Unit 2: Economic Indicators and the Business Cycle

National Income and Product Accounts

Keep track of the flows of money between different sectors of the economy.

EX: For example, used cars, two-year-old computers, old furniture, old houses, and so on are all useful and provide welfare to individuals for years after they are produced. Yet the value of these items is only included in GDP in the year in which they are produced.

Calculated by Bureau of Economic Analysis, a division of the US government's Department of Commerce.

National Accounts

Keep track of the flows of money between different sectors of the economy.

EX: Include detailed underlying measures that rely on double entry accounting.

EX: Presents output, expenditure, and income activities of the economic actors (households, corporations, government) in an economy, including their relations with other countries' economies, and their wealth (net worth). Measures of these are examples of macro-economic data.

Calculated by Bureau of Economic Analysis, a division of the US government's Department of Commerce.

Household

A person or group of people who share an income.

EX: Supply labor, land, capital, and entrepreneurial ability to resource markets. Basically own factors of production and sell their labor.

Also buy goods and services, part of consumer spending.

Roommates living together and working to pay the rent are considered a _________.

Firm

An organization that produces goods and services for sale.

EX: Apple, Google, Microsoft, Coca Cola, Ikea, Honda, Disney

Product Markets

Where goods and services are bought and sold.

EX: For example the market for airline travel; smart-phones, new cars; pharmaceutical products and the markets for financial services such as banking, mortgages and pensions.

Factor Markets

Where resources, especially capital and labor, are bought and sold.

EX: Labor Market, in which workers are paid for their time or households as owning and selling the other factors of production to firms. Some examples are inputs like capital, labor, raw material, entrepreneurship, and land.

Consumer Spending

Household spending on goods and services.

EX: Bill spends $300 to buy his wife dinner at the finest restaurant in Charleston.

Stock

A share in the ownership of a company held by a shareholder.

EX: Ms. Moneybags buys an existing share of Disney and owns 1% of the company.

Bond

A loan in the form of an IOU that pays interest.

EX: For example, a ___?____ has a face value of $1000 a buyer purchases the _____?____ at a premium of $1050. The same ______?_____ is bought by a different buyer a few months later at a discounted price of $950. At the maturity of the _____?____, both investors will receive $1000 which is the face value of the ______?____.

blank is one word fill in

Government Transfers

Payments that the government makes to individuals without expecting a good or service in return.

EX: Veteran benefits, unemployment insurance, Medicaid, Social security, Medicare

Disposable Income

Equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption and to save

EX: Tara's monthly income is $6,000. After paying her rent, bills, and other taxes, she is left with $250 at the end of the month.

Private Savings

Equal to disposable income minus consumer spending, is disposable income that is not spent on consumption.

EX:

Y (Aggregate income represented by GDP) = 10,000

C (Consumption) = 7,000

T (Tax Revenue)=1,000

(Y-T-C)-----> (10,000-1,000-7,000) = 2,000

Financial Markets

The banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing.

EX: banks, pension funds, insurance companies, and mutual funds

Government Borrowing

The amount of funds borrowed by the government in the financial markets.

EX: Federal debt. The aggregate, gross amount that Treasury can borrow is limited by the United States debt ceiling. As of August 31, 2020 federal debt held by the public was $20.83 trillion and intragovernmental holdings were $5.88 trillion, for a total national debt of $26.70 trillion.

Government Purchases of Goods and Services

Total expenditures on goods and services by federal, state, and local governments

EX: Military spending on ammunition, local public school's spending on chalk, erasers, and teacher's salaries

Exports

Goods and services sold to other countries

EX: A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal,Canada.

Imports

Goods and services purchased from other countries

EX: An American buys a bottle of French perfume in Tulsa.

Inventories

Stocks of goods and raw materials held to facilitate business operations.

EX: An automobile company builds a new factory with the machinery needed to build cars and keep up with the demand for cars through mass production. Overtime, those cars accumulate a ______ of finished cars in preparation for shipment to dealers.

Investment Spending

Spending on new productive physical capital, such as machinery and structures, and on changes in inventories

EX: Abby spends $1,200 to buy a computer for use in her publishing business.

Final Goods and Services

Goods and services sold to the final, or end, user.

EX: A consumer's purchase of a new car from a dealer.

Intermediate Goods and Services

Goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services.

EX: The purchase of lumber by a carpenter who will use it to produce wooden furniture to sell.

Gross Domestic Product

The total value of all final goods and services produced in the economy during a given year.

EX: In 2009, the _____?_____ of the US was $14,259 billion, or about $46,372 per person.

Hint: There are 3 ways to find this: value added approach, income approach, and expenditure approach all get you to the same number, which is __?__.

Aggregate Spending

The total spending on domestically produced final goods and services in the economy— is the sum of consumer spending (C), investment spending (I), government purchases of goods and services (G), and exports minus imports (X-IM).

EX: Consumption Spending: $400,000

Business Investment: $200,000

Government Expenditures: $125,000

Value of Exports: $50,000

Value of Imports: $185,000

$50,000+ $400,000-$185,000+$125,000+ $200,000=$590,000

Value Added

The value of its sales minus the value of its purchases of inputs.

EX:

Value of production added by Bread Co. ---->

$100 (total value of all sales) -$0 (purchases) =$100

Value of production added by Cheese Co. ---->

$60 (total value of all sales)-0 (purchases)=$60

Value of production added by Pizza Co. ---->

$225 (total value of all sales)-($50-$35) purchases=$140

Total value added by all firms in the economy:

GDP---> $100+$60+$140=$300

Net Exports

The difference between the value of exports and the value of imports. (X-IM)

EX: Value of Exports = $200 B

Value of Imports= $150 B

200 B-150B= $50B

Aggregate Output

The total quantity of final goods and services produced within an economy. Also known as GDP.

EX:

Value of final goods sold directly to consumers by the Bread CO. ---> $100-$50 = $50

Value of final goods sold directly to consumers by the Cheese CO. ---> $60-$35=$25

Value of final goods sold directly to consumers by the Pizza CO. ----> $225-$0=$225

Total Spending on all final goods by consumers:

GDP = $300

Real GDP

The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

EX: Assume there are only 2 goods in the economy, French fries and onion rings. In 2009, 1 million servings of French fries were sold for $0.40 each and 800,000 servings of onion rings were sold for $0.60 each. From 2009 to 2010, the price of French fries rose to $0.50 and the servings sold fell to 900,000; the price of onion rings fell to $0.51 and the servings sold rose to $840,000. Calculate real GDP in 2010 using 2009 prices.

$900,000($0.40) + $840,000($0.60) = $880,000

Nominal GDP

The total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced.

EX: Assume there are only 2 goods in the economy, French fries and onion rings. In 2009, 1 million servings of French fries were sold for $0.40 each and 800,000 servings of onion rings were sold for $0.60 each. From 2009 to 2010, the price of French fries rose to $0.50 and the servings sold fell to 900,000; the price of onion rings fell to $0.51 and the servings sold rose to $840,000. Calculate nominal GDP in 2009 and 2010.

$900,000($0.50)+$840,000($0.51) = $878,400

Chain-linking

The method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year.

EX: In 2013, production increased by 10.3% and in 2014 production increased by 9.1%. Therefore, the average increase in production is 9.7%. (10.3 +9.1)/2 = 9.7

GDP Per Capita

GDP divided by the size of the population; it is equivalent to the average GDP per person.

EX: The United States had $20 trillion in gross domestic product in 2015. Additionally, there were 300 million people living in the country in 2015. Using the above formula, you would calculate 20 trillion/300 million = $66,666

Employed

People are currently holding a job in the economy, either full time or part time

EX: Employed part time: 150,000

Employed full time: 550,000

150,000+550,000= 700,000

Unemployed

People are actively looking for work but aren't currently employed.

EX: Frictionally unemployed 50,000

Structurally unemployed: 30,000

Cyclically unemployed: 20,000

Discouraged workers: 200,000

50,000+30,000+20,000=100,000 unemployed

DISCOURAGED workers are NOT counted as

Labor Force

Equal to the sum of the employed and the unemployed.

EX: Employed: 700,000

Unemployed: 100,000

700,000 + 100,000= 800,000

Labor Force Participation Rate

The percentage of the population aged 16 or older that is in the labor force.

EX:

Labor force: 800,000

Civilian, non-institutionalized population >16: 1,000,000

(800,000/1,000,000)x100= 80%

Unemployment Rate

The percentage of the total number of people in the labor force who are unemployed.

EX: Unemployed: 100,000

Labor force: 800,000

(100,000/800,000)x100=12.5%

Discouraged Worker

Nonworking people who are capable of working but have given up looking for a job due to the state of the job market.

EX: During the Great Recession, the manufacturing sector shed senior workers unable to work on the new CNC machines in their workplace. Nick Eberstadt of the American Enterprise Institute has blamed the "flight from work" on lack of supply of skilled, able, and willing workers and an increasing reliance on disability insurance.

Another cause of this occurrence or kind of worker could be due to restrictions that limit employment options for formerly incarcerated persons and jobs that are perceived as being inaccessible to a specific gender.

Marginally Attached Workers

Would like to be employed and have looked for a job in the recent past but are not currently looking for work.

EX: Could be a person currently attending school in an effort to strengthen their skills and resume OR hey may have stopped actively looking for work so that they can attend to some family issues.

Underemployed

People who work part time because they cannot find full-time jobs.

EX: An individual who has an engineering degree and is forced to work as a pizza delivery guy for his main source of income because there is no demand and no job openings with his degree.

EX: An individual who works part time at an office job but would prefer to work full time.

Job Search

Workers who spend time looking for employment.

EX: Tina looks in the newspaper for potential job openings, so she can support her kids. She circles waitress, cashier register, and office clerk. She creates a list of people to contact and considers sending emails to them.

Frictional Unemployment

Unemployment due to the time workers spend in job search.

EX: Dwight voluntarily leaves his job at a regional paper company to seek employment at a big box office supply store.

Structural Unemployment

Unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate.

EX: George has the uncanny ability to repair 1970s style 8 track cassette players, but no employer is willing to hire him.

Efficiency Wages

Wages that employers set above the equilibrium wage rate as an incentive for better employee performance.

EX: Employers often have difficulty observing directly how hard an employee works. They elicit more work effort by paying above market wages: employees receive these higher wages are more likely to work harder to ensure they aren't fired, which would cause them to lose their higher wages.

Natural Rate of Unemployment

The unemployment rate that arises from the effects of frictional plus structural unemployment.

EX: Frictionally unemployed: 1,000

Structurally unemployed: 2,000

Cyclically unemployed: 4,000

Employed: 63,000

1,000+2,000=3,000

1,000+2,000+4,000+63,000=70,000

3,000/70,000=0.0428 or about 4.28%

Cyclical Unemployment

The deviation of the actual rate of unemployment from the natural rate.

EX: Recession hits the economy, causing the closure of an auto factory;800 workers are laid off.

EX: A retail store fires 10 employees due to persistently falling sales lost to online shopping.

Real Wage

The wage rate divided by the price level.

EX: If nominal wages rise from $20,00 per year to $30,000 per year and CPI rises from 100 to 175 what happens to the __________?

We can say that _________ fell because overall prices are rising faster than wages, so purchasing power fell.

Real Income

Income divided by the price level.

EX: If you earned $50,000 last year and will earn $50,000 this year, you will have the same amount of income. However, if inflation changes, the buying power you used to have will be affected. If inflation goes up 2%, the cost of goods essentially goes up 2% as well. Your __________ drops, not because your actual home income changes, but because the amount you can purchase with $50,000 is less this year than it was last year.

Inflation Rate

The percentage change per year in a price index- typically the consumer price index.

EX: Find the (____?____) for 2007.

2006 CPI: 201.6

2007 CPI: 207.3

(207.3-201.6)/201.6 x 100 = 2.83%

Shoe-leather Costs

The increased costs of transactions caused by inflation.

EX: When inflation is expected to be high, workers get paid more frequently and make more trips to the bank.

There is a net cost to economy and this is an increase in cost of financial transactions coast imposed by inflation.

Menu Costs

The real costs of changing listed prices.

EX: In response to unexpectedly high inflation, the manager of Cozy Cottages of Cape Cod must reprint and resend expensive color brochures correcting the price of rentals this season.

There is a net cost to the economy since Cozy Cottages has to reprint and resend the expensive brochure when inflation causes rental prices to rise.

Unit-of-Account Costs

Arise from the way inflation makes money a less reliable unit of measurement.

EX: Lanwei is reimbursed by her company for her work related travel expenses. Sometimes, however, the company takes a long time to reimburse her. So when inflation is high, she is less willing to travel for her job.

There is net cost and Lanwei's foregone output is a cost to the economy.

Nominal Interest Rate

The interest rate actually paid for a loan.

EX: The interest rates advertised on student loans and every interest rate you see listed by a bank.

Real Interest Rate

The nominal interest rate minus the rate of inflation.

EX: If a loan carries a nominal interest rate of 8%, but the inflation rate is 5%, the _______ interest rate is

8% (nominal interest rate) - 5%(inflation rate) = 3%.

Disinflation

The process of bringing the inflation rate down.

EX: For example, if the annual inflation rate for the month of January is 5% and it is 4% in the month of February, the prices lowered or (____?____) by 1% but are still increasing at a 4% annual rate.

Aggregate Price Level

A measure of the overall level of prices in the economy.

EX: An increase in aggregate demand corresponds with an increase in aggregate ______ level.

A decrease in aggregate demand corresponds with a decrease in lower aggregate _______ level.

Market Basket

A hypothetical set of consumer purchases of goods and services.

EX: Prices for 2016:

Soccer Balls= $10, Quantity=100

Shoes=$50, Quantity=40

Concert tickets: $100, Quantity= 20

($10X100) +($50X40)+$100X20)= $5000

Price Index

Measures the cost of purchasing a given market basket in a given year. The index value is normalized so that it is equal to 100 in the selected base year.

EX: Calculate the ______ for 2018.

MB for 2017: $5,660

MB for 2018: $6,240

(6240/5000)x100= 124.8

Consumer Price Index (CPI)

Measures the cost of the market basket of a typical urban American family.

EX: Calculate the ______ for 2017.

MB for 2016:$5,000

MB for 2017: $$5660

(5660/5000)x100= 113.2

Producer Price Index (PPI)

Measures changes in the price of goods and services purchased by producers.

EX: Often responds to inflationary or deflationary pressures more quickly than CPI. This is often regarded as an "early warning signal" of changes in the inflation rate.

EX: Cotton, gasoline, and steel. Consists of finished goods. They have undergone their final stage of manufacturing and will be sold to consumers

GDP Deflator

100 times the ratio of nominal GDP to real GDP in that year.

EX: If Nominal GDP is $100B and Real GDP is $80, what is the____________? (used to determine how output has changed over time)

($100B/$80B)x100 = $125B