17. Calculations… Remember…in 2008 the market basket was valued at $14 … in 2009 the market basket was valued at $19 1. If the base year is 2008, what is the price index of 2009? Price Index = (New Year Price / Base Year Price) X 100 2. What is the inflation rate for 2009? Inflation Rate = { (New Year Price – Base Year) / Base Year Price } X 100
Just as economists study output of single producers, they also want to know the total amount of goods & services the economy as a whole produces
Each quarter, the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce, releases an estimate of the level and growth of U.S. gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States. What Does / Does Not Count Towards GDP: 2) Includes those goods produced in the USA, even if the company is owned by foreign firms or U.S. owned companies elsewhere do not count Japanese cars made in Ohio count 3) Intermediate Products aren’t counted Products used in making other products (like new tires on a car) but replacement tires do count (flour, sugar, salt bought as end product counts but not what goes in bakery items) 4) Excludes Secondhand Sales - Sale of used goods (does not accumulate new wealth) 5) Informal economy –operates without gov’t regulation - babysitters, drug dealers, mowing lawns etc. 6) unpaid work – volunteer firefighter & stay at home parents provides value but no $ is exchanged so can’t count in GDP Other GDP limitations 1. Reporting delays - too much info to report on present 2. tells nothing about the composition of output (up usually is good but what if it is creating nerve gas instead of public works, down usually bad but could be new drug that saves on medical costs 3. or the impact of production on quality of life. 4. Excludes non-market transactions - mowing lawn or housekeeping GDP is still the best measure of overall economic health because it only measures production within a nation’s borders! = want more production
"U.S. Economy Grows at a 5.9% Rate" The Bureau of Economic Analysis' announcement about real GDP growth in late 2009 seemed like very good news. The U.S. economy grew at an annualized rate of 5.9 percent from October through December. Given the real GDP declines of much of the previous two years, was this evidence that the recession is over? Using GDP as an indicator that some people feel identifies a recession, maybe it is over. Then again, the National Bureau of Economic Research uses much more than simple GDP growth to identify the beginning and end of a recession.
Switched from GNP to GDP in 1991 = GDP + all payments that Americans receive from outside the United States minus all payments made to foreign-owned resources inside the United States. Personal Income (PI) is the total amount of income received by individuals before taxes. Disposable Personal Income (DI) is PI less taxes (personal income taxes). What’s the difference between GDP & GNP? Not equal (GDP is measure of all final goods & services produced in U.S. no matter who & GNP is all goods & services produced by U.S. citizens no matter where they are from
How do you come up with GDP with all types of business? Useful to think of the economy as being made up of several different parts, called sectors, receive various components of national income & use income to purchase the total output (help circular flow of economic activity) 1. Break economy into four sectors 2. State that each of these sectors buy goods & services (they make expenditures) that are produced C (makes up about 60-70% of GDP) - Household - made up of all persons who occupy a house, apartment, or room in separate living quarters -receives income from disposable personal income spends on goods & services like groceries, rent, books, cars I – businesses – investment in capital goods plants, equipment, inventories (goods produced but not yet sold) G – all spending on goods & services for defense, transportation, etc. but do not count transfer payments (like welfare, S.S.) – gets income from taxes/investments F- net exports- value of all exports minus imports (buys tractors, computers, airplanes, and farm product & supplies product like Japanese cars, British woolens)
Economists use GDP figures to determine not only how big an economy is, but whether it is growing or shrinking and at what rate! With inflation, output may appear to grow from one year to the next without actually doing so To reduce distortions of inflation, economist construct a price index - statistical series that can be used to measure changes in price over time
How are they created? 1. Choose base year (serves as basis for comparison of other years) 2. Market basket - goods representative of the purchases made over time (# of items must remain fixed over time - want to capture trend of prices) 3. Price of each item in market basket is recorded & then totaled = represent the prices of the market basket in the base year (represents 100%) To see how prices change: 1. Record prices a year later & total CPI - reports changes on 90,000 items, compiled monthly by Bureau of Labor Statistics PPI-sample of 3,000 commodities & base year of 1982, reported by Bureau compare price index for each year & then find % of change
Why useful? Find out if GDP (increase in quantity of goods & services produced or was it caused by inflation) Real GDP is calculated by dividing current GDP by the implicit GDP price deflator and multiplying by 100
How are they created? 1. Choose base year (serves as basis for comparison of other years) 2. Market basket - goods representative of the purchases made over time (# of items must remain fixed over time - want to capture trend of prices) 3. Price of each item in market basket is recorded & then totaled = represent the prices of the market basket in the base year (represents 100%) To see how prices change: 1. Record prices a year later & total CPI - reports changes on 90,000 items, compiled monthly by Bureau of Labor Statistics PPI-sample of 3,000 commodities & base year of 1982, reported by Bureau compare price index for each year & then find % of change
CPI -This is one way the government measures inflation. It is termed as the “ market basket of consumer good and services .” or -changes in the average prices of this basket changes overall cost of living – COL index -surveys thousands of households about their spending habits to create market basket then visits 25,000 retail stores to get price changes GDP price deflator - base year of 1992, compiled quarterly The BLS measurement of the CPI-U includes all urban consumers, representing about 87 percent of the total U.S. population. "It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural non-metropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals." With a few exceptions, these price indexes are seasonally adjusted. According to the BLS, "many economic series, including the CPI, are adjusted to remove the effect of seasonal influences-those which occur at the same time and in about the same magnitude every year. Among these influences are price movements resulting from changing weather conditions, production cycles, changeovers of models, and holidays." Calculating the CPI-U "The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 25,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments. All taxes directly associated with the purchase and use of items are included in the index." "Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other reas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives." "In calculating the index, price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local data are then combined to obtain a U.S. city average."
Inflation Calculator You can use the BLS "Inflation Calculator" to determine price level change over any period of time (beginning in 1913) or to determine the buying power of the dollar at any given time compared to another. For instance, $100 in 1913 had the same “buying power” as $2,202.11in April 2010. A good that cost $100 in 1913 (all other things being equal) would cost $2,202.11 today. If electronics prices had been consistent with the CPI-U over time an I-Pod that cost $200 today would have cost just $59.95 in 1990 (if you could have bought an I-Pod in 1990).
Demand-Pull : consumers/business converge to buy up goods & services so merchants have to raise prices (lose customers though) Cost-Push : example – union wins large wage contract = increased cost of producing goods & then pass price to customers = rise in prices Wage-Price Spiral : higher prices = people ask for higher wages creates spiral, if workers get higher wages then merchants increase prices Excessive monetary growth – any extra money given & then spent will cause demand-pull
Price level – magnitude of prices at one point in time (used in comparison over time) The inflation rate is determined by comparing the price level at the beginning and end of a period. Deflation can occur when there is a decrease in the general price level. Types describing severity of inflation – Creeping inflation is inflation in a range of 1 to 3 percent annually. Galloping inflation is when inflation can go as high as 100 to 300 percent annually. Inflation of more than 500 percent a year is known as hyperinflation. (record 828 octillion worth of one prewar pengo) We can also end up with situations where the general price of goods falls throughout the market This results in deflation Calculated the same way as inflation, BUT results in a negative number
The dollar buys less – today our dollar buys 5 cents worth of goods & services bought in 1900 (prices rise & purchasing power decreases) Spending habits change Disrupts economy – interest rates increase too so less spending on housing & durable goods (businesses stop expanding & cut back inventories/production) Speculation increases Risky spending – people who usually invest in safe options now buy condos, diamonds, works of art or things that increase in price (don’t invest in normal things) people don’t want savings to go worthless so SPEND now to take advantage of lower prices Lenders are hurt; negative effect on economy loans made earlier are repaid with inflated dollars (ones with less purchasing power) – loan of $100 to buy 200 loaves of bread but once inflation sets in price doubles to $1 a loaf = only 100 loaves for lender
Unemployed – people available for work who made a specific effort to find a job during the past month & who worked less than 1 hour for pay in a week Bureau of Census – monthly survey of 50,000 households B. The unemployment rate understates unemployment because it does not include “discouraged” workers (stopped looking for job in past 4 weeks) & during recession this figure can skyrocket people who are working part-time because they cannot find full-time work ARE EMPLOYED!! (even if it’s 1 hour a week, say they lost a good job & now work a bad one) so employed doesn’t mean fully employed Underground economy includes gambling, drug dealing, illegal activities, or people in the informal economy (no taxes on earnings) which may make the UR too high
Frictional – between jobs for one reason or another such as looking for a better job or a first time worker Structural – consumer tastes make some goods & services not in demand (horses, whips, saddles to U.S. automobiles & then to foreign made automobiles) gov’t closes military bases, occurs with fundamental change in operations of the economy Cyclical – people are laid off during recession (cut back production), = people stop buying cars, fridges, washers, dryers Seasonal – resulting in changes of weather or demand for certain produts – carpenters work less in winter (seasonal takes place every year but cyclical may last 3-5 years) Technological – workers with less skills, talent, education are replaced by machines DIFFERENCE BETWEEN STRUCTURAL & TECHNOLOGICAL - factors unrelated to efficient means of production can cause structural unemploy. But in your laboring days, you'll want to make sure not to choose a job that is going to be made obsolete by technology. There's not much need anymore for telegraph operators or horse-and-buggy drivers; the telephone and automobile did those jobs in. A few jobs that are likely to go down as the horse-and-buggy drivers of the 21st century, probably sooner than later:Bank teller, Telephone operator, Photo processor, Video store clerk, Newspaper classifieds salesperson
Economy is healthy and there is little cyclical unemployment during Natural Rate Reasons for Unemployment: New technology = less jobs (allows us to be more productive so innovation is good!) People compete for jobs (makes for more productive workers) New entrepreneurs start businesses so you need a surplus of workers to pull from
Each month, the Bureau of Labor Statistics (BLS) releases data from the monthly "Household Survey" conducted by the Bureau of the Census, providing a comprehensive body of information on the employment and unemployment experience of the U.S. population, classified by age, sex, race, and a variety of other characteristics. The BLS also conducts the Current Employment Statistics (CES) program, surveying about 150,000 businesses and government agencies, representing approximately 390,000 individual work sites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls. The BLS compiles information from these sources and announces the monthly "Employment Situation," reporting the current U.S. employment and unemployment data estimates. The monthly announcement reports employment data from the previous full month. Education matters . Those with less education tend to be unemployed at higher rates. The group with the lowest identified unemployment rate in March was people with a Bachelors Degree or higher, at 4.9 percent. Those without a high school diploma had an unemployment rate almost 3 times higher, at 14.5 percent. Figure 2: U.S. Unemployment Rates, March 2010 U.S. Unemployment Rate by Demographic Group Civilian Non-institutionalized Population 9.7% Men (20 years and over) 10.0% Women (20 years and over) 8.0% Teenagers 26.1% Whites 8.8% Black/African Americans 16.5% Hispanics/Latino Ethnicity 12.6% Asians 7.5% U.S. Unemployment Rates by Educational Attainment All adults, 25 years and over 8.3% Less than HS Diploma 14.5% HS Graduates, no college 10.8% Some College, Associate Degree 8.2% Bachelors Degree and Higher 4.9% Additional Unemployment Data “ The number of long-term unemployed (those jobless for 27 weeks and over) increased by 414,000 over the month to 6.5 million. In March, 44.1 percent of unemployed persons were jobless for 27 weeks or more.” As the recession continues, larger numbers are unemployed for a longer time. Those analysts concerned that this will be a “jobless recovery” believe that many of the long-term unemployed will not find jobs in their old industries, as investments in technology replace employees. “ The civilian labor force participation rate (64.9 percent) and the employment-population ratio (58.6 percent) continued to edge up in March.” “ The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) increased to 9.1 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.” “ About 2.3 million persons were marginally attached to the labor force in March, compared with 2.1 million a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.” “ Among the marginally attached, there were 1.0 million discouraged workers in March, up by 309,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.3 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.” Many have simply given-up looking for work. Others are working only part-time, not by choice.
BUSINESS CYCLE = recurring ups & downs of real GDP
Recession - declines for two quarters/six months in a row Begins when economy reaches a peak (point where real GDP stops going up – real GDP is at a temp high), then when GDP is decreasing then economy is in contraction & ends when the economy reaches a trough (turnaround point where real GDP stops going down, the low point in real GDP) Recovery -period when real GDP begins rising Expansion - continues until the economy reaches a new peak, beyond recovery Contraction - unemployment rate rises, higher unemployed = less goods & services = lower standard of living If recession becomes really severe then we have depression - state of the economy with large #’s of people out of work, shortages, wasting factory production (GREATER THAN 2% DROP IN REAL GDP) The worst depression in U.S. history was the Great Depression, which began in 1929. The Great Depression was caused by various factors, including excessive borrowing in the 1920s and global economic conditions. Since the Great Depression, the United States has experienced several recessions, but each was short compared with the recovery that followed.
Causes of Business Cycles A. Businesses reduce their capital expenditures once they decide they have expanded enough (not building new factories, getting new equipment which causes unemployment in some industries) B. Businesses cut back their inventories at the first sign of an economic slowdown. (or build back up with good signs of sales in future) C. Businesses cut back on investment after an innovation takes hold (1. It’s good b/c everyone is competing & innovating but then economic activity slows) D. Tight money policies (high interest rates & tight credit market) of the Federal Reserve System slow the economy. E. External shocks, such as increases in oil prices and international conflicts, can cause business cycles.
What Does Composite Index of Leading Indicators Mean? An index published monthly by the Conference Board (Conf. Board Leading Economic Index) used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. These variables have historically turned downward before a recession and upward before an expansion . The single index value composed from these ten variables has generally proved capable of predicting recessions over the past 50 years The Composite Index of Leading Indicators is a number that is used by many economic participants to judge what is going to happen in the near future. By looking at the Composite Index of Leading Indicators in the light of business cycles and general economic conditions, investors and businesses can form expectations about what's ahead, and make better-informed decisions.
Usually when the economy contracts (real GDP decreases) then unemployment rate increases (higher the unemployment rate = fewer goods & services produced & standard of living declines)
