum.

Recession:Recession: real GDP declines 6 months.real GDP declines 6 months.

Recovery:Recovery: an upturn - real GDP rises.an upturn - real GDP rises.

Trough:Trough: real GDP reaches its minimum.real GDP reaches its minimum.

Recession

Recession

TimeTime

PeakPeak

(Have averaged five years)(Have averaged five years)

Economic Growth in the United StatesEconomic Growth in the United States

GrowthGrowth

Other Measures of a Other Measures of a Nation’s HealthNation’s Health

Review:•What is GDP?•What is the GDP formula?

1.) 1.) National Household IncomeNational Household Income:: is the is the total incometotal income earned by a nation’s earned by a nation’s

permanent residents.permanent residents.

Other Measures of a Nation’s HealthOther Measures of a Nation’s Health

2.) 2.) Disposable Personal IncomeDisposable Personal Income:: is the income that household and non-corporate is the income that household and non-corporate

businesses businesses have left have left afterafter satisfying all their bills satisfying all their bills.. It is basically a measurement of It is basically a measurement of “free cash”“free cash”


HealthHealth

CPICPIConsumer Price Index Consumer Price Index

(measures inflation)(measures inflation)

GDP is not a perfect measurementGDP is not a perfect measurement

Some things that contribute to economic Some things that contribute to economic well-being are well-being are not includednot included in GDP. in GDP.

The The value of a clean environmentvalue of a clean environment.. The The value and amount of leisure timevalue and amount of leisure time.. TheThe amount of debt levels for familiesamount of debt levels for families.. The The value of almost all activity that takes value of almost all activity that takes

place outside of markets, such as the value place outside of markets, such as the value of the time parents spend with their children of the time parents spend with their children and the value of volunteer workand the value of volunteer work..

TheThe effects of inflationeffects of inflation..

Problems with GDPProblems with GDP

Inflation Terms Inflation Terms

InflationInflation is a sustained increase in the is a sustained increase in the average price levelaverage price level

HyperinflationHyperinflation:: Extremely high inflation Extremely high inflation A sustained decline in the average price A sustained decline in the average price

level is calledlevel is called deflationdeflation A period of inflation combined with high A period of inflation combined with high

unemployment is calledunemployment is called stagflationstagflation (can be (can be referred to as a recession or depression)referred to as a recession or depression)

Causes of InflationCauses of Inflation

Two sources of inflation:Two sources of inflation:

1)1) Demand-Pull InflationDemand-Pull Inflation

2)2) Cost-Push InflationCost-Push Inflation

Sources of Short-term Inflation

PriceLevel(CPI)

P

AS

AD

1) Demand-Pull Inflation: inflation caused by an increase in demand or the supply of $

0

The increase in the aggregate demand curve pulls up the price level.

Basically this type of inflation is caused by consumers’ increased

need for goods and services.

AD'

P'

GDP

Sources of Short-term Inflation

P

AS

AD

0

AS'

The increase in costs of productionpush up the price level.

Basically, inflation is caused by increased costs that suppliers

have to pay to produce their

products.

2) Cost-push inflation: inflation caused by a decrease in supply which pushes prices up.

GDP fell: unemployment went up! GDP

PriceLevel(CPI)

P'

How to Stop InflationHow to Stop InflationSupply-side Economics or Demand-side EconomicsSupply-side Economics or Demand-side Economics

1.) 1.) Demand-side Economics: (for Demand-Pull)Demand-side Economics: (for Demand-Pull) policy policy to shift the to shift the aggregate aggregate demand curve by increasing demand curve by increasing interest rates interest rates as a way of promoting price stability.as a way of promoting price stability.

EXAMPLE:EXAMPLE: Interest Rates:Interest Rates: government could government could increase interest rates increase interest rates as a as a way of decreasing consumer demand.way of decreasing consumer demand.

A Good levelA Good level

Price Level

GDP

ADAD ASASInflation

Using demand-side economics the government can control inflation AND promote growth.

**Biggest Prob w/ Demand-Side: *******Biggest Prob w/ Demand-Side: *****

GDP DecreasesGDP Decreases

A Good levelA Good level

Price Level

How to Stop InflationHow to Stop InflationSupply-side Economics or Demand-side EconomicsSupply-side Economics or Demand-side Economics

2.)2.) Supply-side Economics: (for Cost-Push)Supply-side Economics: (for Cost-Push) policy to shift policy to shift the the aggregate supplyaggregate supply curve through business tax cuts or other curve through business tax cuts or other changes that changes that increaseincrease production. production.

EXAMPLE: Business Taxes:Taxes: cut the business taxes so businesses have more cut the business taxes so businesses have more money. money.

This will This will reduce the costs of productionreduce the costs of production and will cause supply to increase, and will cause supply to increase, thus increasing GDP AND it will reduce the price level thus increasing GDP AND it will reduce the price level (deflation).(deflation).

GDP

ADAD ASASInflation

Using supply-side economics the government can control inflation AND promote growth.

Since GDPSince GDP increasesincreases, , supply-sidesupply-side is is better to use. However there is the better to use. However there is the risk of driving up competition, which risk of driving up competition, which could hurt smaller companies.could hurt smaller companies.

Real versus Nominal GDPReal versus Nominal GDP

Nominal GDPNominal GDP:: values the production of goods and values the production of goods and

services at services at current pricescurrent prices..

Real GDPReal GDP:: adjusts theadjusts the values of the production of values of the production of

goods and services for goods and services for inflationinflation

*We need to*We need to adjustadjust the GDP forthe GDP for inflationinflation to see if growth has actually occurred.to see if growth has actually occurred.

How does inflation affect How does inflation affect GDP?GDP?

An accurate view of the economy requires adjusting An accurate view of the economy requires adjusting Nominal GDPNominal GDP to to Real GDP Real GDP by using the by using the CPICPI..

Real vs Nominal GDPReal vs Nominal GDP

Let’s say there is a Let’s say there is a 4%4% increase in GDP increase in GDP between between Year 1Year 1 and and Year 2Year 2. .

This appears good, but what is This appears good, but what is inflation?inflation?

Based on the CPI Based on the CPI (a tool used to measure inflation)(a tool used to measure inflation),, inflation has increased inflation has increased 4%4% as well. as well.

Bummer! This means that our Bummer! This means that our economy did not grow at all.economy did not grow at all.

Inflation is not factored into GDP: Why is that a bad thing?Inflation is not factored into GDP: Why is that a bad thing?

Measuring the Price Level and Inflation: CPIMeasuring the Price Level and Inflation: CPI

Consumer Price Index Consumer Price Index (CPI):(CPI):

Measures inflation Measures inflation Looks at Looks at prices of the goods and services that a prices of the goods and services that a

typical urban family buys over time.typical urban family buys over time. It is used to monitor changes in the cost of It is used to monitor changes in the cost of

living over time.living over time.

"economic blood pressure of a nation""economic blood pressure of a nation"

1)1) Fill the Market Basket:Fill the Market Basket: Determine what Determine what prices are most important to the typical prices are most important to the typical consumer.consumer.

The The Bureau of Labor Statistics (BLS) Bureau of Labor Statistics (BLS) identifies a market identifies a market basket of goods and services the typical family buys through basket of goods and services the typical family buys through the the Consumer Expenditure Surveys. .

7,000 families from around the country provided information 7,000 families from around the country provided information each quarter on their spending habits in the interview survey.each quarter on their spending habits in the interview survey.

Goods and Services

How the Consumer Price Index Is Calculated?How the Consumer Price Index Is Calculated?

2)2) Compute the Market Basket’s Cost:Compute the Market Basket’s Cost: Use the data on prices to calculate the Use the data on prices to calculate the cost of the basket of goods and cost of the basket of goods and services.services.

= $

2011


3)3) Choose a Base Year and Compute Choose a Base Year and Compute the Index:the Index:

Designate one year as the Designate one year as the base yearbase year, , making it the benchmark against which other making it the benchmark against which other years are compared. years are compared.

Compute the index (% change) by using a Compute the index (% change) by using a simple % change formula.simple % change formula.

== $$

20112011

==$$$$

20122012


Measuring Measuring UnemploymentUnemployment

(Temperature of the nation)(Temperature of the nation)


HealthHealth

1) 1) Frictional UnemploymentFrictional Unemployment Arises from normal labor turnover: Arises from normal labor turnover:

people entering and leaving the labor people entering and leaving the labor forceforce

People are in-between jobs People are in-between jobs Generally Generally short-termshort-term and and voluntaryvoluntary

People choose to do this because there People choose to do this because there are other jobs availableare other jobs available

THIS TYPE OF UNEMPLOYMENT IS THIS TYPE OF UNEMPLOYMENT IS NOT BAD.NOT BAD.

Types of UnemploymentTypes of Unemployment

2.) 2.) Seasonal UnemploymentSeasonal Unemployment

Unemployment Unemployment caused by seasonal caused by seasonal changes changes in labor demand during the in labor demand during the year. year.

For example, during the winter For example, during the winter months the demand for farm hands months the demand for farm hands declinesdeclines


3.) 3.) Structural UnemploymentStructural Unemployment Arises when changes in Arises when changes in technologytechnology or or

international competitioninternational competition change the skills change the skills needed to perform jobs or change the needed to perform jobs or change the locations of jobslocations of jobs


Exists because unemployed workers often:Exists because unemployed workers often:1)1) DO NOT have the skills demanded by employers, orDO NOT have the skills demanded by employers, or2)2) DO NOT live where their skills are in demandDO NOT live where their skills are in demand

That is, there is a mismatch of skills or That is, there is a mismatch of skills or geographic location.geographic location.

EXAMPLE:EXAMPLE: As the older generation ages then As the older generation ages then they struggle to keep up with technology. They they struggle to keep up with technology. They can lose there jobs to a younger generation that can lose there jobs to a younger generation that is familiar with technology.is familiar with technology.

4.) 4.) Cyclical UnemploymentCyclical Unemployment Arises from the fluctuations of the Arises from the fluctuations of the

business cycle.business cycle. IncreasesIncreases during a recession and during a recession and

decreasesdecreases during an expansion. during an expansion. The The ONLY ONE ONLY ONE DIRECTLYDIRECTLY related to the related to the

BUSINESS CYCLEBUSINESS CYCLE..


EXAMPLE:EXAMPLE: Ford lays off Ford lays off employees because sales employees because sales have plummeted over the have plummeted over the pass two quarters.pass two quarters.

How isHow isUnemployment Unemployment

Measured?Measured?

How is Unemployment Measured?How is Unemployment Measured?

Unemployment is measured by the Unemployment is measured by the Bureau Bureau of Labor Statistics (BLS).of Labor Statistics (BLS). It surveys 60,000 randomly selected It surveys 60,000 randomly selected

households every month.households every month. The survey is called the The survey is called the Current Current

Population SurveyPopulation Survey..

How is Unemployment Measured?How is Unemployment Measured?

Based on the answers to the survey Based on the answers to the survey questions, the BLS places each adult questions, the BLS places each adult into one of three categories:into one of three categories:

1)1) EmployedEmployed

2)2) UnemployedUnemployed

3)3) Not in the labor forceNot in the labor force

Unemployment RateUnemployment Rate

• An An Unemployed WorkerUnemployed Worker is:is: One who is One who is 16 years16 years or older (but not retired), or older (but not retired), notnot currently employed, currently employed, AND is AND is activelyactively seeking employment. seeking employment.

According to the According to the Bureau of Labor StatisticsBureau of Labor Statistics::

•People are People are Not in the Labor ForceNot in the Labor Force if they are: if they are: not actively seekingnot actively seeking (wealthy or lazy), (wealthy or lazy),

in the in the military, institutionalized (prison), military, institutionalized (prison), retired, or in school.retired, or in school.

under 16under 16,,

Natural Rate of UnemploymentNatural Rate of Unemployment

The The Natural Rate of UnemploymentNatural Rate of Unemployment is is unemployment that will unemployment that will notnot go away. go away. It is the amount of unemployment that the It is the amount of unemployment that the

economy normally experiences, even in the economy normally experiences, even in the good times.good times.

So, how do we know what is a So, how do we know what is a healthy healthy unemployment rateunemployment rate??

According to the Bureau of Labor Statistics: According to the Bureau of Labor Statistics: in-between in-between 4% and 5%4% and 5%

How doe the government help How doe the government help the unemployed?the unemployed?

2)2) Government-Run Employment Agencies:Government-Run Employment Agencies: give give out information about job vacancies in order to out information about job vacancies in order to match workers and jobs more quickly.match workers and jobs more quickly.

1)1) UNEMPLOYMENT INSURANCEUNEMPLOYMENT INSURANCE is a government is a government program that partially protects workers’ incomes program that partially protects workers’ incomes when they become unemployed. when they become unemployed. Offers partial payment of former wages for a Offers partial payment of former wages for a

limited timelimited time to those who are laid off. to those who are laid off. NOT ENTITLED TO THIS IF YOU GET NOT ENTITLED TO THIS IF YOU GET

YOURSELF FIREDYOURSELF FIRED..

It does not measure:It does not measure:

Problems with the Unemployment Rate:Problems with the Unemployment Rate:

1)1) Those that are Those that are UNDEREMPLOYED:UNDEREMPLOYED:

2)2) Those that are Those that are falsely reportingfalsely reporting that they are that they are not not seeking seeking employment employment (or get paid under the table)(or get paid under the table) only to get WELFARE.only to get WELFARE.

Their skills are Their skills are aboveabove the job they havethe job they have.. EXAMPLE:EXAMPLE: Someone with Someone with

a Ph.D working at a Ph.D working at McDonaldsMcDonalds

SummarySummary

Gross Domestic Product (GDP)Gross Domestic Product (GDP) … …measures an economy’s total expenditure measures an economy’s total expenditure on on newlynewly produced goods and services @ produced goods and services @ their their market valuemarket value.. Does not count products made overseas.Does not count products made overseas. Does not count used goods.Does not count used goods. Does not count depreciation.Does not count depreciation. Indirectly counts transfer payments.Indirectly counts transfer payments.

GDPGDP is divided among four components of is divided among four components of expenditure: expenditure:

1.1. Consumption Consumption (only market prices)(only market prices)

2.2. Investment Investment (net only, no depreciation)(net only, no depreciation)

3.3. Government Purchases Government Purchases (no Trans Pay)(no Trans Pay)

4.4. Net Exports Net Exports (Ex - Im)(Ex - Im)

Consumer Price IndexConsumer Price Index is the tool we use to is the tool we use to measure inflation and reduce measure inflation and reduce Nominal Nominal GDP GDP to to Real GDPReal GDP by using CPI in the by using CPI in the GDP DeflatorGDP Deflator..

SummarySummary

Measuring a Nation’s Economic Health GDP Gross Domestic Product (measures national growth) CPI...

Documents

Transcript of Measuring a Nation’s Economic Health GDP Gross Domestic Product (measures national growth) CPI...