1. PART 1: Measuring the National Economy, Business Cycle, Unemployment, & Inflation Unit #5: The Macroeconomy

2. WHAT IS MACROECONOMICS? -study of the workings of the economy as a whole

3. How do we assess our economy’s health? We examine economic indicators – data/statistics gathered about an economy

4. Economic Indicator #1: Gross Domestic Product Read Econ Alive pages 252-254 and complete notes in section III (A – D)

5. GDP – The Measure of National Output Gross Domestic Product Market value of all final goods and services produced within a country during a given time period Market value – price x quantity produced Final goods – any new good that is ready for use by a consumer GDP excludes intermediate goods (one’s that are used to make others) GDP excludes secondhand sales (sale of used goods) Produced within a country – foreign owned firms that produce within the borders COUNT towards GDP Given time period – look at quarterly GDP & yearly Most important is the growth rate of GDP Issues with GDP – leaves out unpaid household & volunteer work, ignores informal/underground economy, says nothing about income distribution, doesn’t show what was exactly produced

8. The Output-Expenditure Model The output-expenditure model (created by Keynes) is a model used to help calculate GDP by examining how much certain sectors of the economy spend on different types of goods & services that were produced. GDP = C + I + G + NX C = Consumer Sector I = Business/Investment Sector G = Government Sector NX = Foreign Sector (Exports-Imports)

9. Adjusting GDP Let’s say this: 2006 GDP was $13.2 trillion 2007 GDP is $13.8 trillion Is this good for the U.S. economy?

10. Real vs. Nominal GDP Nominal GDP measures the output of an economy valued at today’s prices Problem – Nominal GDP will go up if prices go up, even if the actual output of the economy does not! Real GDP measures the ouput of an economy valued at prices that are fixed over time Solution – Real GDP allows us to compare the total output of an economy from year to year as if prices have never changed!

11. GDP per capita GDP per person where the total GDP is divided by the population (measures standard of living from country to country)

12. Economic Indicator #2: Inflation Read Econ Alive pages 261-266 and complete notes in section V (A-E)

13. Inflation Rate Definition: the percentage increase in the average price level of goods & services from one month/year to the next Consumer Price Index (CPI) price index for the “market basket” of consumer goods & services Market basket based on thousands of surveys of households about spending habits and then BLS tracks price changes of these items each month Primary measure of inflation in the U.S.

15. Severity of Inflation Types Creeping Inflation - 1-3 % annually , very gradual rise in the price level Hyperinflation – over 500% annually, the most severe inflation Deflation – decrease in the general level of prices in the economy (opposite of inflation) Why could this be good or bad?

16. Causes of Inflation Increase in Money Supply Demand-Pull Inflation: all sectors of the economy try to buy more goods and services than the economy can produce so producers must raise prices Cost-Push Inflation: costs of production increase so producers must raise prices of their products Usually involves energy prices! Wage-Price Spiral occurs when higher prices throughout the economy force workers to demand higher wages, forcing producers to raise their prices even more (cycle)!!!

17. What are the COSTS of INFLATION? The dollar buys less (loss of purchasing power) Fixed incomes suffer Change in Spending Habits Savings worth reduced = People SPEND NOW! Without savings economy cannot prosper Higher Interest Rates Lenders are hurt (getting repaid in money with less purchasing power) Demand for Loans decreases = Without lending economy cannot prosper

18. Economic Indicator #3: Unemployment Read Econ Alive pages 258-261 and complete notes in section VI (B-C)

19. Unemployment The unemployment rate shows the percentage of unemployed people divided by the total number of people in the civilian labor force Let's start by defining a few concepts that are needed to help us understand the unemployment rate. Civilian and Non-institutionalized Adult Population: Everyone 16 years old or older and who is not in the military, not in jail or prison, not living permanently in nursing homes, and not in other "institutions." Labor Force (LF): The total number of adult non-institutionalized civilians who are either working and on a payroll (E) OR are actively seeking work (U). LF = E + U Employed (E): The number of adult civilians who are working and on a payroll of some type. Unemployed (U): The number of adult civilians who are not working but are actively seeking work.

20. Problems with the Rate Counts part-time workers as employed Causes underestimation Leaves out “discouraged workers” Causes underestimation Doesn’t count underground economy Causes overestimation

21. Four Types of Unemployment: Frictional: workers in between jobs – seeking first job or looking for new one Structural: advances in technology reduces demand for certain skills Seasonal: results from changes in weather Cyclical: related to the health of the economy – THIS IS BAD UNEMPLOYMENT!

22. 1. People in a resort area that is busy in the summer and winter try to make enough money during these times of the year to tide them over during the fall and spring. 2. Many travel agents have left the field because their former customers now go to the Internet for the lowest fares. 3. National Unemployment rose to 6% as the economy slumped for the third straight month. 4. A Broadway musical show had its final run, leaving all the actors unemployed. 5. A typewriter company let go all its workers and shut down after one hundred years in business because computers made its product obsolete. 6. Jenny lost her job at Rita’s Water Ice late fall as the demand for water ice decreases when temperatures drop. 7. Hundreds of Mexican immigrants moved to California in the last year, but many remained unemployed because their English is not yet adequate for most jobs. 8. Lumber companies laid off hundreds of workers after reducing their projected output due to a slow-down of housing starts throughout the nation.

23. Full Employment (also called Natural Rate of Unemployment) Frictional, Structural, and Seasonal are all acceptable unemployment types but what we want to minimize is cyclical unemployment Full Employment occurs when jobs exist for everyone who wants to work and the economy is healthy & growing 4-6% unemployment is healthy This rate may be changing!!!

24. http://www.econedlink.org/unemployment/

25. Business Cycles – Measuring Our Nation’s Economy Through Real GDP Changes Read Econ Alive pages 266-269 and complete notes in section VII (A-C)

26. Phases of the Business Cycle Phase: Expansion- period of increasing real GDP (we’re producing more!) Recovery– period when the economy begins to produce more again Phase: Contraction- period of decline in real GDP (we’re producing less!) Recession– when real GDP declines for two consecutive quarters or six months Depression– prolonged economic downturn characterized by extreme conditions – plummeting GDP, extremely high unemployment, bank/business failures, etc. Phase: Peak– point where real GDP stops going up Phase: Trough– point where real GDP stops going down

27. Highest level of employment would be at the peak

29. Indicator Performance During Business Cycle: During expansion: Unemployment decreases Inflation increases Real GDP increases During contraction: Unemployment increases Inflation decreases Real GDP decreases