Economics of Information Technology

1
Economics of Information Technology

• Measuring Economic Variables
• CPI, UNEMPLOYMENT GDP

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Measuring Economic Variables

• Worksheet, pp 7-7 7-15

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Three Basic Formulas

• D Ending-beginning value/ beginning value x
  100
• Index value current period/value in base
  period x 100
• Real value nominal value /price deflator x 100

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Measuring Employment Unemployment

• U UNEMPLOYED/LABOR FORCE X 100
• E EMPLOYED, 16 OLDER/NONINSTITUTIONAL
  POPULATION, 16 OLDER X 100
• LFPR E U/POPULATION, 16 OLDER X 100

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Economic Report Of President

• Employment and Unemployment Tables

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Economic Report Of President

• Which group of people have highest LFPR? Which
  lowest? Why?
• What demographic group has traditionally had the
  highest U?
• Determine Din U between 1995 - 2000.

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Economic Report Of President

• What has happened to average duration of U in
  second 1/2 of century?
• Both unemployment employment were higher in
  1990 than in 1950. Why?
• Do data on national U rate reflect extent of U
  among particular groups?

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What Unemployment Rate Does Not Show

• Unemployment for different demographic groups
• Unemployment in states regions
• Unemployment in different industries
• Discouraged worker effect
• Duration of unemployment

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Measuring Price Changes

• CPI Weighted cost of base period items in
  current period/ weighted cost of base period
  items in base period x 100

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Measuring Price Changes

• D CPI Change in CPI/beginning CPI x 100
• If CPI in yr 2 is 165 in yr 1 is 150, what is
  the D CPI ?
• 165 - 150/150 x100 10

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Measuring Price Changes

• Real value current value/CPI x 100
• If income was 10,000 in 1990 20,000 in 2000
  CPI in 2000 is 200, what is real value in 2000 in
  1990 (base) dollars?
• 20,000/200 x 100 10,000
  

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Constructing Price Index

• What is cost of items in base year?
• What is cost of items in year 1?
• Compute CPI for year 1
• What is cost of items in year 2?
• Compute CPI for year 2

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Constructing Price Index

• What is the percentage increase in prices from
  base year to year 2?
• If CPI was 141.9 in 12/92 and CPI was 145.8 in
  12/93, what is the D in prices?

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Economic Report Of President

• Price Tables

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Economic Report Of President

• What was the overall CPI in 1999?
• What was the D in prices between 1967 1999?
• What CPI components have contributed most to this
  increase?
• D inflation determined how?
• What is the D in prices from 1993-94?

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Problems With CPI

• Overstates changes in cost of living
• Substitution bias
• Consumer buying patterns respond to changes in
  relative prices
• Overstates changes in cost of living
• Quality adjustment
• Cannot completely adjust for introduction of new
  goods or changes in quality of existing goods
• Superlative indices take into account consumers
  ability to substitute

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Problems With CPI

• Overstates changes in cost of living
• Outlet substitution
• Consumers may change shopping patterns, shifting
  from high-priced to low-priced outlets
• Current CPI assumes all difference in price
  reflects differences in quality of service

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CPI Commission

• Reported that CPI overstates inflation by 1.1
  per year
• Why is this important?
• CPI used to calculate real GDP
• Productivity is calculated from real GDP
• CPI used to calculate many other economic
  statistics

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Measuring Economic Growth

• Real GDP nominal GDP/ price deflator x 100
• GDP deflator nominal GDP/base year GDP x 100

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Measuring Economic Growth

• Growth rate real GDP in yr 2 - real GDP in yr
  1/real GDP in yr 1 x 100
• If real GDP in year 1 1000 in year 2
  1038, what is economic growth rate between the
  two years?

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Measuring Economic Growth

• What is real GDP for year 3?
• What is real GDP for year 4?
• What is real GDP per capita for year 3?
• What is real GDP per capita for year 4?

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Economic Report Of President

• Growth Productivity Tables

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Economic Report Of President

• What is the base year used?
• In what years was there negative economic growth?
• What component of GDP is the largest?
• What component of GDP is the smallest?

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Problems With GDP

• Does not measure increases in social welfare
  (decreases in crime rate or increases in leisure
  time)
• Does not measure nonmarket transactions
  (housework child care)
• Does not reflect losses or social ills such as
  pollution

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Problems With GDP

• Says nothing about distribution of output among
  people
• Cannot measure quality differences in products
• Does not include underground economy transactions

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Performance Of U.S. Economy By Presidential
Administration

• Worksheet

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Presidential Performance

• During which presidency was rate of economic
  growth highest?
• What brought this about?
• What period of time saw greatest average annual
  drop in real GDP?

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Presidential Performance

• Which periods of time in this century do you
  think were soundest in terms of overall economic
  performance?
• What relationship can you find between rate of
  unemployment and rate of price change?

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Relevant Articles

• Revised GDP Rules Likely to Reveal More Growth,
  p 7-18
• The New Economy Work in progress, p. 7-21
  7-23
• Greenspan Credits Technology, pp. 7-24 7-26