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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?

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Employment Definitions Bureau of Labor Statisticsgovernment agency that tracks the number of people who are employed or unemployed Civilian Labor Forcenumber of people aged 16 years and older who are not in the armed forces and who are employed, or are seeking employment

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Employed people are people with jobs. The unemployment rate is the percentage of the civilian labor force that is unemployed

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Undercounted Unemployment U3people w/out work actively looking U4U3+discouraged workers U5U3+U4+marginally attached U6U3+U4+U5+part-timers looking for full time work

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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:

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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:

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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

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4. Seasonal Unemployment a) Occurs due to the seasonal nature of jobs b) What industries are affected by seasonal unemployment?

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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

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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?

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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.

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Inflation hurts everyone. FALSE: Some people benefit from inflation despite its generally harmful effects.

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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

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Problems of Inflation Money becomes worthless People lose faith in the Government Happened in 1920s 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

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Inflations Winners Borrowersthe money they pay back is worth less than the money they borrowed Homeownersfixed interest mortgages mean they pay back their loans with cheaper $ Farmers whose crops rise in price and pay back their loans with cheaper $

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Inflations Losers Saversmoney 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

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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

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Problems of deflation Reduces the value of peoples assets Decreases consumer spending Decreased demand affects businesses Leads to higher unemployment

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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

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Changes in the CPI are used to measure inflation

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Why is the CPI important? Determines the inflation rate which is used by: Manufacturers and retailers in predicting future price increases

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Employers in calculating salaries and pensions Government in determining Cost of living adjustments for Social Security recipients

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CPIs limitations The overall CPI may not match ones own households budget Identify two of the CPIs 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 70s A person in their 20s with a full time job A family with 2 children in college

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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

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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

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Investment (I) Spending by businesses on machinery, factories, tools and construction of new buildings

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Government (G) Spending by all levels of government on goods and services Includes military, schools and highways

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Net Exports (X-M) Xexports of goods and services Mimports of goods and services (X-M) is spending abroad on a nations 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)

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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

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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

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Gross domestic product 2012 (millions of Ranking EconomyUS dollars) 1 United States 15,684,800 2 China 8,358,363 3 Japan 5,959,718 4 Germany 3,399,589 5 France 2,612,878 6 United Kingdom 2,435,174 7 Brazil 2,252,664 8 Russian Federation 2,014,776 9 Italy 2,013,263 10 India 1,841,717 11 Canada 1,821,424 12 Australia 1,520,608 13 Spain 1,349,351 14 Mexico 1,177,956 15 Korea, Rep. 1,129,598 16 Indonesia 878,193 17 Turkey 789,257 18 Netherlands 772,227 19 Saudi Arabia 711,050 20 Switzerland 632,194

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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.

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GDP Per Capita 2012 Ranking EconomyUS dollars 1 Qatar 103,900 2 Liechtenstein 89,400 3 Bermuda 86,000 4 Macau 82,400 5 Luxembourg 81,100 6 Monaco 70,700 7 Singapore 61,400 8 Jersey 57,000 9 Norway 55,900 10 Falkland Islands 55,400 11 Brunei 55,300 12 Isle of Man 53,800 13 Hong Kong 52,300 14 United States of America 50,700 15 United Arab Emirates 49,800 16 Switzerland 46,200 17 Guernsey 44,600 18 Cayman Islands 43,800 19 Canada 43,400 20 Australia 43,300

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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

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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

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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

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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!

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Contraction Economy shrinks as the demand for goods and services decreases Workers lose their jobs No money to spend on stuff!

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How are growth and Recession determined? Growth6 consecutive months of increasing GDP Recession6 consecutive months of decreasing GDP

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Which component of GDP would each of these fit into? 1. A mechanic fixes a transmission 2. A business purchases laptops and software 3. A local library purchases new audio books 4. A retailer purchases tennis shoes from a manufacturer in China and sells them 5. Mother purchases those tennis shoes from the retailer

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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