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Unit 2. Macroeconomic Indicators GDP, CPI, unemployment rate. Circular Flow. Total Production. What is the monthly production of this coffee shop?. Value of Production. What is the value of the monthly production of this coffee shop? This is like calculating GDP…. Gross Domestic Product. - PowerPoint PPT Presentation
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Unit 2
Macroeconomic IndicatorsGDP, CPI, unemployment
rate
Circular Flow
Total Production
JANUARY FEBUARY
# of coffees
# of lattes
# of scones
# of coffees
# of lattes
# of scones
25 25 50 30 30 40
What is the monthly production of this coffee shop?
Value of Production
What is the value of the monthly production of this coffee shop?
This is like calculating GDP…
JANUARY FEBUARY
# of coffees
25 $3.00# of
coffees30 $3.00
# of lattes
25 $2.50# of
lattes30 $2.50
# of scones
50 $1.50# of
scones40 $1.50
Gross Domestic Product
Aggregate spendingC + I + G + Xn = GDP
What’s not counted? Intermediate goods Used goods Non-market transactions Underground economy Transfer payments Sale of financial investments (stocks or bonds)
Consumption or C
Largest component of GDP Durable goods, non-durable goods,
and services
Investment or I New machinery purchased by firm New construction for firm or consumer Unsold inventory Most volatile component
Government or G
All levels purchases of final goods & services
Investments in infrastructure
Net Exports (X-M) or Xn Add any domestically produced goods
bought by foreigners (exports = X) Subtract any spending by our citizens on
foreign made goods (imports = M)
National Income
Aggregate IncomeRESOURCE SUPPLIED INCOME RECEIVED
Labor Wages
Entrepreneurial Talent
Profit
Capital Interest
Land Rent
W + P + I + R = GDP
Real GDP v. Nominal GDP
Nominal GDP is the value of current production at the current prices.
Real GDP is the value of current production using prices from a fixed point in time. (base year) aka constant-dollar or real
Keepin’ it Real
Year# of
lattesPrice
per cupNominal GDP
Real GDP
Price Index
2000 1000 $2
2001 1200 $3
2002 1800 $4
2003 1600 $5
Price Index = Price in current year* 100 Price in base
year
2000 is the base year
Keepin’ it Real
Year# of
lattesPrice
per cupNominal GDP
Real GDP
Price Index
2000 1000 $2 $2000 100
2001 1200 $3 $3600 150
2002 1800 $4 $7200 200
2003 1600 $5 $8000 250
Real GDP = Nominal GDP * 100 Price index
% Real GDP = % Nominal GDP - % Price Index
Long Run Economic Growth
Increase in Real GDP
or Real GDP/capita
SwitzerlandC
onsu
mer
goods
Capital goods
A
Deflationary gap: when the economy is producing below full-employment. Low aggregate demand and high unemployment puts downward pressure on prices
BFull-employment output: The economy is producing just inside its PPC, the NRU prevailes
CInflationary gap: The economy is producing beyond full-employment at less than NRU. Competition for workers puts upward pressure on prices.
D
Economic growth: A point beyond the nation's PPC represents what could be attained through economic growth
MacroeconomicsMeasuring Economic Goals
PPC analysis of Macroeconomic goals: The simple production possibilities curve can be used to illustrate three of the economic goals
Real GDP/capita 2005
US Real GDP per Capita
YearReal GDP/capita % of 1900 real
GDP% of 2000 real
GDP
1900 $5,219 100% 14.5%
1920 $7,083 136% 19.7%
1940 $8,943 171% 24.9%
1960 $14,452 277% 40.3%
1980 $23,700 454% 66.0%
2000 $35, 887 600% 100%Rule of 70, mathematical formula that tells how long it takes real GDP/capita, to double
Number of years to double = 70Annual growth rate
The US annual growth rate over the last century is 1.9%
Sources of Economic Growth Productivity or labor productivity
Output/worker Human capital improvements Physical capital improvements Progress in technology
Savings and Investment Spending Foreign Investment Education Infrastructure Research & Development Political stability, property rights, and excessive
government intervention
True/False Clues
Employed people are people with jobs.
Unemployed people are people without jobs.
The civilian labor force is the number of people aged 16 years and older who are not in the armed forces.
Employment Definitions
The Bureau of labor Statistics is the government agency that tracks the number of people who are employed and unemployed.
The civilian labor force is the number of people aged 16 years and older who are not in the armed forces and who are employed or are seeking employment.
Employed people are people with jobs. The unemployment rate is the percentage of the
civilian labor force that is unemployed.
Unemployment
Frictional Unemployment Structural Unemployment Cyclical Unemployment
Natural Rate of Unemployment Full Employment
Types of Unemployment
1. A computer programmer is laid off because of recession.2. A literary editor leaves her job in New York to look for a new job in
San Francisco.3. An unemployed college graduate is looking for his first job.4. Advances in technology make the assembly-line worker’s job
obsolete.5. Slumping sales lead to the cashier being laid off.6. An individual refuses to work for minimum wage.7. A high school graduate lacks the skills necessary for a particular job.8. Workers are laid off when the local manufacturing plant closes
because the product made there isn't selling.9. A skilled glass blower becomes unemployed when a new machine
does her job faster.
Employment, Unemployed and Unemployment Rate
Employed = everyone currently working, including part-time workers
Unemployed = people looking for work or temporarily laid off from work
Labor force = employed + unemployed Unemployment rate = unemployed
labor force Labor force = labor force
Participation rate population aged 16 and older
Inflation & Price Index
Inflation is a rise in the general level of prices.
Price Index · Fix the basket · Find the prices · Compute the basket cost · Choose the base year and compute the
index Price Index = Current year/Base year * 100 Inflation reduces the purchasing power of money
Inflation
CPI Consumer Price Index ~ Most commonly reported
Overall cost of goods/services bought by typical consumer Fix the basket Find the prices Compute the basket cost Choose the base year and compute the index Compute inflation = % change in price index
CPI assigns a value of 100 to the base year.
Inflation rate
For comparison of prices to base year:
(CPI year 2 – CPI year 1)/CPI in year 1 * 100 =
% change in prices or inflation rate
Wages & Income
Nominal income is the money earned in current dollars.
Real income is the purchasing power of nominal
income. Income has been adjusted for inflation Real income = Nominal income
Price index (hundredths) SUMMARY Use price index to compare dollar figures
from different points in time and to adjust for inflation.
Inflation and Interest Rates
Banks lend at nominal interest rate Calculate real interest rate to
determine the purchasing power of their loan
Real i = Nominal i – inflation rate
Impact of inflation
Helped Hurt
Quiz
U.S. Economy
"Happy days are here again, The skies above are clear again
Let us sing a song of cheer again --Happy days are here again"*
Is it time to sing this old song again? The size of the US. economy increased at an annual rate of 5.7 percent in the fourth quarter of 2009. The economy is growing and prosperity just around the corner. Right? Read more about the Q4 2009 GDP data and decide for yourself.
Current Key Economic Indicators
as of February 5, 2010
Inflation On a seasonally adjusted basis, the CPI-U increased 0.1 percent in December 2009 after rising 0.4 percent in November. The index for all items less food and energy rose 0.1 percent in December after being unchanged in November. (January 29, 2010)
Federal Reserve The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. (January 27, 2010)
Current Key Economic Indicators
as of February 5, 2010
Employment and Unemployment The U.S. unemployment rate fell from 10.0 to 9.7 percent in January, and nonfarm payroll employment was essentially unchanged (-20,000). Employment fell in construction and in transportation and warehousing, while temporary help services and retail trade added jobs. (February 5, 2010)
Real GDP U.S. real gross domestic product increased at an annual rate of 5.7 percent in the fourth quarter of 2009, according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent. (January 29, 2010)
Figure 1: U.S. Real GDP Growth Rate2007-2009
Year Quarter Growth Rate*
2007 Q1 1.2%
Q2 3.2%
Q3 3.6%
Q4 2.1%
2008 Q1 -0.7%
Q2 1.5%
Q3 -2.7%
Q4 -5.7%
2009 Q1 -6.4%
Q2 -0.7%
Q3 2.2%
Q4 5.7%
[NOTE: The 2007 and 2008 Real GDP estimates have been adjusted since their original publication to reflect analysis of more accurate and detailed lagging economic data.]
Sector Current $ Chained $Change Q3 to Q4
C 10,250.5 9,298.5 +45.9
I 1,522.8 1,601.8 +12.4
G 2,566.4 2,584.4 -1.1
Xn -353.8 -341.1 +16.3
GDP 14,463.4 13,155.0 +182.0
Billions of dollars
January BEA announcement
detailed the Q4 2009 GDP data
U.S. Standard of Living
U.S. GDP Q4 2009 (current dollar) $14,463.4 (billion)Q4 2009 (chained dollar) $13.155.0 (billion)
U.S. Population (2009 est.) 308,000,000
Nominal GDP Per capita $46,959.09 Real GDP Per capita $42,711.04
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