Macroeconomics

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Macroeconomics
the Big Picture
Production
Unemployment
Inflation
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3. Production
the creation of goods and services
measuring serves as a basis for setting reaching
macro goals
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2. Inflation
a general rise in the price level
Some prices may even be going down!!
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1. Unemployment
a resource (factor of production) is not being
used
our focus is on people
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Consequences of Unemployment

1. Loss of goods and services

2. Individual loss of spending ability and social
issues
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Types of Unemployment

1. Frictional

between jobs
2. Structural
job replaced
3. Cyclical
less business
4. Seasonal
temporary job
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Measuring Unemployment
1. population
everyone
over 16, working or looking
2. labor force
not working, but looking
3. unemployed
4. discouraged
labor not looking
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Calculating Unemployment
unemployed
labor force
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Calculate the Unemployment Rate
Population 260 million
labor force 160 million
Unemployed 32 million
Unemployed /labor force 32 million/160 million
.20 20
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Full Employment
Deals with which type?

1. Frictional?

2. Structural?
3. Cyclical?
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The Natural Rate of Unemployment
At full employment there will still be some

1. Frictional

2. Structural
but no Cyclical
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The Natural Rate of Unemployment
actual unemployment may only get as low as
4 5
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Jobless rates by group
Jobless changes by sector
January December
White 8 8.5
Black 15.7 15.8
Hispanic 11.9 13
Asian 6.9 7.2
Adult men 8.8 9.4
Adult women 7.9 8.1
20-24 years old 15.2 15.3
25-54 years old 7.9 8.5
55 and older 6.7 6.9
January December
Private 50,000 139,000
Manufacturing 49,000 14,000
Retail 27,500 2,800
Health care 10,600 26,700
Financial -10,000 0
Temporary -11,400 38,100
Restaurant -4,400 3,300
Construction -32,000 -17,000
Government -12,000 -26,000
Numbers in percent
Number of jobs added/lost
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Which type?
a. Frictional
b. Structural
1. A student who decides at mid-semester to
devote the rest of the term to studying quits her
part-time job
2. A graphic artist who is out of work because
a computer now does her job.
3. A waiter who quits his job and is applying
for the same type of work in a restaurant where
morale is better.
d. Not Unemployed
c. Cyclical
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Which type?
a. Frictional
b. Structural
4. The son of a local farmer who works 20-hour
weeks without pay on the farm while waiting for a
job at a nearby factory.
5. A travel agent who is laid off because the
economy is in a slump and vacation travel is at a
minimum.
6. A plumber who works 5 hours per week for his
church (on a paid basis) until he can get a
full-time job
d. Not Unemployed
c. Cyclical
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2. Inflation
a general rise in the price level
Some prices may even be going down!!
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Consequences of Inflation

1. Hyperinflation

2002 Argentina
1920s Germany
1990s Russia
2. Money loses value
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Real Interest rate decreases
Interest rate - inflation rate

1. Savings

Lose value
2. Loans
Are easier to repay
3. Wealth
May increase
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Types of Inflation

1. Demand-Pull

2. Cost-Push
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1. Demand-Pull

Price
S1
P2
P1
D1
Quantity
Q1
Q2
buyers demands greater than producers supply
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2. Cost Push
Price
S1(initial equilibrium)
P2
P1
D
Quantity/time
Q1
Q2
sellers costs are passed on to buyers
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Who loses?
Who loses?
1. Nellie borrows 5,000 for her college
expenses at an interest rate of 4 percent to be
paid off over 5 years, during which time the
inflation rate averages 6 percent.
1. Nellie borrows 5,000 for her college
expenses at an interest rate of 4 percent to be
paid off over 5 years, during which time the
inflation rate averages 6 percent.
2. Oscar invests 3,000 in securities that pay
5.3 annually for 10 years, and the inflation
rate during that time averages 6.4 percent.
2. Oscar invests 3,000 in securities that pay
5.3 annually for 10 years, and the inflation
rate during that time averages 6.4 percent.
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Who loses?
3. The Lynchburg National Bank commits to 4
million in 15-year mortgages at an average
mortgage rate of 7.75 percent. The inflation
rate averages 8 percent over this 15-year period.
4. Barney bought a house in 1991 for 100,000
that he now plans to sell for 200,000. during
this time the inflation rate has averaged 3
percent.
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The Price Index
1. Measures price changes
by
2. calculations
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Calculating an Index
amount in 2nd year Amount in 1st (or base) year
X 100
For Example
2002 Price 260
2003 Price 300
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Actual Calculation
300 260
115.4
X 100
1.1538
year 1 year 1
Base year
X 100
Base year 100 (always)
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Calculating a Price Index!!
Year Market Basket Price Index
1 170
2 180
3 200
4 200
5 224
6 250
7 280
Calculate a Price Index, and assume that year 3
is the base year
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Calculating a Price Index!!
Year Market Basket Price Index
1 170 85
2 180 90
3 200 100
4 200 100
5 224 112
6 250 125
7 280 140
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Consumer Price Index
measures a shopping basket of consumer goods
checked regularly
then an index is created
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Other Indices
1. PPI
2. WPI
3. MPI
4. GDP Price Index
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Disinflation
a slowing of the inflation rate
the aim of policies
usually phrased as slowing inflation
http//abcnews.go.com/Video/playerIndex?id6484348

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3. Production
the creation of goods and services
measuring serves as a basis for setting reaching
macro goals
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Full Production
producing at maximum capacity
on the PPC
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Economic Growth
the full-production full-employment capacity
grows over time
the PPC shifts out
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Measuring Production

1. GDP

production in a country
2. Nominal GDP
current
3. Real GDP
adjusted
4. GNP
production of a country
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A Measure of Output
Only final goods and services count

• What Does Not Count Toward GDP?
• Sales at intermediate stages of production.
  Their value is already counted in the final-user
  good. Including them would result in double
  counting.

Stage 1 farmers wheat
Stage 2 millers flour
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A Measure of Output

• What Else?
• Financial transactions and income transfers. They
  do not reflect production.
• Production outside the geographicborders of the
  country is not counted.
• Goods not produced during the current period are
  not counted.

• Stocks

1955 Chevy
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Which are included in this year's GDP?
1. Interest on an ATT bond - 2. Social
Security payments to retirees - 3. Services of a
painter in painting a house - 4. Income of a
dentist - 5. Money received from the sale of a
1990 model car- 6. Monthly allowance of a
college student - 7. Rent for a 2 bedroom
apartment - 8. Money received for selling this
year's model car - 9. Interest on a government
bond -
YES
NO
YES
YES
NO
NO
YES
YES
NO
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Which?
10. A two hour decline in the work week - 11.
Purchase of the ATT bond - 12. A 2 billion
increase in business investments - 13. Purchasing
100 shares of GM common stock - 14. Purchase of
an insurance policy - 15. Wages paid to your
butler - 16. Market value of a homemaker's
services - 17. Purchase of the Mona Lisa -
NO
NO
YES
NO
YES
YES
NO
NO
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Calculating Real GDP
nominal GDP for a year price index number for
that year
X 100
For Example
2000 GDP 9.873 trillion
2000 GDP Index 107.04
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Actual Calculation
9.873 107.04
9.224
X 100
.0092238
calculation works for deflating or inflating
any dollar amount
nominal price target year index
X 100
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Gross Domestic Product Complete the following
table assuming that Year 1 is the base year.
Year Output Price Money GDP GDP Index Real GDP
1 100 4.00
2 120 4.40
3 110 5.00
4 110 5.20
5 135 5.20
6 140 5.60
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Gross Domestic Product Complete the following
table assuming that Year 1 is the base year.
Year Output Price Money GDP GDP Index Real GDP
1 100 4.00 400 100 400
2 120 4.40 528 110 480
3 110 5.00 550 125 440
4 110 5.20 572 130 440
5 135 5.20 702 130 540
6 140 5.60 784 140 560