Macroeconomics Unit 2 Macro Measures

Unit 2: Macro Measures Measuring Economic Growth Definition of Gross Domestic Product (GDP)Define Nominal GDPThe dollar value of all final goods and services GDP measured in current prices. It does not account produced within a countryÕs borders in one year. for inflation from year to year. Define Real GDPWhat is the expenditures approach? GDP adjusted for inflation and expressed in constant, The expenditure approach adds up all the spending or unchanging, dollars done in the economy by households, businesses, the Three things not included in GDP: government, and other countries. 1. Intermediate goods- GDP includes only final goods GDP = __C__+__ I__ +__G_+__(X-M)__ (ex: price of finished car, not the radio, tires, etc.) What is the income approach? 2. Non-production transactions including used goods The income approach adds up all the income earned in or financial transactions. (ex: stocks, real estate, social the economy including wages, rent, interest, and profit security) 3. Non-market Activities- (ex: illegal production or National Income = __W_ +__ R__+_i__ + _PR__ labor) Business Cycle Measuring Unemployment Label peak, recession/contraction, trough, expansion 1. Frictional Unemployment: Temporarily unemployed or being between jobs. Individuals are qualified workers with transferable Real GDP skills but they arenÕt working. Peak 2. Structural Unemployment Peak Changes in the structure of the labor force make some skills obsolete. Workers DO NOT have transferable skills and these jobs will never come back. Trough Trough 3. Cyclical Unemployment Unemployment that results from economic downturns (recessions). As demand for goods and services falls, demand for labor falls and workers are fired. Unemployment Rate Equation Recession Expansion Time Practice: True or False 1. Investment spending is spending on financial assets like stocks and bonds False 2. Transfer payments are not counted in the calculation of GDP True 3. If the nominal GDP increases then the economy is definitely experiencing inflation False 4. An economy is not at full employment unless there is no unemployment False 5. Countries that have generous unemployment benefits tend to have higher natural rates of unemployment True 6. Lumberjacks are structurally unemployment when they are replaced by machines True Natural Rate on Unemployment (NRU) What is the natural rate of unemployment? The amount of unemployment that exists when the economy is healthy. The economy is at full employment when there is no cyclical unemployment Problems With Unemployment Rate What are discouraged job seekers? People that are no longer looking for a job because they gave up. Since these people are not counted in the labor force, the unemployment rate may be too low. What are underemployed (part-time) workers? Someone who wants more hours but canÕt get them is still considered fully employed. The unemployment rate ignores the plight of such workers. Consumer Price Index (CPI) What is the CPI? CPI is an index number that shows how prices change over time for a fixed basket of consumer goods Consumer Price Index (CPI) Equation- GDP Deflator What is the GDP Deflator? The deflator is an index number that measures all prices and is used to convert nominal GDP into real GDP Deflator Equation- CPI Practice 1. Assume the value of a market basket for a given year is $550 and the same basket in the base year was $500. Calculate the CPI. CPI = 110 2. If the CPI for a given year is 90 then the change in prices between that year and the base year is _-10%_ 3. Fill in the blanks in the chart below. Start with 2009 as the base year then recalculate with 2010 as the base year. GDP Deflator Practice 1. The Nominal GDP is $100 billion and the Real GDP is $80 billion. Calculate the GDP deflator. 125 (prices are 25% higher since the base year) 2. The Real GDP is $100 billion and the GDP deflator is 200. Calculate the Nominal GDP. Nominal GDP =$200 billion 3. The Real GDP is $200 billion and the GDP deflator is 120. Calculate the Nominal GDP. Nominal GDP = $240 billion 4. The Nominal GDP is $300 billion and the GDP deflator is 150. Calculate the Real GDP. Real GDP = $200 billion 5. The Nominal GDP is $100 billion and the GDP deflator is 125. Calculate the Real GDP. Real GDP = $80 (same as question #1) Key Terms Define deflationA decrease in the general price level. The opposite of inflation Define disinflationA decrease in the rate of inflation. Prices are going up, but not as fast as before Define Velocity of MoneyThe velocity of money is the average times a dollar is spent and re-spent in a specific period of time Quantity Theory of Money Quantity Theory of Money Equation: Helped or Hurt by Unanticipated Inflation Assume expected inflation is 2% but actual inflation turns out to be 5%. Who is helped and hurt by inflation? Helped -Borrowers Hurt -Lenders -Savers -People on fixed incomes Three Causes of Inflation 1. The Government prints money to pay citizens and pay off debts (see the Quantity Theory of money) Usually causes hyperinflation. Examples: Germany after WWI, Zimbabwe in 2008, 2. Demand-Pull Inflation- An overheated economy with excessive spending but same amount of goods. 3. Cost-Push Inflation- The result of a Ònegative supply shockÓ that increases the costs of production and forces producers to increase prices. Example: A significant increase in the price of oil would lead to higher costs for firms and higher prices. __M__ x__V__=__P__x__Q__ __M__= Money Supply __P___= Price Level __V__= Velocity of Money __Q___= Quantity/Output Assume the amount of money is $5 and it is being used to buy 10 products with a price of $2 each. 1. How much is the velocity of money? 4 2. If the velocity and output stay the same, what will happen if the amount of money increases to $10? Price level will also double.