unit 4.ppt
TRANSCRIPT
Unit 4:Is the
Economy Healthy?
Measuring Economic Performance
Why are some countries rich and others poor?
How do economists know an economy is growing?
What measurements do you keep track of?
Real GDP in the United States
Since 1940
Which Country Is Better Off?
Country A
Country B Country C
GDP $1,500 $2,500 $3,000
Which Country Has the Highest
Standard of Living?Country
ACountry
B Country C
GDP $1,500 $2,500 $3,000
Population 5 10 15
GDP per Capita
Country A
Country B Country C
GDP $1,500 $2,500 $3,000
Population 5 10 15
GDP/capita $300 $250 $200
GDP per Capita, 2012(current U.S. Dollars)
Country GDP/CapitaUnited States $51,749Mexico $9,749China $6,091India $1,489Russian Federation $14,037Zimbabwe $714Spain $28,624Germany $41,863Greece $22,083
Origami Paper Cups AKAProduction and Distribution
Factors Contributing to Long-Term Economic Growth
• Technological innovation• High investment in human capital and
capital goods• High level of economic freedom • Strong incentives to save and invest • Political stability• Free trade• Slower rates of population growth• Low inflation
Measuring a Nation’s Economy
A nation’s production is measured by calculating GDP
What Is Gross Domestic Product?
● Gross domestic product (GDP) is the total market value of all final goods and services produced annually in a country.
Why Count Only Final Goods?
● An intermediate good is a good that is not ready for use or purchase. It could be a good that is partially assembled. It could even be the components that are used in producing a final product.
● Suppose economists counted both final and intermediate goods and services when they computed GDP. Then they would be double counting, or counting goods more than once.
Does GDP Omit Anything?
● We do not count illegal goods and services in GDP because we do not have any records of their sale or purchase.
● Any legal transaction that is not recorded also cannot be counted. If someone is paid in cash, with no sales receipt, the transaction is not likely to be recorded.
● We do not count goods and services that are traded outside official market settings. Cutting your friends hair would be an example.
● The sale of used goods is not counted in GDP.● Stock transactions and other financial
transactions are also not included in GDP.● Government payments, such as social
security checks, are not exchanged for goods or services, and are also not counted in GDP.
(All About GDP Worksheet part A)
GDP vs. GNP
●GDP= Total market value of final goods and services produced within the borders of the United States (by both citizens and noncitizens)●GNP=Total market value of final goods and services produced by U.S. citizens (wherever they reside- US, France, Mexico, etc.)
Measuring GDP
How Is GDP Measured?
● The GDP of the United States in 2014 was more than $17 trillion.
● Economists determined this number by adding up the amount spent by four sectors: household, business, government, and foreign.
● Amounts spent by the household sector are called consumption.
● Amounts spent by the business sector are called investment.
● Amounts spent by the government sector are called government purchases. As mentioned before, government purchases do not include government transfer payments.
● Spending by residents of other countries on goods produced in the United States is called export spending. Spending by Americans on foreign-produced goods is called import spending.
(Worksheet All About GDP Part B)
●All goods produced in the economy must be bought by someone in one of the four sectors of the economy. Summing the spending of the four sectors and subtracting import spending will give a good estimate of GDP.
Calculating GDPGross domestic product (GDP) is the total market value of all final goods and services produced annually in a country.
GDP = C + I + G + EX – IM
Note that import spending is subtracted when calculating GDP.
Latest GDP ranking
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html
GDP Per Capita vs GDP
● Greater production of goods and services is only one of the many factors that contribute to being better off or possessing greater well-being.
● All other things being equal, greater production may result in reduced leisure time or reduced family time.
● Population must be considered when comparing the GDP of two different nations
Latest GDP per capita ranking
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html
Do you get it?
Categorize GDP event Worksheet
Work with your partner.
Real GDP
The Two Variables of GDP: P and Q
● GDP is calculated by multiplying the price of goods produced (P) by the quantity produced (Q).
● If either price OR quantity rises, the GDP will rise.● To get an accurate assessment we need to look at
each variable separately.● If price is held constant, then any rise in GDP must
be due to a rise in quantity.● This measurement is called Real GDP
Real GDP
● How do we keep price constant? Economists do it by choosing the price in a base year and then comparing it with prices in all other years.
GDP is equal to price in the current year multiplied by quantity in the current year.
Nominal GDP = P current year X Q current yearReal GDP is equal to price in the base year multiplied by quantity in the current year.
Real GDP = P base year X Q current year
To sum it up….
GDP is the VALUE of all final goods and services produced
GDP (nominal GDP) measures these values using current prices (not adjusted for inflation)
Real GDP measures these values using the price of a base year (adjusted for inflation)
Measuring the Cost of Living
Using the Consumer Price Index we can see if we have to spend more or less
dollars to maintain our standard of living.
The Consumer Price Index●The consumer price index is a measure of the overall cost of the goods and services bought by a typical consumer. It is taken monthly.
● A price index is a measure of the price level, or the average level of prices.
● The most widely used price index is the consumer price index (CPI).
● The consumer price index is calculated using a sampling of thousands of households. The Bureau of Labor Statistics surveys what consumers paid for a group of goods that represent all the types of goods they might purchase in a year. This group of goods is called the market basket.
Inflation rate (percentage change in CPI): The inflation rate is the percentage change in the price index from the preceding period
Measuring the Unemployment Rate
Unemployment Rate
●Unemployment is measured by the Bureau of Labor Statistics (BLS).
● It surveys 60,000 randomly selected households every month.
● The survey is called the Current Population Survey●Based on the answers to the survey questions, the BLS places each adult into one of three categories:
● Employed● Unemployed● Not in the labor force
Who’s who??
●Adult or Not? Military or Institutionalized?● The BLS considers a person an adult if he or she is over 16
years old.● We don’t count people in the military or institutions
●Employed or Not?● A person is considered employed if he or she has spent most
of the previous week working at a paid job.● A person is unemployed if he or she is on temporary layoff, is
looking for a job, or is waiting for the start date of a new job.
Labor Force
●Labor Force or Not?● A person who fits neither of these categories, such
as a full-time student, homemaker, or retiree, is not in the labor force.
● The labor force is the total number of workers, including both the employed and the unemployed.
● The BLS defines the labor force as the sum of the employed and the unemployed.
Figure 1 The Breakdown of the Population in 2001
Copyright©2003 Southwestern/Thomson Learning
AdultPopulatio
n(211.9 million)
Labor Force(141.8
million)
Employed(135.1
million)
Not in labor force(70.1
million)
Unemployed (6.7 million)
The unemployment rate is calculated as the percentage of the labor force that is unemployed●Unemployment rate = (# unemployed/labor force)X100The employment rate is calculated as the percentage of the adult population that is employed●Employment rate = (# employed/adult population) X100
●It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.●Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.●Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work
September 2014 Stats (#’s in the thousands)
●(Civilian noninstitutional) Adult population 247,947●(Civilian) Labor force 155,922●Unemployed 9,617●Employed 146,306
● You do the math. Find the unemployment and employment rates.
Homework: The Current Unemployment Rate
Find a recent article that discusses the current unemployment rate in the economy. Explain the main topics of the article and the information it provides on the current unemployment rate. Discuss how the unemployment rate in general influences economic performance.
Provide the title of the article, date it was published, and where it was a published (magazine name, newspaper, web address)
1 paragraph minimum
Aggregate Supply and Demand
Economy-wide supply and demand
Business Cycles (Fluctuations)
●Economic fluctuations are irregular and unpredictable●GDP and CPI fluctuate together●When GDP declines, unemployment increases●When production and incomes fall, and unemployment rises it is known as a recession when it’s mild and a depression when it’s severe.
TRANSPARENCY 12-3: The Phases of the Business Cycle
● Changes in money supply
● Changes in business investment, residential construction, and government spending
● Politics● Innovation● Dramatic changes to
supply
Business cycles can be caused by several types of events:
Explaining Short-run Fluctuations
●We use aggregate supply and aggregate demand to explain economic fluctuations.
● The aggregate-demand curve shows the quantity of goods and services households, firms, and government wish to buy at each price level. It slopes negatively.
● The aggregate-supply curve shows the quantity of goods and services that firms produce and sell at each price level. It slopes positively.
● The price level and production adjust to balance aggregate supply and demand.
Aggregate Demand Curve
●The reason it slopes downward has to do with the effect of price levels on consumption, investment, and net exports.●If there is a change in C, I, G, or NX the curve will shift.●When aggregate demand shifts left it will create a recession.
Aggregate Supply Curve
●The reason it slopes upward has to do with the amount of production at each price level.●If there is a change in labor, capital, natural resources, or technology the curve will shift.●If aggregate supply shifts left it will create a recession.
Inflation and Deflation
What Is Inflation?
●Inflation is an increase in the price level, or the average level of prices.
How Do We Measure Inflation?
●One way of determining inflation is to look for changes in the consumer price index (CPI).
● For example, if the CPI increases from 180 in one year to 187 in the next year, the inflation rate is 3.89 percent.
● Between 1960 and 2006, the United States experienced wide fluctuations in inflation rates. Approximately what was the highest rate during those years? (Answer: 13.25 percent) Approximately what was the lowest rate? (Answer: 0.5 percent)
TRANSPARENCY 12-1: Measuring Inflation
Demand-Side Versus Supply-Side Inflation●Inflation can originate on either the demand side of the economy or the supply side of the economy. If aggregate demand increases and aggregate supply stays the same, inflation will occur.
● Demand-side inflation occurs when an increase in the price level originates on the demand side of the economy. Demand-side inflation can be caused by an increase in the money supply.
● Supply-side inflation occurs when an increase in the price level originates on the supply side of the economy.
The Simple Quantity Theory of Money●The simple quantity theory of money presents a clear picture of what causes inflation.●To understand this theory, you need to understand velocity and the exchange equation.
● Velocity is the average number of times a dollar is spent to buy final goods and services in a year.
● The exchange equation says that the money supply multiplied by velocity equals the price level (or average price) multiplied by the quantity of output.
●The simple quantity theory of money predicts that changes in the price level will be strictly proportional to changes in the money supply.
TRANSPARENCY 12-2: The Exchange Equation
M x V = P x Q
M = Money supplyV = VelocityP = Price levelQ = Quantity of output
●According to this theory, if the money supply doubles from $500 to $1,000, the price level will double from $10 to $20—assuming that velocity and quantity of output remain constant.●In reality, the change will not be perfectly proportional. A 100 percent increase in the money supply may result in a 50 percent increase in the price level.●Nevertheless, in the real world, we see that the greater the change in the money supply, the greater the change in the price.
The Effects of Inflation
●Inflation increases the amount that people must spend on particular goods or services. It can affect people on fixed incomes, savers, and partners in contracts.
● Inflation reduces the buying power of people on fixed incomes, such as social security or investment proceeds.
● If the inflation rate is greater than the interest rate earned on savings accounts, the money in those accounts loses value. As time goes on, savers will be able to buy fewer goods with the same amount of money.
● Over time, inflation can eat up the profits factored into a long-term contract. As the costs of supplies and labor increase during the length of the project, the profit that was factored into the contract begins to disappear.
● To hedge against inflation is to try to avoid or lessen a loss by taking some counterbalancing action. People try to figure out the best protection against inflation by investing in items such as gold, real estate, and art.
What Is Deflation?
●Deflation is the opposite of inflation. Deflation is a decrease in the price level, or the average level of prices.
● A downward change in the CPI indicates deflation.
Demand-Side Deflation Versus Supply-Side Deflation
● Like inflation, deflation can result from a change in price or a change in supply. For example, if aggregate demand decreases and aggregate supply stays the same, deflation will occur.
Simple Quantity Theory of Money and Deflation
● The simple quantity theory of money can be used to explain deflation, just as it was used to explain inflation.
● According to this theory, if the money supply drops from $1,000 to $500, the price level will drop from $20 to $10—assuming that velocity and quantity of output remain constant.
A Major Effect of Deflation
●When prices fall, they do not all fall at the same time. When prices do not fall at the same time, deflation can lead to firms going out of business and workers being laid off. These are common results during times of deflation.
