measuring serves as a basis for setting reaching macro
goals
the creation of goods and services
the creation of goods and services
Some prices may even be going
down!!
a general rise in the price level
a general rise in the price level
our focus is on people
a resource(factor of
production)is not being used
a resource(factor of
production)is not being used
1. Loss of goods and services
1. Loss of goods and services
2. Individual loss of spending ability and social issues
2. Individual loss of spending ability and social issues
1. Frictional1. Frictional
2. Structural2. Structural
3. Cyclical3. Cyclical
4. Seasonal4. Seasonaltemporary job
less business
job replaced
between jobs
2. labor force
2. labor force
1. population
1. population
3. unemployed3. unemployed4. discouraged4. discouragedlabor not
looking
not working, but looking
over 16, working or looking
everyone
labor forcelabor force
unemployedunemployed
labor force = 160 million
labor force = 160 million
Unemployed = 32 million
Unemployed = 32 million
Population = 260 million
Population = 260 million
Unemployed /labor force = 32 million/160 million = .20 = 20%
Unemployed /labor force = 32 million/160 million = .20 = 20%
1. Frictional?
1. Frictional?2. Structural?2. Structural?
3. Cyclical?3. Cyclical?
Deals with which type?
Deals with which type?
1. Frictional1. Frictional2. Structural2. Structural
but no Cyclical
but no Cyclical
At full employment there will still be some:
At full employment there will still be some:
actual unemployment may only get as low as
actual unemployment may only get as low as
4 – 5 %
4 – 5 %
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
Jobless rates by group Jobless changes by sector
Numbers in percent Number of jobs added/lost
1. A student who decides at mid-semester to devote the rest of the term
to studying quits her part-time job
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.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.
3. A waiter who quits his job and is applying for the same type of work in a
restaurant where morale is better.
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.
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.
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
6. A plumber who works 5 hours per week for his church (on a paid basis) until he
can get a full-time job
Some prices may even be going
down!!
a general rise in the price level
a general rise in the price level
1. Hyperinflation1. Hyperinflation
2. Money loses value
2. Money loses value
1. Savings1. Savings
2. Loans2. Loans
3. Wealth3. Wealth May increase
Are easier to repay
Lose value
1. Demand-Pull
1. Demand-Pull
2. Cost-Push2. Cost-Push
1. Demand-Pull
1. Demand-Pull
buyers demands greater than producers supply
Price
Quantity
P2
P1
Q1
D1
S1
Q2
New price and output
D2(increase in demand)
Orig. price and output
2. Cost Push2. Cost Push
sellers’ costs are passed on to buyers
Price
Quantity/time
P2
P1
Q1
D
S1(initial equilibrium)
Q2
S2(new equilibrium)
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.
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.
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.
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.
2. calculations
2. calculations
1. Measures price changes
1. Measures price changes
by %
amount in 2nd year
Amount in 1st (or base) year X 100
2003 Price = $300 2003 Price = $300
2002 Price = $2602002 Price = $260For Example:For Example:
$300
$260 = 115.4
year 1
year 1
year 1
year 1
Base year =
Base year =
X 100= 1.1538
X 100
Base year = 100 (always)
Base year = 100 (always)
YearMarket 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
YearMarket Basket
Price Index
1 $170 85
2 180 90
3 200 100
4 200 100
5 224 112
6 250 125
7 280 140
checked regularly
checked regularlythen an index is created
then an index is created
measures a “shopping basket” of consumer goods
measures a “shopping basket” of consumer goods
2. WPI2. WPI
1. PPI1. PPI
3. MPI3. MPI
4. GDP Price Index
4. GDP Price Index
a slowing of the inflation rate
a slowing of the inflation rate
the aim of policiesthe aim of policies
usually phrased as “slowing inflation”
usually phrased as “slowing inflation”
http://abcnews.go.com/Video/playerIndex?id=6484348
measuring serves as a basis for setting reaching macro
goals
the creation of goods and services
the creation of goods and services
producing at maximum capacity
producing at maximum capacity
on the PPC
on the PPC
the full-production full-employment capacity
grows over time
the full-production full-employment capacity
grows over time
the PPC shifts outthe PPC shifts out
1. GDP1. GDP
4. GNP4. GNP
2. Nominal GDP
2. Nominal GDP3. Real GDP3. Real GDP adjusted $$
current $$
production of a country
production in a country
Stage of productionValue added to the product (equals income created)
Sales Receipts(at each stage of production)
Stage 1: farmer’s wheat
Stage 2: miller’s flour
Stage 3: baker’s bread(wholesale)
Stage 4: grocer’s bread (retail)
$.30
$.65
$.90
$1
by farmer$.30
by grocer$.10
by miller$.35
by baker$.25
• 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.
Total consumer expenditure = $1 Total value added = $1
Only final goods and services countOnly final goods and services count
• 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
Which are included in this year's GDP? :
1. Interest on an AT&T 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
YES NONO
YES
YESYE
SYES
YES
YES YE
SYES
NONONONO
NONO
Which?
10. A two hour decline in the work week -
11. Purchase of the AT&T 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 -
NONO
YES
YES
YES
YESYE
SYES
NONO
NONO
NONO
NONO
nominal GDP for a year
price index number for that year
X 100
2000 GDP Index = 107.04
2000 GDP Index = 107.04
2000 GDP = $9.873 trillion
2000 GDP = $9.873 trillion
For Example:For Example:
$9.873
107.04 = 9.224
nominal pricetarget year
index
nominal pricetarget year
index
calculation works for “deflating” or “inflating” any dollar amount
calculation works for “deflating” or “inflating” any dollar amount
X 100= .0092238
X 100
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
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