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Unit 2

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.

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Unit 2

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  1. Unit 2 Macroeconomic Indicators GDP, CPI, unemployment rate

  2. Circular Flow

  3. Total Production What is the monthly production of this coffee shop?

  4. Value of Production What is the value of the monthly production of this coffee shop? This is like calculating GDP…

  5. Gross Domestic Product • Aggregate spending C + 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)

  6. 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

  7. 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)

  8. National Income • Aggregate Income W + P + I + R = GDP

  9. 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

  10. Keepin’ it Real 2000 is the base year Price Index = Price in current year * 100 Price in base year

  11. % Real GDP = % Nominal GDP - % Price Index Keepin’ it Real Real GDP = Nominal GDP * 100 Price index

  12. Long Run Economic Growth Increase in Real GDP or Real GDP/capita

  13. Macroeconomics Measuring Economic Goals PPC analysis of Macroeconomic goals: The simple production possibilities curve can be used to illustrate three of the economic goals Switzerland Economic growth: A point beyond the nation's PPC represents what could be attained through economic growth D B Consumer goods Inflationary gap: The economy is producing beyond full-employment at less than NRU. Competition for workers puts upward pressure on prices. C Full-employment output: The economy is producing just inside its PPC, the NRU prevailes A Deflationary gap:when the economy is producing below full-employment. Low aggregate demand and high unemployment puts downward pressure on prices Capital goods

  14. Real GDP/capita 2005

  15. US Real GDP per Capita Rule of 70, mathematical formula that tells how long it takes real GDP/capita, to double Number of years to double = 70 Annual growth rate The US annual growth rate over the last century is 1.9%

  16. 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

  17. 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.

  18. 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.

  19. Unemployment • Frictional Unemployment • Structural Unemployment • Cyclical Unemployment • Natural Rate of Unemployment • Full Employment

  20. Types of Unemployment • A computer programmer is laid off because of recession. • A literary editor leaves her job in New York to look for a new job in San Francisco. • An unemployed college graduate is looking for his first job. • Advances in technology make the assembly-line worker’s job obsolete. • Slumping sales lead to the cashier being laid off. • An individual refuses to work for minimum wage. • A high school graduate lacks the skills necessary for a particular job. • Workers are laid off when the local manufacturing plant closes because the product made there isn't selling. • A skilled glass blower becomes unemployed when a new machine does her job faster.

  21. 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

  22. 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

  23. 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.

  24. 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

  25. 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.

  26. 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

  27. Helped Hurt Impact of inflation

  28. Quiz

  29. 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.

  30. 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)

  31. Current Key Economic Indicators as of 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) 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)

  32. 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.]

  33. January BEA announcement detailed the Q4 2009 GDP data Billions of dollars

  34. 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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