GDP + Poverty

7.1: Gross Domestic Product

Economic Measures

National income accounting: system economists use to collect and organize macroeconomic statistics on production, income, investment, and savings

• Dept of commerce presents this data in the National income and product accounts (NIPA)

  • NIPA is used to determine economic policies

Gross Domestic Product (GDP): dollar value of all final goods and services produced w/in a countries borders in a given year

• Since different quantities of goods are sold at different prices, economists try to figure out the avg prices of these items + total # sold during that year (then calculate GDP)

Intermediate goods: products used in the production of final goods (ie: computer chips for the final product of a computer)

1. Expenditure approach/out-put approach: adding all annual expenditures

   1. 1. Estimate annual expenditures (consumer goods and services, business goods and services, govt goods and services, net exports)

   2. Net exports are found by adding up exports and subtracting imports

   3. Find value of all 4 categories + add them to find total expenditures on goods and services = GDP

2. Income approach- adding up all incomes in the economy

Two Measures of GDP

• GDP is used to find out how well the economy is doing

What GDP Doesn't Measure

• Does Not take into account non market activities, underground economy, negative externalities, quality of life

• Nonmarket activities-- goods and services that people do themselves (ie: caring for children, cooking dinner, washing car)

  • GDP rises when ppl are paying for the services

  • When these nonmarket activities are shifted to the market, GDP goes up even tho production hasn’t increased

• Underground economy-- production and income that isn't recorded (ie: black market, illegal gambling, ‘under the table’ wages, selling your bike, baby-sitting, shoveling snow, etc.)

• Negative externalities-- unintended economic side effects (ie: power plant polluting the air results in a negative shift)

• Quality of life-- Additional goods and services do not always make people happier

Other Economic Measures

1. Gross national product (GNP): annual income earned by nation’s firms and citizens

   1. Measure of market value of all goods and services produced by americans in one year

   2. DOES NOT account for depreciation

   3. GNP - cost of depreciation = NNP (net national product) 

depreciation: loss of the value of capital equipment that results from normal wear and tear

• cost of replacing phys capital reduces the value of what is produced

Factors that Affect GDP

1. Economists add up total supply of goods + services (ie: GDP)

2. Calculate price level

Price level: the avg of all prices in economy

3. Find AS

Aggregate supply: total amount of goods and services in the economy available at all possible price lvls

• As price changes firms change their output

Aggregate demand: the amount of goods and services in the economy that will be purchased at all possible price lvls

• Price levels fluctuate, individuals and business change how much they buy

• Opposite direction of the change of aggregate supply

7.4: Unemployment

Types of Unemployment

• Govt pays close attention to see ways of spurring economic recovery

• cdtns that cause unemployment: general economic cdtns, lengthy job searches, seasonal production schedules

1. Frictional unemployment: when people take time to find a job

   1. Unemployment insurance contributes slightly to frictional unemployment (less pressure to find a new job)

2. Seasonal unemployment: when industries slow/shut down for a season/make seasonal shifts in their production schedules (ie: harvest schedules and vacations)

   1. Economists do nothing to avoid this since it is a part of a healthy economy

3. Structural unemployment: workers’ skills don’t match those needed for the jobs that are now available

   1. Shift from agriculture → industrial (basic farming skills are no longer needed to survive)

   2. 5 major causes

      1. New technologies

      2. Discovery of new resources

      3. Changes in consumer demand

      4. Globalization

      5. Lack of edu

4. Cyclical unemployment: during recessions or downturns in the business cycle, demand for goods and services drops

   1. Resulting slowdown in production causes the demand for labor to drop (ppl get laid off)

   2. Ex: GD

• Circumstances outside of the economy: Terrorist attacks (ie: 9/11), natural disasters (ie: Hurricane Katrina)

The Unemployment Rate

Unemployment rate: % of the nation’s labor force that is unemployed

• US Bureau of Census conducts a monthly households survey for the Bureau of Labor Stats (BLS)

  • Poll 60,000 families about unemployment that month (sample represents the entire pop)

• Labor force: civilians 16+ (have job or ISO)

  • BLS officials: # of unemployed + # of employed ppl = total labor force (divide # of unemployed x 100 = % of unemployed

• When unemployment rate is adjusted--- the rate has increased or decreased to take into account the level of seasonal unemployment

  • More accurately compare from month to  month to track level of seasonal unemployment

• Does Not reflect regional differences

The Goal of Full Employment

• Unemployment rate of 4-6% is normal

Underemployed: working at a job for which they are overqualified or working part-time when they desire full-time

Discouraged workers: have stopped searching for employment and sometimes rely on other family members or savings to support themselves

• If they were included the unemployment rate would be a lot higher than reported

• US encourages full employment

  • Monetary and fiscal policies (ie: promoting sustainable growth

  • Infrastructure and highways promote fuller employment

7.5: Inflation and Deflation

How rising prices affect you

• Slight changes at first

• Money supply, change sin demand, and increased production costs all contribute to the rise in prices throughout the economy

Inflation: general increase in prices across an economy

• Over the years, prices go up

Purchasing power: the ability to purchase goods and services

• Prices rise, purchasing power of money declines

Price Indexes

Price index: is a measurement that shows how the average price of a standard group of goods changes overtime

• Help consumes and business owners make economic decisions

Consumer price index (CPI): determined by measuring the price of a standard group of goods meant to represent the “market basket” of the typical urban consumer

• Computed by BLS

• By looking at CPI: consumers, business, and govt can compare the cost of a group of goods this month w/ the same or similar group of goods (prior)

• CPI = (updated cost/base-period cost) x 100

Market basket: representative collection of goods and services

Inflation rate: % rate of change in price level over time

• Typically between 2 yrs

• (CPI for YR A - CPI for YR B)/(CPI for YR B x 100)

• Cost of the market basket for that period is assigned the index # of 100

  • Each updated cost is compared w/ the base-period cost to determine the index for that month

  • As costs rise, the index rises

• 1-3% of inflation does not cause a lot problems

  • If it exceeds 5% it can become unstable and unpredictable

Core inflation rate: the rate of inflation excluding the effects on food and energy prices

Hyperinflation: inflation that is out of control

• Can go as high as 100% or 500%, money loses its value (rare and leads to total economic collapse) 

Identifying Causes of Inflation

Quantity theory: the theory that too much money in the economy causes inflation

• $ supply should be carefully monitored to keep it in line w/the nation’s productivity (measured by real GDP)

• Economists at U of C developed this: $ supply could be used to control price levels in the long term

  • Key to stable pieces: increase the supply of $ at the same rate the economy was growing

• AD increases during wartime

  • Demand for new equipment, supplies and services → increases the value of those items + wages rise

• Inflation occurs when producers raise prices in order to meet increased costs

  • Wage increases are the biggest reason, the largest single production cost for most companies

    • Low unemployment- employers must offer higher wages to attract and retain workers (can result in collective bargaining)

Wage-price spiral: rising wages cause higher prices, and higher prices cause higher wages

Interpreting Effects of Inflation

• Inflation affects purchasing power, income and interest rates

• Can erode purchasing power

  • Purchasing power of a dollar has fallen-- a dollar will not buy the same # of goods it did last year

• Can erode income

  • If wages increase w/inflation the worker’s real income stays the same

  • Those who don’t receive their income in wages can increase their incomes by raising the prices to keep w/inflation

Fixed income: income that does not increase when prices go up

• therefore their income has less purchasing power

*SS payments DO rise w/inflation

• True return interest rate depends on the rate of inflation

• Bank’s interest rate: The amount they gain from interest is taken away by inflation

  • If inflation rate is higher than interest rate, they will lose money

• Ppl w/savings and fixed incomes will see the value of their money fall in times of high inflation

  • Inflation discourages savings and investment, and economic growth (ie: US 1970s-1980s)

  • High inflation: ppl typically rush to spend any money they earn (hard to save, borrow, or spend)

Recent Trends in the Rate of Inflation

Deflation: sustained drop in price level

• Rising unemployment + falling capital investment 

• Measured by watching for negative growth rates in the CPI (and other indexes)

• 2008 recession: global demand for oil dropped, gas price dropped 30% in one month, CPI was 3% lower

7.6 Poverty and Income Distribution

Living in Poverty

• Factors that affect poverty rate:  single-parent home, inner city, don’t have at least a HS edu, the way income is distributed

• Census looks at: How many families and households live in poverty

Poverty threshold: income level below which income is insufficient to support a family or household

• Varies w/size of the family

• Family w/total income below the poverty threshold, everyone in the family is poor

• Measured via poverty rate

Poverty rate: the % of ppl who live in households w/income below the official poverty threshold

• Used to discover whom the govt considers poor + what factors seem to contribute

• Differ by groups

• Race + ethnic origin, type of family, age, residence

What Causes Poverty?

• Million are unemployed for a variety of reasons

• Working poor: poor adults  that have jobs

  • Low wages, limited work schedule

• Changes in family structure: single-parent families are likely to be poorer

• Where ppl live: racial minorities are concentrated in inner cities (far from high-wage jobs in suburban areas)

  • Don’t own cars, mass-transit systems are not efficient to go from city to suburbs

  • In rural areas there is little business or industry

• Unequal treatment: yt workers have higher salaries

  • Differences in hrs worked, edu, work experience

  • Racial and gender discrimination

  • Generally agreed upon: racial and gender discrimination have diminished

• Low-wage service jobs: less-ed ppl work low-skilled jobs

  • Globalization, decline in manufacturing, + rise of service economy  = decline in high-paying manufacturing jobs

• Lack of education: college graduates earned 2x+ as much as those who don’t complete high school

Household Income

Income distribution: how the nation’s total income is distributed among its population

• Don't reflect effects of taxes or non-cash govt aid (ie: housing subsidies, healthcare, food stamps)

Food stamp program: helps low-income people buy food

1. Rank nations households according to income

2. Divide list into fifths w/= #s of households in each 5th

   1. Lowest 5th appears at the top of the list (poorest 20%)

3. Compute each group’s avg income 

   1. Adding incomes of all households in their group/#of households

4. Compute each groups share/%: groups total income/total income of all the groups

   1. 2nd column: each groups share

   2. 3rd column: cumulative total 

Lorenz curve: illustrates distribution of income in the economy

• Reasons for differences in income

1. Differences in skill and education

   1. Labor skills are determined by education, training, + workers natural ability

2. Inheritances

3. Field of work

The Economic Goal of Equity

• Critics of antipoverty: harm the poor by making them dependent

  • Unrealistic hopes of eradicating poverty

  • Increase the size of the govt required to administer the programs

• Earned Income Tax Credit (EITC): refundable tax credit that low-income families w/children receive when they file their federal income tax return

  • Eligibility based on the taxpayers earned income + # of qualifying children

  • Est in 1975

  • Intended to offset the SS payroll tax on low-income families

  • One of the most effective anti poverty program for working families

Enterprise zones: areas where companies can locate and be free of a certain state, local, and federal taxes and restrictions on business operations

• Benefit business by lowering their costs

• Help locals by making work easier to find

• Revitalize inner cities

• Job training programs developed to help workers who lack the skills to earn adequate income

• Affordable housing have helped poor people obtain housing

  • Payments to landlords by govt, lower rent

  • Poor ppl receive vouchers that cover part of the rent

  • Govt owned housing, low rental fees

• Welfare system: provides food and medical care for those in need (esp children + elderly)

  • Underwent major reform w/Clinton- 1996: Personal Responsibility and Work Opportunity Reconciliation Act

    • Responded to criticism that welfare encouraged unemployment

    • Replaced AFDC w/TANF (temporary assistance for needy families) provides w/block grants, states are now responsible for implementing programs to move poor adults from welfare dependence to employment 

    • TANF set 5-yr limit on receipt of benefits

    • Plan called for shift from welfare to workforce

Block grants: lump sums of money, to the states

Cash transfers: direct payments of money to poor, disabled, or retired

• TANF

• SS (1935): elderly lost their life savings and had no income

  • Collects payroll taxes from current workers and redistributes that money to current recipients  (retired ppl, ppl unable to work bcs of disability, some widows and orphans of those ppl)

• Unemployment insurance: funded by taxes paid by employers

  • Compensation  checks provide workers who have lost their jobs

  • States set rules (like TANF)

  • Temporary help (most cases: 26 weeks)

• Workers compensation: workers injured or disabled on the job

In-kind benefits: goods and services provided for free or at greatly reduced prices (ie: food stamps, subsidized housing, legal aid)

• Legal aid: legal advice no charge (poor people represented in court are paid w/tax dollars)

Medical benefits: health insurance for children and elderly, disabled, and poor

• Medicare covers some poors who are unemployed or not covered by employers insurance plans

• Children's health insurance program (CHIP): provides HI for children uninsured (6.5+ M children)

• State and local programs aid students w/learning disabilities

  • Edu programs add to nations human capital and labor productivity

Charitable Donations

• Federal tax law allows individuals and corporations to take tax deductions for charitable donations

  • Economic incentive to be charitable

• Gt may also provide grants and other assistance to orgs that provide social services

  • Private groups can do a more effective job at helping those in need than the govt