Economic Indicators Review

Chapter 11: Economic Indicators (Review)

GDP, Inflation, and Unemployment

GDP

• Is the quickest and easiest way to measure how an economy is doing.

• Is the market value of all final goods and services produced within a country in a given year.

• = C + I + G + NX

Multiple Choice

What is the largest component of GDP?

• Investment

• Government spending

• Net Exports

• Consumption

Multiple Choice

If your family buys a new house (built the same year it was purchased), then it would fall under what component of GDP?

• Investment

• Government spending

• Net Exports

• Consumption

What is NOT part of GDP?

• Illegal goods and "black market" activity

• Transfer payments like Social Security or unemployment assistance

• Used goods - Goods are only counted once, the year they were first produced. If not sold, then counted as "inventory" under Investment spending for that year.

• Intermediate goods - Goods not in their "finished" state, like metal used in making cars.

• Things done for yourself/on your own and other activities with no record of it (favors done for a friend).

Multiple Select

Which things would be included when trying to determine a country's GDP for 2018? (Click all that apply)

• Household spending on food

• A car produced in 2017 but sold in 2018

• Governments building new bridges

• Importing chocolate from Switzerland

• Money from the government to retired people

Nominal vs. Real GDP

Nominal GDP is the GDP for any year expressed in terms of THAT YEAR'S prices. It is calculated as the (current year price x current year quantity).

Real GDP is the GDP for any year expressed in terms of BASE YEAR prices. It is calculated as the (base year price x current year quantity). Real GDP is therefore more accurate when trying to analyze if growth has occurred in an economy from year to year.

CPI and Changing Price Levels

• A rise in prices is known as inflation. A decline in prices is known as deflation.

• Rather than track the changing prices of everything, economists simplify the process by using the Consumer Price Index (CPI).

• The CPI is then used to calculate a rough estimate of the overall changes in the price level of goods and services in an economy.

Steps in Calculating the Change in Price Level Using the CPI

• Determine a "market basket" - a list of the typical items bought by typical consumers. The items bought and their quantities must remain the same every year for an accurate comparison.

• Determine the total cost of the market basket for the "base year".

• Determine the total cost of the market basket for any other year.

• Divide the total cost of the basket in the "other" year by the total cost of the basket in the base year, and multiply by 100. This is the CPI value for that year.

Steps in Calculating the Change in Price Level Using the CPI cont'd

• When you have the CPI value for at least two separate years, you can use those values to calculate the percentage change in prices.

• Take the CPI value in the "later year" and subtract the CPI value from the "earlier year." Divide that by the CPI value from the "earlier year" and then multiply by 100. This is the percentage change in CPI reflects the percentage change in prices.

• If the number from the equation above is positive, it means there was inflation.

• If the number from the equation was negative, it means there was deflation. (This is rare but can happen).

Multiple Choice

If the CPI from 1998 was 163, and the CPI from 1999 was 166.6, then the percentage change in price was how much?

• 3.6% (inflation)

• -2.21% (deflation)

• 2.21% (inflation)

• .022% (inflation)

Aggregate Demand and Aggregate Supply

The word "aggregate" basically means "total." So rather than look at the supply and demand of one good, macroeconomics wants to know the TOTAL demand and supply of EVERYTHING, so it uses aggregate demand and aggregate supply.

Aggregate Demand

• The "total" demand of everything that is produced in an economy.

• Comes from the demands of households, firms, government, and foreigners added together.

• Therefore, AD = C + I + G + NX

• Whenever one of these components change (increase or decrease), the overall AD will change (increase or decrease).

• Keep in mind that NX includes imports and exports! So as exports increase, NX increases (along with AD). As imports increase, NX actually decreases (and so does AD).

Changes in AD

Any increase in C, I, G, or NX will shift the AD curve right. That will increase the price level and the output (Q, or Real GDP)

Any decrease in C, I, G, or NX will shift the AD curve left. That will cause the price level and output to decrease.

Changes in AS

Better technology or low oil prices (because oil is used in many things) will shift the AS curve right. That will lower price levels and increase production (or output, or Q, or RGDP).

Any loss in technology or high oil prices will shift AS left, so price levels rise and production falls.

Multiple Select

Which of the following would cause price levels to rise, as illustrated in an AD/AS graph? (Select all that apply)

• More imports

• More exports

• Rise in oil prices

• Better technology

• More government spending

Multiple Choice

How should the vertical axis be labeled on any AD/AS graph you draw?

• Output

• Aggregate Demand

• Price

• Price Level

Unemployment

Economists and governments often want to know how many people aren't working, but it's not as straightforward as it sounds. Many people are not included when trying to determine the unemployment rate.

The unemployment rate is calculated by taking the number of "unemployed" people and dividing it by the labor force. But who is unemployed, and what is the labor force? Let's break it down...

Unemployment

• Does not include people under 16, in the military, or in a mental or correctional facility. This leaves us with the noninstitutionalized adult civilian population.

• This noninstitutionalized adult civilian population is further broken down to people "not in the labor force." This includes retired people, full-time students, homemakers, and "discouraged workers" - those with no jobs and have given up looking for one.

• Everyone that's left is part of the "labor force" and includes people employed, and unemployed - with no job but looking for one.

Multiple Choice

Which of the following would NOT be considered as part of the unemployment rate.

• A man who switched from full-time to part-time work.

• A man who stays at home to raise his children.

• An Admiral in the Navy.

• All of them

Types of Unemployment

• Frictional - Unemployment between two jobs.

• Structural - Not enough jobs available for everyone, or people not having the desired skills to fill available jobs.

• Cyclical - Unemployment caused by the ups and downs of the economy.

• Seasonal - Unemployment caused by changing seasons.

Multiple Choice

This kind of unemployment is almost unavoidable and partly determines the Natural Rate of Unemployment

• Fractional

• Cyclical

• Structural

• Seasonal