Unit 4: Measuring economic performance

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Unit 4 Measuring economic performance
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What is Macroeconomics?

• Macroeconomics is the study of the large economy
  as a whole. It is the study of the big picture.
• Instead of analyzing one consumer, we analyze
  everyone.
• Instead of one business we study all businesses.

Why study the whole economy?

• Macro was created to
• Measure the health of the whole economy.
• Guide government policies to fix problems.

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For all countries there are three major economic
goals

• Promote Economic Growth
• Keep Prices Stable (Limit Inflation)
• 3. Limit unemployment
• In this unit we will analyze how each of these
  are measured.

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Stats used to measure economic performance

• 1. Gross domestic product
• 2. productivity
• 3. inflation
• 4. unemployment

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Gross Domestic Product
Most important stat used to measure ECONOMC
GROWTH!!!
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GDP

• GROSS DOMESTIC PRODUT (GDP)
• dollar value of all final goods and
  services produced within a countrys borders in
  one year.

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World GDP Distribution
2010 Nominal GDP
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GDP expenditure approach

• Adds up the value of spending in an economy in
  one year

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1. Consumer Spending/consumption (C)

• Goods and services purchased by consumers
  (durable and nondurable goods)
• largest category of GDP

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2. Investment (I)spending

• When businesses put money back into their own
  business
• Includes spending on
• Capital resources
• Construction
• Inventory

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Capital resources

• Equipment, machinery,
• factories etc

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Construction
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Inventory

• Unsold merchandise

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3. Government Spending (G)

• Any good or service the government
• purchases (military, education, roads etc)
• Infrastructure
• roads
• bridges

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4. Net Exports (Xn) spending

• Spending on TOTAL exports

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Exports vs. Imports

• Exports
• items made in the US and sold to another
  country

• Imports
• items made in another country and sold to the US
• Imports are counted in
• The GDP, but
• NEGATIVELY!!

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Formula for GDP (expenditure approach)

• GDP C I G XN

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For each situation, identify if it is included in
GDP the identify the category C, I, G, or Xn
1 You spend 10.00 for movie tickets 2 The
Government spends 5M Increase in defense
spedning 3 Ford
builds a new 2M factory 4 You buy 20,000
Toyota that was produced in Japan 5 A Canadian
purchases a U.S. produced car 6 You spend
10,000 Tuition to attend college 7 A Farmer
purchases new 100K tractor
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Things excluded in expenditure approach
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1. intermediate goods

• Item that goes into
• making a final product

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2. Transfer payments

• Money is transferred from person or government to
  another person
• example social security, welfare, tax refund
  etc.

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3. donations and gifts
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4. Financial transactions

• Include things like
• Buying and selling of stock
• One business buying another

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5. used items
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6. illegal sales
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• Anything in which a record is not kept is NOT
  counted in the GDP
• Example
• A man builds a deck on his own house
• he does not pay himself to do this
• You baby sit your neighbor and are
• paidunder the table

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Counted or Not Counted in the GDP????

1. Sam buys an outfit from Platos closet, a resale
   clothing store
2. Sue buys a new outfit from Macys
3. Bill gets new brakes installed on his car
4. Ford purchases steel from Germany to build a car
5. France buys computers from the United States
6. Michael buys stock in Disney

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Shortcomings of GDP

• 1. Non-market (production occurs but no is
  exchanged) transactions not counted
• 2. Does not look at quality
• 3. Tells nothing about who gets goods
• 4. Does not account for population

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Per Capita GDP

• Looks at the GDP per person
• total GDP/population
• Better indication of a countrys standard of
  living!!!

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World GDP Distribution
2010 Nominal GDP
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Topic 2 Interpreting GDP Statistics

• GDP measures growth or lack of growth of an
• economy

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Business CycleCalculating GDP over
severalyears results in a Business Cycle ups
and downs of the economy
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THE BUSINESS CYCLE
The national economy fluctuates resulting in
periods of boom and bust.
Recession decline in GDP for 6 months or more

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U.S. Business Cycle
Blue line NOT trend line Above 0
growth Under 0 decline
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Predicting Business Cycles

• Economists use Index of Leading Economic
  Indicators (ILEI) to predict future of the
  economy
• ILEI includes stats such as
• stock prices, unemployment
• claims building permits

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Pizza Making Factory

• Materials 1 black marker, 1 red marker,
  scissors,
• sheets of paper, round template
• Procedures
• 1. Trace the pizza template onto a piece of paper
• 2. Cut out the circle
• 3. Draw 5 colored in (size of a quarter)pepperoni
  pieces on the circle using the RED marker
• 4. Draw 5 colored in (size of a dime) black
  olives on the circle using the BLACK marker
• Circles must be traced and then CUT using
  scissors,
• no tearing!!!! Cut 1 pizza at a time!

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Pizza Making Factory

• 1. What happened to productivity (line 10) from
  round 1 to round 3? Why?
• 2. What happened to the quality of the pizzas
  from round 1 to 3? Why?
• 3. What effect did productivity have on the
  average cost of a pizza (line 8)?
• Why is this important???

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Topic 3 Productivity

• Number of goods/ services that a worker can
• produce for each hour of work

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Productivity and economic growth
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Things that increase a countrys productivity

• 1. Improvement in capital resources
• 2. Improvement in labor resources
• more training/education
• Specialization
• incentives
• 3. better technology

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Topic 4 Inflation

• Increase in the economys overall price level
• (does not mean all prices are rising, prices rise
• unevenly)

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What is Inflation?
Inflation reduces the purchasing power of money

• When inflation occurs, each dollar of income will
  buy fewer goods than before.

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Degrees of Inflation

• Creeping inflation
• Prices grow up to 4
• a year
• Prices creep up

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• Galloping
• Price level DOUBLES in a year

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• Hyperinflation
• Prices increase 500 a year or more

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Ducktales inflation
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Inflation types consider a Polar Pop (.74)
Next years price
Creeping inflation .76 (3)
Galloping inflation 1.48 (double)
Hyperinflation 3.70 (500)
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Measuring Inflation
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1. Consumer Price Index (CPI)

• Index used to measure INFLATION
• CPI looks at a consumer market basket of goods
  such as food, clothing, transportation,
  entertainment medical care

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CPI formula

• CPI
• Current price/base price X 100

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CPI example
Year Price of bread CPI - using 2000 as base
2000 1.19
2002 1.32
2006 1.49

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Year Price of bread CPI - using 2000 as base
2000 1.19 1.19/1.19 X 100 100
2002 1.32 1.32/1.19 X 100 110.9
2006 1.49 1.49/1.19 X 100 125.2
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CPI info.

• To find rate of change in inflation, take the
  CPI and subtract 100 from it
• Base year will always have a CPI of 100

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Adjusting numbers for inflation

• To be able to compare the value of items or
  statistics, they must be adjusted for inflation
• WHY?? Prices increases over the years a 2012
  statistic would always be more than a 2011, 2005
  1990 etc. statistic because prices have
  increased during that time period

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Example of adjusting for inflation (highest
grossing movies in U.S. history)
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How can you figure out which is the most popular
movie of all time?
What is the problem with this method?
Nominal Box Office Receipts
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How can you figure out which is the most popular
movie of all time?
Real Box Office Receipts (adjusted for inflation)
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Did the economy below actually grow???
If apples are the only thing being produced Year
1 10 apples at 1 each GDP 10 Year 2 10
apples x 2.00 GDP 20
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• Real GDP - GDP adjusted for price increases
• best indicator of economic growth, uses a BASE
  year to make comparisons
• More accurate statistic when trying to determine
  growth of an economy
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• GDP deflator
• removes the effects of inflation from the GDP

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• REAL GDP Nominial GDP
• GDP deflator X 100

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Did this economy really grow?
Year GDP GDP deflator Real GDP
1 450 100 450/100 X 100
2 452 106 452/106 X 100
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Example of Real GDP
Year GDP GDP deflator Real GDP
1 450 100 450
2 452 106 426
Once real GDP is calculated it shows the economy
did not really grow from year 1
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Rule of 70

• Can find the of years it will take for
• prices to double
• Take increase in prices and divide into 70

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• How long will it take for prices to double if
  prices increase by 3 a year
• 70/3 23 years

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Does GDP accurately measure standard of living?

• Real GDP per capita is the best measure of a
• nations standard of living.
• Real GDP per capita is real GDP divided by the
  total population.

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4. Real Income

• Income adjusted for inflation DETERMINES
  PURCHASING POWER
• Purchasing Power how
• much stuff will buy

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Cost of Living in U.S.

• Highest cost of living
• New York, NY
• Honolulu, Hawaii
• San Francisco, CA
• San Jose, CA
• Stamford, Conn.
• Washington DC
• Fairbanks, AL
• Boston, Mass
• San Diego, CA
• LA, CA

• Lowest cost of living
• Brownsville, TX
• Pueblo, Co
• Ft. Hood, TX
• Fort Smith, Ark
• Sherman, TX
• Springfield, Ill
• Waco, TX
• Fayetteville, Ark
• Austin, TX
• Springfield, MO

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Formula for Real income

• Real income
• nominal income/ CPI X 100
• Shows purchasing power

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Example of real income
Year Income CPI Real income
1 30,000 100 30,000/100 x 100 ??
2 30,900 (3raise) 105 30,900/105 X 100 ???
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Example of real income
Year Income CPI Real income
1 30,000 100 30,000
2 30,900 (3raise) 105 29,428.57
Person made more But .. purchasing power
actually went down
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Reasons for Inflation
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1. Cost push inflation

• IT COST COMPANIES MORE TO PRODUCE - They PUSH
  this price increase on to consumers
• Example the price of beef goes up, so McDonalds
  raises the price of their hamburgers

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2. Demand Pull inflation

• Caused by demand exceeding supply or a
• rapid increase in the money supply
• spending PULLS price level up

Zimbabwe 2008 Inflation rate
79,600,000,000 Amount of time for price to
double 24.7 hours
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Inflation practice

•  
•  

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Item Year 1 Year 2
Food 5000 5400
Clothing 2250 2700
Gas 3200 3000
CPI Current price/ Base price X 100 What is
the CPI for food in year 2 using year 1 as a
base? What is the CPI for gas in year 2 using
year 1 as a base?
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• Food CPI 108
• Gas CPI 93.8

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Did the economy in the chart below grow from year
1 to year 2? Why or why not?
Year Nominal GDP GDP deflator
1 5,000 100
2 6,600 125
Find REAL GDP for each year and compare Real
GDP actual GDP/GDP deflator X 100
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• Real GDP year 1 5,000
• Real GDP year 2 5,280
• YES economy did grow

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In which of the cities below will you earn the
MOST REAL income?
Real income Actual income/ CPI X 100
City Income CPI
Cleveland 30,000 101
Atlanta 30,000 103
Chicago 30,000 110
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• You receive a 2 raise at your job. Inflation
  increases by 3. Does your purchasing power
  increase, decrease or stay the same?
  _______________________
• You receive a 4 raise at your job. Inflation
  increases by 2. Does your purchasing power
  increase, decrease or stay the same?
  _______________________

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write CP is the statement refers to cost push
inflation and DP if the statement refers to DP
inflation.

• ____The price of sugar increases. As a result,
  bakeries charge more for a cake.
•  ____ Americans have more money. As a result
  their demand for items is higher which causes
  prices to go up
• ____ The auto workers union is successful in
  negotiating pay raises as a result, the price
  of cars go up
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Effects of Inflation

• Anticipated inflation
• inflation that is expected
• Able to plan for

• Unanticipated Inflation
• Inflation whose full extent was not expected not
  planned for

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1. Fixed Income Groups

• - elderly living on fixed retirement funds
• - landlords receiving fixed payments
• - minimum wage workers
• are hurt by inflation because the amount of
  being received is FIXED for a number of years.
• Prices go up, but income stays the same
  decrease
• in purchasing power

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2. Savers

• depends on interest rate given and what happens
  to price level.
• For example if you earn 1 interest on a savings
  account but inflation goes up 1.5, your will
  buy less If you earn more interest than the
  inflation rate purchasing power will go up

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3. Lenders

• depends on interest rate charged and what
  happens to price level.
• For example if a bank charges a 6 interest rate
  and inflation goes up 7, the , once it is paid
  back will be worth less than when it was borrowed

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4. Borrowers

• Depends on interest rate charged and what
  happens to price level.

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Helped or hurt by inflation??

• 1. A man lends 100 to his friend in 2010. The
  friend pays him back today.
• 2. A tenant signs a one year lease to rent an
  apartment for 800 a month?
• 3. An elderly couple lives off fixed retirements
  payments 2,000 a month
• 4. A woman who is saving money in a savings
  account earning 1 a year. Inflation is going up
  by 3 a year.

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Topic 5 Unemployment

• The of people who are not
• working, but actively seeking
• employment

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Unemployment rates

• Highest rates

• Lowest rates

Yuma, AR 27.5
El Centro, CA 26.6
Yuba City CA 15.8
Merced, CA 15.7
Ocean City, NJ 14.5
Modesto, CA 14.5
Bismark, ND 2.6
Fargo, ND 3
Lincoln, Neb 3
Midland, TX 3
Ames, Iowa 3.1
Lafayette, LA 3.1
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Types of Unemployment
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1. Frictional Unemployment

• Temporarily unemployed
• Skills are present
• Results from normal changes in the labor market
• Reasons for frictional unemployment
• Graduating from school
• In between jobs
• Re-enter workforce

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• 2. Seasonal Unemployment
• Due to time of year and the nature of the job.
• These jobs will come back
• Examples
• Life Guards

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3. Structural Unemployment

• Changes in the organization of the labor force
  or the structure of a company
• Workers DO NOT have skills needed and these jobs
  will not come back OR skill of worker is obsolete
  
• Workers must learn new skills to get a job.
• Examples
• VCR repairmen
• Carriage makers

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Reasons why structural unemployment occurs

• Change in technology
• Company relocates
• Merger takes place

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4 Cyclical Unemployment

• Unemployment that results from
• a RECESSION
• - the company doesnt have to keep the worker
• Examples
• Steel workers laid off during recessions.
• workers laid off due to people not spending

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Practice

• Joe just graduated from school and is looking for
  his first management job
• Sally lost her job at Sears due to declining
  sales
• Tim was replaced by a robot on the assembly
  line

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• 4. Kim just graduated from school and cannot find
  a job in her field so she is working as a
  waitress
• Jim lost his job when his company consolidated
  and moved to another state

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Video clip

• unemployment benefits - the 99ers

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The Natural Rate of Unemployment

• This is the normal amount of unemployment that we
  SHOULD have.

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Full employment means NO Cyclical
unemployment! Unemployment rate of around 4-6
FULL EMPLOYMENT
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Criticisms of the Unemployment Rate

• What is wrong with the unemployment rate?
• It can misdiagnose the actual unemployment rate
  because of the following
• Discouraged workers-
• Some people are no longer looking for a job
  because they have given up.
• Part-Time Workers-
• Someone who wants more shifts but cant get them
  is still considered employed.

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Cost of Unemployment

• GDP GAP - potential production is lost

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Okuns Law

• For every 1 point by which the actual
  unemployment rate exceeds the natural rate, a GDP
  gap of about 2 occurs
• Example The unemployment rate is 8 (2 over
  acceptable)
• GDP gap 2 X 2 4

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• Tradeoff between inflation and unemployment.

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In general, there is an inverse relationship
between unemployment and inflation
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• When UNEMPLOYMENT is low (more circulating in
  the economy) the value of the dollar goes down
  INFLATION is higher
• When UNEMPLOYMENT is high (less circulating in
  economy) INFALTION is lower