measuring serves as a basis for setting reaching macro

goals

the creation of goods and services

the creation of goods and services

Some prices may even be going

down!!

a general rise in the price level

a general rise in the price level

our focus is on people

a resource(factor of

production)is not being used

a resource(factor of

production)is not being used

1. Loss of goods and services

1. Loss of goods and services

2. Individual loss of spending ability and social issues

2. Individual loss of spending ability and social issues

1. Frictional1. Frictional

2. Structural2. Structural

3. Cyclical3. Cyclical

4. Seasonal4. Seasonaltemporary job

less business

job replaced

between jobs

2. labor force

2. labor force

1. population

1. population

3. unemployed3. unemployed4. discouraged4. discouragedlabor not

looking

not working, but looking

over 16, working or looking

everyone

labor forcelabor force

unemployedunemployed

labor force = 160 million

labor force = 160 million

Unemployed = 32 million

Unemployed = 32 million

Population = 260 million

Population = 260 million

Unemployed /labor force = 32 million/160 million = .20 = 20%

Unemployed /labor force = 32 million/160 million = .20 = 20%

1. Frictional?

1. Frictional?2. Structural?2. Structural?

3. Cyclical?3. Cyclical?

Deals with which type?

Deals with which type?

1. Frictional1. Frictional2. Structural2. Structural

but no Cyclical

but no Cyclical

At full employment there will still be some:

At full employment there will still be some:

actual unemployment may only get as low as

actual unemployment may only get as low as

4 – 5 %

4 – 5 %

January December

White 8 8.5

Black 15.7 15.8

Hispanic 11.9 13

Asian 6.9 7.2

Adult men 8.8 9.4

Adult women 7.9 8.1

20-24 years old 15.2 15.3

25-54 years old 7.9 8.5

55 and older 6.7 6.9

January December

Private 50,000 139,000

Manufacturing 49,000 14,000

Retail 27,500 2,800

Health care 10,600 26,700

Financial -10,000 0

Temporary -11,400 38,100

Restaurant -4,400 3,300

Construction -32,000 -17,000

Government -12,000 -26,000

Jobless rates by group Jobless changes by sector

Numbers in percent Number of jobs added/lost

1. A student who decides at mid-semester to devote the rest of the term

to studying quits her part-time job

1. A student who decides at mid-semester to devote the rest of the term

to studying quits her part-time job

2. A graphic artist who is out of work because a computer now does her job.2. A graphic artist who is out of work because a computer now does her job.

3. A waiter who quits his job and is applying for the same type of work in a

restaurant where morale is better.

3. A waiter who quits his job and is applying for the same type of work in a

restaurant where morale is better.

4. The son of a local farmer who works 20-hour weeks without pay on the farm

while waiting for a job at a nearby factory.

4. The son of a local farmer who works 20-hour weeks without pay on the farm

while waiting for a job at a nearby factory.5. A travel agent who is laid off because

the economy is in a slump and vacation travel is at a minimum.

5. A travel agent who is laid off because the economy is in a slump and vacation

travel is at a minimum.

6. A plumber who works 5 hours per week for his church (on a paid basis) until he

can get a full-time job

6. A plumber who works 5 hours per week for his church (on a paid basis) until he

can get a full-time job

Some prices may even be going

down!!

a general rise in the price level

a general rise in the price level

1. Hyperinflation1. Hyperinflation

2. Money loses value

2. Money loses value

1. Savings1. Savings

2. Loans2. Loans

3. Wealth3. Wealth May increase

Are easier to repay

Lose value

1. Demand-Pull

1. Demand-Pull

2. Cost-Push2. Cost-Push

1. Demand-Pull

1. Demand-Pull

buyers demands greater than producers supply

Price

Quantity

P2

P1

Q1

D1

S1

Q2

New price and output

D2(increase in demand)

Orig. price and output

2. Cost Push2. Cost Push

sellers’ costs are passed on to buyers

Price

Quantity/time

P2

P1

Q1

D

S1(initial equilibrium)

Q2

S2(new equilibrium)

1. Nellie borrows $5,000 for her college expenses at an interest rate of 4 percent to be paid off over 5 years, during which

time the inflation rate averages 6 percent.

1. Nellie borrows $5,000 for her college expenses at an interest rate of 4 percent to be paid off over 5 years, during which

time the inflation rate averages 6 percent.2. Oscar invests $3,000 in securities

that pay 5.3 % annually for 10 years, and the inflation rate during that time

averages 6.4 percent.

2. Oscar invests $3,000 in securities that pay 5.3 % annually for 10 years, and the inflation rate during that time

averages 6.4 percent.

1. Nellie borrows $5,000 for her college expenses at an interest rate of 4 percent to be paid off over 5 years, during which

time the inflation rate averages 6 percent.

1. Nellie borrows $5,000 for her college expenses at an interest rate of 4 percent to be paid off over 5 years, during which

time the inflation rate averages 6 percent.2. Oscar invests $3,000 in securities

that pay 5.3 % annually for 10 years, and the inflation rate during that time

averages 6.4 percent.

2. Oscar invests $3,000 in securities that pay 5.3 % annually for 10 years, and the inflation rate during that time

averages 6.4 percent.

3. The Lynchburg National Bank commits to $4 million in 15-year mortgages at an average mortgage rate of 7.75 percent.

The inflation rate averages 8 percent over this 15-year period.

3. The Lynchburg National Bank commits to $4 million in 15-year mortgages at an average mortgage rate of 7.75 percent.

The inflation rate averages 8 percent over this 15-year period.

4. Barney bought a house in 1991 for $100,000 that he now plans to sell for

$200,000. during this time the inflation rate has averaged 3 percent.

2. calculations

2. calculations

1. Measures price changes

1. Measures price changes

by %

amount in 2nd year

Amount in 1st (or base) year X 100

2003 Price = $300 2003 Price = $300

2002 Price = $2602002 Price = $260For Example:For Example:

$300

$260 = 115.4

year 1

year 1

year 1

year 1

Base year =

Base year =

X 100= 1.1538

X 100

Base year = 100 (always)

Base year = 100 (always)

YearMarket Basket

Price Index

1 $170

2 180

3 200

4 200

5 224

6 250

7 280

Calculate a Price Index, and assume that year 3 is the base year

YearMarket Basket

Price Index

1 $170 85

2 180 90

3 200 100

4 200 100

5 224 112

6 250 125

7 280 140

checked regularly

checked regularlythen an index is created

then an index is created

measures a “shopping basket” of consumer goods

measures a “shopping basket” of consumer goods

2. WPI2. WPI

1. PPI1. PPI

3. MPI3. MPI

4. GDP Price Index

4. GDP Price Index

a slowing of the inflation rate

a slowing of the inflation rate

the aim of policiesthe aim of policies

usually phrased as “slowing inflation”

usually phrased as “slowing inflation”

http://abcnews.go.com/Video/playerIndex?id=6484348

measuring serves as a basis for setting reaching macro

goals

the creation of goods and services

the creation of goods and services

producing at maximum capacity

producing at maximum capacity

on the PPC

on the PPC

the full-production full-employment capacity

grows over time

the full-production full-employment capacity

grows over time

the PPC shifts outthe PPC shifts out

1. GDP1. GDP

4. GNP4. GNP

2. Nominal GDP

2. Nominal GDP3. Real GDP3. Real GDP adjusted $$

current $$

production of a country

production in a country

Stage of productionValue added to the product (equals income created)

Sales Receipts(at each stage of production)

Stage 1: farmer’s wheat

Stage 2: miller’s flour

Stage 3: baker’s bread(wholesale)

Stage 4: grocer’s bread (retail)

$.30

$.65

$.90

$1

by farmer$.30

by grocer$.10

by miller$.35

by baker$.25

• What Does Not Count Toward GDP?• Sales at intermediate stages of production. Their

value is already counted in the final-user good. Including them would result in double counting.

Total consumer expenditure = $1 Total value added = $1

Only final goods and services countOnly final goods and services count

• What Else? – Financial transactions and income

transfers. They do not reflect production.

– Production outside the geographicborders of the country is not counted.

– Goods not produced during the current period are not counted.

Stocks

1955 Chevy

Which are included in this year's GDP? :

1. Interest on an AT&T bond -

2. Social Security payments to retirees -

3. Services of a painter in painting a house -

4. Income of a dentist -

5. Money received from the sale of a 1990 model car-

6. Monthly allowance of a college student -

7. Rent for a 2 bedroom apartment -

8. Money received for selling this year's model car -

9. Interest on a government bond -

YES

YES NONO

YES

YESYE

SYES

YES

YES YE

SYES

NONONONO

NONO

Which?

10. A two hour decline in the work week -

11. Purchase of the AT&T bond -

12. A $ 2 billion increase in business investments -

13. Purchasing 100 shares of GM common stock -

14. Purchase of an insurance policy -

15. Wages paid to your butler -

16. Market value of a homemaker's services -

17. Purchase of the Mona Lisa -

NONO

YES

YES

YES

YESYE

SYES

NONO

NONO

NONO

NONO

nominal GDP for a year

price index number for that year

X 100

2000 GDP Index = 107.04

2000 GDP Index = 107.04

2000 GDP = $9.873 trillion

2000 GDP = $9.873 trillion

For Example:For Example:

$9.873

107.04 = 9.224

nominal pricetarget year

index

nominal pricetarget year

index

calculation works for “deflating” or “inflating” any dollar amount

calculation works for “deflating” or “inflating” any dollar amount

X 100= .0092238

X 100

Gross Domestic Product

Complete the following table assuming that Year 1 is the base year.

Year Output Price Money GDP

GDP Index

Real GDP

1 100 $4.00

2 120 4.40

3 110 5.00

4 110 5.20

5 135 5.20

6 140 5.60

Gross Domestic Product

Complete the following table assuming that Year 1 is the base year.

Year Output Price Money GDP

GDP Index

Real GDP

1 100 $4.00 $400 100 $400

2 120 4.40 528 110 480

3 110 5.00 550 125 440

4 110 5.20 572 130 440

5 135 5.20 702 130 540

6 140 5.60 784 140 560