How do we know if the economy is healthy ?

1. Bell Ringer • How do we know if the economy is healthy?

2. How do we know if the economy is healthy?

3. Objectives • Explain how gross domestic product (GDP) is calculated. • Distinguish between nominal and real GDP. • List the main limitations of GDP. • Identify other output and income measures.

4. Gross Domestic Product • Gross domestic product (GDP) is the dollar value of all final goods and services produced within a country’s borders in a given year. • In short, GDP tracks exchanges of money. • GDP is a measurement of how well a nation’s economy is doing for a particular year. • Current U.S. GDP (FY2015): $17.95 trillion • Google’s World Development Indicators

6. Nominal vs. Real GDP • Nominal GDP is measured in current prices. • To calculate nominal GDP, we use the current year’s prices to calculate the value of the current year’s output. • The problem with nominal GDP is that it does not account for the rise in prices. Your output might be the same from year to year, but the prices won’t be and nominal GDP would be different. • Real GDP is measured in constant prices based on a particular year. • Real GDP = Nominal GDP adjusted for inflation

7. What is NOT included in GDP? • Intermediate Goods (components of the final good) • Steel, corn syrup, car engines, etc. • Second-hand sales • Purely financial transactions (stocks & bonds) • Goods produced by U. S. firms overseas • The “Underground Economy” • Tips, royalties, under-the-table work • The Black Market

8. What Counts for GDP? Money paid by shoppers in NYC for corn grown in Iowa Fees charged to patients by a dentist in Texas Cost of processing wood pulp into paper at a factory in Maine Money paid by buyers in Indiana for cars made by a Japanese company at a factory in Ohio Money paid by a computer factory in New Mexico for computer chips produced in California Money paid by shoppers in Florida for jeans manufactured in Mexico by a company based in North Carolina YES YES NO YES NO NO

9. What Counts for GDP? Your friend began a fashion design company in 2016. She produces and independently distributes her work. The year she started, she purchased all the necessary supplies and fabric used in producing her designs. Her supplies were made in China, and her fabrics were made in the United States. She bought used desks and stools that were made in New Mexico and new mannequins that were made in Canada. She also paid a local advertising company $10,000 to create ads and promote her company in fashion magazines. At the end of the year, she had $2,200 worth of clothing still in inventory.

10. What Counts for GDP? Which items would be counted in determining U.S. GDP for 2016? Explain your answer. • The clothing she sells in 2016. • The desks and stools. • The mannequins. • The advertising she purchases. • Her inventory of remaining clothing.

11. Gross National Product • In addition to GDP, economists use other ways to measure the economy. • Another leading measure is the gross national product (GNP). • GNP is the market value of all goods and services produced by Americans in one year. • Current U.S. GNP (FY2015)= $16.75 trillion

12. Other Measures • Some economists argue that we shouldn’t measure a country’s value on its wealth alone. • The Social Progress Index measures a country’s Basic Human Needs (food, clean water), Foundations of Wellbeing (education, health care), and Opportunity (civil rights, freedom).

13. Closure • Explain the difference between GDP and GNP in your own words. • Should economists use a measure of a country’s well-being that looks at more than just money and wealth? If so, why?

14. Key Terms • gross domestic product: the dollar value of all final goods and services produced within a country’s borders in a given year • intermediate goods: products used in the production of final goods • nominal GDP: GDP measured in current prices • real GDP: GDP expressed in constant, or unchanging, prices • gross national product: the annual income earned by U.S.-owned firms and citizens

15. Crash Course Economics - Macroeconomics

16. Bell Ringer Based off what you’ve heard from me, other people, or the news, do you think the U.S. economy is in a period of recovery or decline? How do you know this to be true? How do other people know this to be true?

17. Objectives Identify the phases of a business cycle. Describe four key factors that keep the business cycle going. Explain how economists forecast fluctuations in the business cycle. Analyze the impact of business cycles in U.S. history.

18. Introduction • What is a business cycle? • The business cycle is the upward and downward movements of the GDP. • It refers to periods of expansion and contraction in the economy over several months or years.

19. Phases of a Business Cycle • The business cycle consists of four phases: • Expansion • Peak • Contraction • Trough

20. Phases of a Business Cycle

21. Contractions • There are three types of contractions: • A recession is a long economic contraction (6 to 18 months) and is marked by a high unemployment rate. • A depression is a prolonged and severe recession that is characterized by high unemployment and low economic output. • Stagflation is a decline in real GDP combined with inflation.

22. Business Cycle Forecasting • Why do business cycles happen? • No single answer, but it has to do with imbalances between supply and demand. • What affects business cycles? • Negative external shocks (war) and positive external shocks (drop in the price of oil) • Consumer confidence in the economy

24. Quick Activity • Copy the business cycle graphic. • Where was the economy in 2007 (just before the Great Recession)? • Where was it in 2010? • Where do you think it is in 2016?

25. The Great Depression • Before the 1930s, many economists believed that when an economy declined, it would recover quickly on its own. • Declining GDP and high unemployment were two major signs of the Great Depression, the longest recession in U.S. history. • Not until World War II, more than a decade later, did the economy achieve full recovery.

27. Recent U.S. Recessions • 1973-1975 • Cause: Oil embargo by Middle Eastern countries. • 1981-1982 • Cause: Inflation combined with rising gas prices. • 1991 • Cause: First Iraq War; rising gas prices. • 2001 • Cause: 9/11; Dot-Com bubble

28. The Great Recession • 2007-2009 • Cause: Sub-prime mortgage crisis; high gas prices

29. Key Terms • business cycle:a period of macroeconomic expansion followed by one of macroeconomic contraction • expansion:a period of growth as measured by a rise in real GDP • contraction: a period of economic decline marked by falling real GDP • recession: a prolonged economic contraction • depression: a recession that is especially long and severe • stagflation: a decline in real GDP combined with a rise in the price level

30. Bell Ringer • What ideas/images/thoughts do you associate with unemployment? • The current unemployment rate is 4.9 percent. How long do you think the average person remains unemployed? • A: 28 weeks

31. Objectives • Define unemployment and the labor force • Describe how the government measures the economy’s rate of unemployment • Identify the problems in interpreting unemployment data

32. Identifying Unemployment • Natural Rate of Unemployment (Long Term) • The amount of unemployment that the economy normally experiences and does not go away on its own even in the long run. • Cyclical Unemployment (Short Term) • Associated with short-term ups and downs of the business cycle andrefers to the year-to-year fluctuations in unemployment around its natural rate.

33. How Is Unemployment Measured? • Unemployment is measured by the Bureau of Labor Statistics (BLS). • It surveys 60,000 randomly selected households every month. • The survey is called the Current Population Survey. • Based on the answers to the survey questions, the BLS places each adult (over 16) years old into one of three categories: • Employed • Unemployed • Not in the labor force

34. Employment Definitions • Employed: A person is considered employed if he or she has spent most of the previous week working at a paid job. • Unemployed: A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. • Labor Force: the total number of available workers; the sum of the employed and the unemployed. • Not in the Labor Force: A person who fits neither of these categories, such as a full-time student, homemaker, disabled person, retiree, etc., is not in the labor force.

35. Unemployment Rate Since 1960

36. Average Duration of Unemployment

37. The Breakdown of the Population

38. Labor Force Participation

39. Labor Force Participation Rates for Men and Women Since 1976

40. Issues in Measuring Unemployment • Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics. • Underemployed workers are counted as fully employed. • Some people falsely claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work.

41. “America’s Increasingly Irrelevant ‘Unemployment Rate’” Work with a partner to complete questions 1-6 on the worksheet.