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Measuring the Economy

Measuring the Economy. Unemployment Questions: Employed people are people with jobs? Unemployed people are people without jobs? The civilian labor force is the number of people aged 16 years and older who are not in the armed forces?. Employment Definitions.

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Measuring the Economy

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  1. Measuring the Economy Unemployment Questions: Employed people are people with jobs? Unemployed people are people without jobs? The civilian labor force is the number of people aged 16 years and older who are not in the armed forces?

  2. Employment Definitions • Bureau 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

  3. Employed people are people with jobs. • The unemployment rate is the percentage of the civilian labor force that is unemployed

  4. Undercounted Unemployment • U3—people w/out work actively looking • U4—U3+discouraged workers • U5—U3+U4+marginally attached • U6—U3+U4+U5+part-timers looking for full time work

  5. Types of Unemployment 1. Frictional unemployment Temporary condition that occurs when an individual is out of their current job and looking for another job or looking for their first job. Examples:

  6. 2. Structural unemployment a)Workers who cannot find jobs because the structure of the economy has changed b) New technology is introduced or the company relocates and the worker does not want to move Examples:

  7. 3. Cyclical unemployment a) Workers who are laid off due to a downturn in the economy. b) They expect to be rehired when the economy improves

  8. 4. Seasonal Unemployment a) Occurs due to the seasonal nature of jobs b) What industries are affected by seasonal unemployment?

  9. Examples of unemployed workers • Recent college graduate seeking her first job • Worker who has quit his job to move to be with his family • Carpenter is laid off because housing construction has declined • Ski resort closes as the Spring approaches

  10. 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?

  11. Inflation TRUE OR FALSE • If 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.

  12. Inflation hurts everyone. • FALSE: Some people benefit from inflation despite its generally harmful effects.

  13. 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

  14. Problems of Inflation • Money becomes worthless • People lose faith in the Government • Happened 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

  15. Inflation’s Winners • Borrowers—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 $

  16. Inflation’s Losers • Savers—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

  17. 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

  18. Problems of deflation • Reduces the value of people’s assets • Decreases consumer spending • Decreased demand affects businesses • Leads to higher unemployment

  19. 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

  20. Changes in the CPI are used to measure inflation

  21. Why is the CPI important? • Determines the inflation rate which is used by: • Manufacturers and retailers in predicting future price increases

  22. Employers in calculating salaries and pensions • Government in determining Cost of living adjustments for Social Security recipients

  23. CPI’s limitations • The overall CPI may not match one’s own household’s budget • Identify 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

  24. GDP Gross 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

  25. How to measure GDP GDP= C + I + G + (X-M) Consumption (C) • Spending by households on goods and services • Makes up two-thirds of GDP spending

  26. Investment (I) • Spending by businesses on machinery, factories, tools and construction of new buildings

  27. Government (G) • Spending by all levels of government on goods and services • Includes military, schools and highways

  28. Net Exports (X-M) • X—exports of goods and services • M—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)

  29. 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

  30. Importance of GDP Increase 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 GDP • Indicates the economy is contracting and usually seen by an increase in unemployment • Confidence in the economy decreases and people spend less

  31. GDP Per Capita • GDP 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.

  32. Shortcomings of GDP • GDP 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

  33. The Underground Economy • Consists of two parts: • “black markets” • Drug dealing, video and music piracy • “Off-the-books activities” • Any job where taxes are not withheld, cash • In 2012 the UE in the USA was $2 trillion

  34. Costs and Benefits of UE • Costs • 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

  35. The Business Cycle • The Business Cycle is the natural rise and fall of the economy over time • Expansion • Demand for goods and services increases • Employment increases • People have money and they are spending!

  36. Contraction • Economy shrinks as the demand for goods and services decreases • Workers lose their jobs • No money to spend on stuff!

  37. How are growth and Recession determined? • Growth—6 consecutive months of increasing GDP • Recession—6 consecutive months of decreasing GDP

  38. Which component of GDP would each of these fit into? • A mechanic fixes a transmission • A business purchases laptops and software • A local library purchases new audio books • A retailer purchases tennis shoes from a manufacturer in China and sells them • Mother purchases those tennis shoes from the retailer

  39. 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

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