Macro Ex. 2 - Feb 18 recording ch 18 pt 2

Recap of Previous Class

• Discussed the topic of

  • Room temperature half and half and its preservatives.

  • Tested flavor differences between cold and room temperature beverages.

  • Discussed taste variations of drinks depending on the type of container.

Nominal vs Real GDP

• Nominal GDP: Value calculated using current prices and quantities.

  • Example for 2025: Calculated using 2025 prices and quantities:

    • (50 \times 100 + 10 \times 80 + 100 \times 20 = 5,000 + 800 + 2,000 = 7,800)

• Real GDP: Value calculated using base year prices, regardless of current prices.

  • Used for 2025, based on 2017 prices for quantities:

    • (40 \times 100 + 11 \times 80 + 90 \times 20 = 4,000 + 880 + 1,800 = 6,680)

• Importance of distinction:

  • Nominal GDP can suggest false growth due to price changes.

  • Real GDP provides a clearer measure of actual economic output over time.

GDP Growth and Comparison

• Comparison of GDP across years:

  • Nominal GDP: Increased from $5,540 to $7,800

  • Real GDP: Increased from $5,540 to $6,680

  • The increase in real GDP indicates economic growth despite lower increases than nominal figures.

• Real GDP per capita: Important for assessing standard of living.

  • Example comparing the US and China illustrates significant differences in GDP per capita despite close real GDP figures.

Calculation of GDP Deflator and Inflation Rate

• GDP Deflator Formula:

  • (GDPD = \frac{Nominal GDP}{Real GDP} \times 100)

  • Example for 2021: 23,594 billion nominal and 40,802 billion real GDP.

  • GDP Deflator for 2021:

    • (GDPD_{2021} = \frac{23,594}{40,802} \times 100 = 57.7)

• Inflation Rate Calculation:

  • Formula: (Inflation Rate = \frac{GDPD_t - GDPD_{t-1}}{GDPD_{t-1}} \times 100)

  • Example yielded an inflation rate of 7.043% and is significant historically.

Employment Measures in Economics

• Labor Force: Total of employed and unemployed who actively seek jobs.

• Discouraged Workers: Those not actively seeking work despite wanting a job; they aren't counted in the labor force.

Personal Income vs Disposable Income

• Personal Income: Sum of all income in the hands of households; excludes corporate profits.

• Disposable Personal Income: Personal income after taxes; indicates available money for spending.

Measuring Unemployment

• Essential definitions as per the Bureau of Labor Statistics:

  • Labor Force Participation Rate: Percentage of the working-age population that is in the labor force.

  • Understanding the intricacies of labor force versus those not considered (e.g., full-time students, military, etc.).

• Examples highlight the calculation of unemployment rates and participation rates based on provided data.

Types of Unemployment

1. Frictional Unemployment: Short-term unemployment aligning with job matching.

2. Structural Unemployment: Due to mismatches between industries and skill sets, often due to technology.

3. Cyclical Unemployment: Arises during economic downturns; fewer jobs due to recession.

• The economic goal is to minimize cyclical unemployment (which has no benefits) while acknowledging frictional and structural unemployment for productive job matching.

• Natural Rate of Unemployment: The rate where only frictional and structural unemployment is accounted for, never reaching 0%.