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 DefinitionsBureau 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 UnemploymentU3—people w/out work actively

lookingU4—U3+discouraged workersU5—U3+U4+marginally attachedU6—U3+U4+U5+part-timers

looking for full time work

Types of Unemployment

1. Frictional unemploymentTemporary 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 unemploymenta)Workers who cannot find jobs because the structure of the economy has changedb) New technology is introduced or the company relocates and the worker does not want to move Examples:

3. Cyclical unemploymenta) Workers who are laid off due to a downturn in the economy.b) They expect to be rehired when the economy improves

4. Seasonal Unemploymenta) Occurs due to the seasonal nature of jobsb) What industries are affected by seasonalunemployment?

Examples of unemployed workersRecent college graduate seeking

her first jobWorker who has quit his job to

move to be with his familyCarpenter 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 FALSEIf 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 hurts everyone.

FALSE: 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 InflationMoney becomes worthlessPeople lose faith in the

GovernmentHappened 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 WinnersBorrowers—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 LosersSavers—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 deflationReduces the value of people’s

assetsDecreases consumer spendingDecreased demand affects

businessesLeads 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 limitationsThe overall CPI may not match

one’s own household’s budgetIdentify 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

GDPGross 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 GDPGDP= C + I + G + (X-M)Consumption (C)Spending by households on goods

and servicesMakes 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 servicesM—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 GDPIncrease 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 GDPIndicates 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  

      (millions ofRanking   Economy US 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

GDP Per CapitaGDP 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 US dollars

       1   Qatar 103,900 2   Liechtenstein 89,400 3   Bermuda 86,000 4   Macau 82,4005   Luxembourg 81,100 6   Monaco 70,700 7   Singapore 61,4008   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 43,40020   Australia 43,300

Shortcomings of GDPGDP 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 EconomyConsists of two parts:◦“black markets” Drug dealing, video and music piracy

◦“Off-the-books activities” Any job where taxes are not withheld,

cashIn 2012 the UE in the USA was $2 trillion

Costs and Benefits of UECosts

◦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 CycleThe Business Cycle is the natural rise

and fall of the economy over timeExpansion

◦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. A mechanic fixes a transmission2. A business purchases laptops and

software3. A local library purchases new

audio books4. A retailer purchases tennis shoes

from a manufacturer in China and sells them

5. 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