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Measuring the Economy
Unemployment
Questions:1. Employed people are people with
jobs?2. Unemployed people are people
without jobs?3. The civilian labor force is the
number of people aged 16 years and older who are not in the armed forces?
Employment DefinitionsBureau of Labor Statistics—government
agency that tracks the number of people who are employed or unemployed
Civilian Labor Force—number of people aged 16 years and older who are not in the armed forces and who are employed, or are seeking employment
Employed people are people with jobs.
The unemployment rate is the percentage of the civilian labor force that is unemployed
Undercounted UnemploymentU3—people w/out work actively
lookingU4—U3+discouraged workersU5—U3+U4+marginally attachedU6—U3+U4+U5+part-timers
looking for full time work
Types of Unemployment
1. Frictional unemploymentTemporary condition that occurs when an individual is out of their current job and looking for another job or looking for their first job.Examples:
2. Structural unemploymenta)Workers who cannot find jobs because the structure of the economy has changedb) New technology is introduced or the company relocates and the worker does not want to move Examples:
3. Cyclical unemploymenta) Workers who are laid off due to a downturn in the economy.b) They expect to be rehired when the economy improves
4. Seasonal Unemploymenta) Occurs due to the seasonal nature of jobsb) What industries are affected by seasonalunemployment?
Examples of unemployed workersRecent college graduate seeking
her first jobWorker who has quit his job to
move to be with his familyCarpenter is laid off because
housing construction has declined
Ski resort closes as the Spring approaches
A labor market mystery?
In January of 2001 the BLS reported that:◦Unemployment increased in January◦The number of unemployed rose by about
300,000 to nearly 6 million, pushing the unemployment rate from 4 to 4.2 %
◦Payroll employment rose by 268,000 jobs◦Construction employment alone rose by
145,000 ◦How can the unemployment rate increase when more people are getting jobs?
Inflation
TRUE OR FALSEIf I have more money, I am better
off. Therefore, if everyone has more money, everyone is better off.
FALSE: More money for everyone causes inflation unless the economy can produce more goods and services.
Inflation hurts everyone.
FALSE: Some people benefit from inflation despite its generally harmful effects.
Inflation: increase in the average price level of all the goods and services produced in the economy
During inflation, the purchasing power of a dollar decreases
Problems of InflationMoney becomes worthlessPeople lose faith in the
GovernmentHappened in 1920’s in Germany
which eventually allowed Adolph Hitler to come to power
High Inflation occurred in the US after the Revolutionary War, almost led to the collapse of the new nation
Inflation’s WinnersBorrowers—the money
they pay back is worth less than the money they borrowed
Homeowners—fixed interest mortgages mean they pay back their loans with cheaper $
Farmers whose crops rise in price and pay back their loans with cheaper $
Inflation’s LosersSavers—money earns
a lower interest rate than the inflation rate
Creditors(Banks)—loans are paid back with cheaper money
People who are on fixed incomes◦ Retirees whose pensions
do not keep up with inflation
Deflation: a decrease in the average price level of all the goods and services produced in an economy
The purchasing power of a dollar increases during deflation
Problems of deflationReduces the value of people’s
assetsDecreases consumer spendingDecreased demand affects
businessesLeads to higher unemployment
Consumer Price Index Measures of the average change
in prices paid by urban consumer for a “market basket” of goods and services
These goods and services include food, clothing, shelter, transportation and prescription drugs
Changes in the CPI are used to measure inflation
Why is the CPI important?Determines the inflation rate
which is used by:◦Manufacturers and retailers in
predicting future price increases
◦Employers in calculating salaries and pensions
◦Government in determining Cost of living adjustments for Social Security recipients
CPI’s limitationsThe overall CPI may not match
one’s own household’s budgetIdentify two of the CPI’s basket that
the following households would spend the most on:◦A family with 4 children under the age
of 10◦A retired couple in their 70’s◦A person in their 20’s with a full time
job◦A family with 2 children in college
GDPGross Domestic Product
is a measure of the total value of all finished goods and services produced in a nation in one year
This production includes whether the company is owned by a foreign or domestic corporation
GDP is the MOST important barometer of national economic health
How to measure GDPGDP= C + I + G + (X-M)Consumption (C)Spending by households on goods
and servicesMakes up two-thirds of GDP
spending
Investment (I)Spending by businesses on
machinery, factories, tools and construction of new buildings
Government (G)
Spending by all levels of government on goods and services
Includes military, schools and highways
Net Exports (X-M)X—exports of goods and servicesM—imports of goods and services(X-M) is spending abroad on a
nation’s goods and services minus spending by people in the country on foreign goods and services
The US GDP in 2012 (trillions of dollars)
GDP = C + I + G + (X-M)
$15.68=$11.11 + $2.06 + $3.06 + ($2.18-$2.70)
When C, I or G increase, GDP increases
When C, I, or G decrease, GDP decreases
When exports (X) go up, GDP goes up because it means more is produced in the US
When imports (M) go up, GDP goes down because it means people in the US are buying what is produced in other countries
Importance of GDPIncrease in GDP means that the economy experiences
economic growth and unemployment goes down
people are spending more money and feeling more confident about the future
Decrease in GDPIndicates the economy is contracting
and usually seen by an increase in unemployment
Confidence in the economy decreases and people spend less
Gross domestic product 2012
(millions ofRanking Economy US dollars)
1 United States 15,684,800 2 China 8,358,363 3 Japan 5,959,718 4 Germany 3,399,589 5 France 2,612,878 6 United Kingdom 2,435,174 7 Brazil 2,252,664 8 Russian Federation 2,014,776 9 Italy 2,013,263
10 India 1,841,717 11 Canada 1,821,424 12 Australia 1,520,608 13 Spain 1,349,351 14 Mexico 1,177,956 15 Korea, Rep. 1,129,598 16 Indonesia 878,193 17 Turkey 789,257 18 Netherlands 772,227 19 Saudi Arabia 711,050 20 Switzerland 632,194
GDP Per CapitaGDP Per Capita is GDP divided by
the size of the population: it is equal to the average GDP per person.
Not an end in itself does not address how a country uses that output to affect living standards.
GDP Per Capita 2012
Ranking Economy US dollars
1 Qatar 103,900 2 Liechtenstein 89,400 3 Bermuda 86,000 4 Macau 82,4005 Luxembourg 81,100 6 Monaco 70,700 7 Singapore 61,4008 Jersey 57,000 9 Norway 55,900
10 Falkland Islands 55,400 11 Brunei 55,300 12 Isle of Man 53,800 13 Hong Kong 52,300 14 United States of America 50,700 15 United Arab Emirates 49,800 16 Switzerland 46,200 17 Guernsey 44,600 18 Cayman Islands 43,800 19 Canada 43,40020 Australia 43,300
Shortcomings of GDPGDP does not measure happiness,
nor does it measure economic welfare.
Production that is excluded◦Household production◦Illegal production◦The underground economy
GDP gives us a ballpark idea of how much we produce, not necessarily how well off we are
The Underground EconomyConsists of two parts:◦“black markets” Drug dealing, video and music piracy
◦“Off-the-books activities” Any job where taxes are not withheld,
cashIn 2012 the UE in the USA was $2 trillion
Costs and Benefits of UECosts
◦Loss of tax revenue ($400 billion gap in the amount that was owed minus what should be collected)
◦This loss reduces what government can spend on public goods and services
Benefits◦Money earned in UE is spent in the
formal economy◦UE increases employment which
increases consumer spending and therefore it increases economic growth
The Business CycleThe Business Cycle is the natural rise
and fall of the economy over timeExpansion
◦Demand for goods and services increases◦Employment increases◦People have money and they are spending!
Contraction◦Economy shrinks as the demand for
goods and services decreases◦Workers lose their jobs ◦No money to spend on stuff!
How are growth and Recession determined?Growth—6 consecutive months of
increasing GDP
Recession—6 consecutive months of decreasing GDP
Which component of GDP would each of these fit into?1. A mechanic fixes a transmission2. A business purchases laptops and
software3. A local library purchases new
audio books4. A retailer purchases tennis shoes
from a manufacturer in China and sells them
5. Mother purchases those tennis shoes from the retailer
How Much is a trillion?One thousand = 10 one hundreds = 1,000
One million = 1,000 one thousands = 1,000,000
One billion = 1,000 millions = 1,000,000,000
One trillion = 1,000 billions = 1,000,000,000,000