Unit 2: Economics Indicators

Macroeconomics - Larger scale economics, focused on entire economy as a whole/interactions with other Macroeconomies

3 Macroeconomic Goals

1. Promote Economic Growth

2. Limit Unemployment

3. Keep prices stable (limit inflation)

Major markets

1. Financial

2. Product

3. Factor

4. Government

5. Households

6. Rest of World

Gross-Domestic Product (GDP)

The dollar value of all final goods/services produced within 1 year

• Measured in dollars (dollar value)

• Only counts new goods/services (final)

• Production within country

• Annual economic performance (1 year)

What is NOT included in GDP?

1. Intermediate goods: Inside but don’t count (price of finished car vs. radio)

1. Non-production Transactions: Financial transactions/used goods (stocks, bonds, real estate, old cars, used clothes)

2. Non-market and Illegal Activities: Household production and crimes (unpaid work, black market, drugs)

What factors strengthen GDP?

1. Economic System: Free-market vs. command vs. mixed

2. Rule of Law: Political stability with publicly supported institutions support economic growth

3. Capital Stock: Countries that have more machines and tools that are more productive

4. Human Capital: Strong public education and training are more productive

5. Natural Resources: Different geographic areas have access to different natural resources

Expenditures Approach

Add all spending on final goods and services produced in a given year

GDP = C + I + G + (X-M)

• Consumer Spending: Durable goods, non-durable goods, services

• Investment: Factory machines, infrastructure, resources, tools, etc.

  • Inventories: Goods produced and held in storage in anticipation of later sales (counted in the year produced)

• Government Expenditures: Government payments for goods/services

• Exports - Imports: Brings down GDP

Income Aproach

Add all income earned from selling all final goods/services produced in a given year

1. Labor

2. Rental

3. Interest

4. Profit

Value-added Approach

Value of production/output minute intermediate consumption inputs/resources

What are the limits of using GDP?

The limitation is that GDP does not measure devotion, but measure everything in short. Only measures production of goods which could have negative effects.

• Underemployment - employed but not productively inefficient

• Discouraged workers - unemployed and no longer looking for work

• Discrimination

Labor Force

• At least 16 years old

• Willing and able to work

• Not institutionalized (in jail or hospital)

• Not in military, school full time, or retired

Great Recognition

Significant number of workers quit their jobs

• Service workers fed up with rude customers

• Better working conditions

Contributors:

1. Social safety net (COVID checks, unemployment benefits, student loan forgiveness)

2. Zooming into work (COVID)

3. Young workers → Less to lose

4. Wages rising →Consumerism generating increasing GDP (stronger economy)

5. Quality of working conditions under COVID were intolerable

Frictional Unemployment

Temporary unemployment or being in between jobs

• Individuals are qualified workers with transferable skills

  • HS of college graduates looking for jobs

  • Individuals that were fired or looking for better jobs

  • Seasonal unemployment →Time of year and nature of job

Structural Unemployment

Changes in the labor force make some skills obsolete

• These workers DO NOT have transferable skills and these jobs will never come back, workers must learn new skills to get a job

• The permanent loss of jobs is called “creative destruction”

  • VCR repairman, milkman

• Technological unemployment →Automation and machinery replace workers

Cyclical Unemployment

Unemployment caused by a recession

• As demand for goods/services fall demand for labor falls (derived demand) and workers are laid off

• “Demand deficient unemployment”

  • Steel workers laid off during recession, restaurant owners lay off waiters after months of poor sales due to recession

Natural rate of unemployment (NRU)

• No frictional unemployment: overqualified workers not moving around

• No structural unemployment: non-transferable skills, non-existent jobs

Amount of unemployment that exists when the economy is healthy and growing:

Amount of Frictional + Amount of Structural

• Real GDP created no cyclical unemployment

Unemployment Rate

\frac{\#unemployed}{Laborforce}\left(100\right)

Labor force participation rate

\frac{Laborforce}{Population16+}\left(100\right)

Nominal

When something is measured in current monetary units (actual prices) without adjusting for inflation, representing face value rather than purchasing power

Price level

Current cost of goods/services in the economy →Nominal cost

Inflation

General increase in the price for goods across an economy over time that decreases purchasing power

\frac{price level year 1 - price level year 2}{price level year 2}\left(100\right)

Shoe-Leather costs

Increased costs of transactions caused by inflation

Menu Costs

Idea that changing a listed price has a real cost

Unit-Account role

The costs that arise from the way inflation makes money a less reliable unit of measurement, provides a universal standard measure of value that eliminates the inefficiencies of comparing the worth of different goods

Real Interest Rate

Real Interest Rate = Nominal Interest rate - Inflation Rate

Lenders and Borrows compared to Interest Rates

High real interest rates generally benefit lenders through higher returns on loans and encourage saving, while low or negative real rates benefit borrowers by reducing the real cost of debt repayment and encouraging spending. High rates restrain borrowing, while low rates incentivize investment and large purchases.

Cost-Push Inflation

Costs of inputs/resources increase leading to less production and/pr higher product prices

Demand-Pull Inflation

More demand than supply for goods/services and consumers are willing/able to pay more → “Too many dollars chasing too few goods”

Deflation

Fall in price levels that increases purchasing power, prices go down for goods and services

Disinflation

Inflation at a slower rate

Who is hurt from inflation?

• Lenders, lend money at a fixed interest

• Savers

• Low income/fixed income

Who is helped from inflation?

• Borrowers, borrow money

• A business where the price of the product increases faster than the price of the resources

How is inflation measured?

The government tracks the prices for specific “market baskets” that included the same goods and services. Two ways to look at inflation overtime:

1. Inflation Rate: percent change in prices from year to year

2. Index numbers assigned to each year that shows how prices have changed relative to specific base year (1982)

Consumer Price Index (CPI)

Commonly used measurement of inflation

• Base year is given an index of 100

• To compare, each year is given an index number as well

CPI = (Cost of Basket in Current Period / Cost of Basket in Base Period) × 100

Adjusting for Inflation

CPI values can be used to adjust for inflation and deflation of specific amounts of wealth

Current Value = Original Value × (Current CPI / Past CPI)

Substitution Bias

As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket

New Products

The CPI market basket may not include the newest consumer products

Product Quality

The CPI ignores both improvements and decline in product quality

GDP Deflator

Nominal vs. Real GDP (nominal - interest)

(Nominal GDP / Real GDP) × 100

Role of gov in maintaining employment and price levels

The role is to prevent unemployment and prevent inflation at the same time

• Too much on preventing inflation and slows down economy, results in unemployment

• Too much on limiting unemployment and overheats the economy, results in inflation