Introduction to Macroeconomics
Introduction to Macroeconomics EC 202
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Inflation or Recession 9 Rate of inflation O The annual percentage rate of change in the price level 9 A measure of how fast prices are rismg 9 Recession O A period in which the economy is growing at a rate significantly below normal 2009 The US Inflation Rate 1900 0 D m Q m c m c m 05 OJ 1 1 1 1 I why 3121 uogneuul Year The us Inflation Rate 2000 2012 All Urban Consumers CPIU US city average All items 1932341DU Percentage change From same period last year 240 60 230 quot quot 50 220 quot quot 40 210 quot quot 30 200 quot quot 20 190 39 1 0 180 4 00 1T0 39 quot 10 Economic Chart Dispenser ht wwwEeonemagiceem 160 i l 1 l i l i l 2 i t i 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 390 U 39 L 1 E F7 39 39 me The US Core Inflation Rate 2000 2012 excludes food amp energy Consumer Price Indexfor All Urban Consumers All Items Less Food ampE Percentage change From same period last year 240 If 230 Ifquot 39U39 220 quotWVJ 210 1 2GB L 190 18039 USU Ecoanic PhartIDispenser I I I njjpfwwwFe0n0magiceomX 20 2390 2390 2390 2390 20 2390 2390 20 2390 20 2390 2390 20 I L I I y I 1 2 300 17390 UUU Recessions and Expansions 0 Growth is not always steady O Recessions O Slowdowns in economic growth 9 Depressions 9 Severe recessions O Expansions O Periods of rapid economic growth Unemployment O Unemployment rate Q The fraction of the labor force searching for work but can t find a job 0 Key indicator of the state of the labor market 9 Usually rises significantly with a recession Year 1 9600 1 965 1 970 1 975 l 980 1 985 1 990 1995 2000 2005 2010 Unemployment rate Va I 4 CD 03 C l M 1 The US 19602009 Unemployment Rate The Unemployment Rate 20002012 Civilian Unemployment Rate Percent SA 39 1K JR Econ0mic Chart Qispenger 950 2390 2 0 2390 1 httRuw0Econ0magiccom 0 2390 210 20 i0 20 30 2390 2390 2390 D 01 D2 03 04 05 US U 08 09 10 11 12 13 Employment 20002012 148000 146000 144000 142000 140000 138000 136000 134000 Civilian Employment Thousands of Persons SA Econ0mic Chart 0ispen er I I I I httHffquEcon0magiccom 20 20 2390 20 20 20 20 2390 2390 2390 20 2390 2390 20 C0 01 02 03 04 05 06 0 08 09 10 11 12 13 Participation Rate 20002012 650 600 6650 6600 6550 6500 6450 6400 6350 Civilian Labor Force Participation Rate Percent SA Econ0mic Chart Hispenger I I I I httpEKwwqEcan0 I00m 20 2390 2390 2390 20 20 20 20 20 2390 2390 20 20 20 00 01 02 03 04 05 06 0 03 09 10 11 12 13 Economic Growth 9 Standard of Living 0 Measured as Output per person YPOP where Y is output and POP is population 9 Directly related to average labor productivity 9 Average labor productivity can be measured as Output per worker YN where N is employment Quarterly Productivity Quarterly productivity in the nonfarm business sector 110 I a 39 INDEX 20051010 m 9 H 39F39 I I I I I I I I I I 1902 1004 1095 1990 2000 2002 2004 2005 2003 2010 2012 QUARTER NOIB Labor WUUUBTWW is output per hourwnrked Growth in Productivity 5 14 E m 6 g3 23 a D E 2 6 Fe E la 0 194773 1973 79 197990 19902000 20002007 20072011 Recession s Job Losses FIGIIIIE 1 A 39 39 quot quot 39 L quotcwJim HI those with dilution beyond my sthonl 3 2 mm mos will a Malta s dtgme o heuzr galnad 9quot amoo jobs In the mama 2 an 0 o 39 39 39 39 gt 39 nth E Asabdale a degree 0 1quot II an Io Ar 1 5171 a to g 1 educanun gaaned a L6 mll onlubs g 2 r l A l I 39 i I a II n BED vii E Those with an mate s degl39ee or some college Liam g g 4 WWI1951 mum1995 megs551m a be on B mace E yobs by E 4 Iiimenial ihlgh1hgoli Vebnnry EDI d om or l5 Dos 56 million In mow 9 altogether In recession ngh mm Glen 6 Asmara dawn mm mileage 7 4 a 17 Barhdorldegree 7 o bent Sewn Aumun39 quot vquot n I and r M pumar Nam m f u ovum mannu 39 J 1 g A M7w mavcry mn Mummy mm m Edsvvary 201 Unemployment Rate by Education Unemployment rate by education 2007 and 2011 178 I 2007 1 quot 39 2011 Inquot I4quot 3 E 111 5 103 E w 3 86 E Z S39o 0 c D m 54 52 4091 1quot 39 13 214 iquot l 117 i i 7 Less t nar I CJI sch34 Hugh schzcn tvjr1iIIrE 5a 1 s degree Source 1 l a 1abr39SS F351 menu11v Lunar 391 15L lath n ELlrwzn m clad ale Is a College Degree Enough 9 About 15 million or 536 percent of bachelor s degreeholders under the age of 25 last year were jobless or underemployed the highest share in at least 11 years In 2000 the share was at a low of 41 percent before the dotcom bust erased job gains for college graduates in the telecommunications and IT fields 9 Broken down by occupation young college graduates were heavily represented in jobs that require a high school diploma or less Is a College Degree Enough O In the last year they were more likely to be employed as waiters waitresses bartenders and foodservice helpers than as engineers physicists chemists and mathematicians combined 100000 versus 90000 There were more working in officerelated jobs such as receptionist or payroll clerk than in all computer professional jobs 163000 versus 100000 More also were employed as cashiers retail clerks and customer representatives than engineers 125000 versus 80000quot Is a College Degree Enough 9 While a college education is important people also now need a skill that an employer wants 9 That is one of the reasons why Boomers who have had the time to develop the skills are taking jobmarket share 9 The number of employed 55 and over has risen more or less steadily since before the beginning of the Great Recession growing by over 4 million while the number ofjobs for all workers has dropped by 8 million and is still down by over 4 million Relative Employment Employment Level 55 years and over LN512024230 Civilian Employment CElSOV 31000 143503 30000 I n 145590 VN 29000 r 144672 20000 142754 27000 7 7 J 140335 Thousands of Persons 1 i Thousands of Persons quot 39 quot 133913 26000 JJ 25 000 I I I I 2007 2008 2009 2010 2011 2012 201 Shaded areas indicate U5 recessions LN512024230 Left 2012 researchstlouisfedorg CEIEDV Right 137000 3 Unemployment Rates by Age April Unemployment Rates by Age seasonally adjusted I Unamploymnnl Rams by Age 14 132 12 10 8 62 63 6 4 2 0 l I All 20 24 25 34 3544 4554 55 and W0 FKB f5 Que r s e um Dryum VX39II N39Ma w rm m l LA w ry r x L zrlu I39Mmm 9282012 45400 PM Calculate GDP using the valueadded expenditure and income methods There are three methods for measuring GDP 1 by aggregating the value added by each firm in the production process The value added by any firm equals the market value of its product or service minus the cost of inputs purchased from other firms and used up in the production process The value added by each firm represents the portion of the value of the final good or service that the firm creates in its stage of the production process Summing the value added by all firms in the economy yields the total value of final goods and services or GDP 2 by adding up the total amount spent on final goods and services and subtracting the amount spent on imported goods and services 3 by adding labor income and capital income Consumption C Spending by households on goods and services 1 consumer durables longlived consumer goods such as cars and furniture 2 consumer nondurables shorterlived goods like food and clothing and 3 services including everything from haircuts to taxi rides to legal financial and educational services Investment 1 Spending mainly by firms on final goods and services primarily capital goods and housing 1 business fixed investment the purchase of new capital goods such as machinery factories and office buildings 2 residential investment the construction of new homes and apartment buildings 3 inventory investment the addition of unsold goods to company inventories Government purchases G Purchases of final goods by federal state and local governments Government purchases do not include transfer payments payments such as unemployment compensation and social security made by the government in which no current goods or services are received Interest paid on the government debt Net exports NX Equal exports minus imports Exports are domestically produced final goods and services that are sold abroad Imports are purchases by domestic buyers of goods and services that were produced abroad Algebraic equation for calculating GDP Y is written as Y C I G NX The circular flow diagram of income and expenditures illustrates how incomes arising from an equal amount of output produced end up with all output being purchased with leakages from the flow equal to injections into the circular flow All output is purchased since whatever output is not willingly purchased is defined to be purchased by the producer as investment in the form of additional inventory The third method of calculating GDP is to sum total labor and capital incomes Labor income before taxes includes wages salaries and the income of the selfemployed It represents about 75 of GDP Capital income is made up of payments to the owners of physical capital factories machines and office buildings and intangible capital such as copyrights and patents and it represents about 25 of GDP The components of capital income include such items as pretax profits earned by business owners the rents paid to owners of land or buildings interest received by bondholders and the royalties received by holders of copyrights or patents Private saving is defined as the amount of disposable income takehome pay if taxes are measured accurately that is not consumed Public saving is equal to the surplus of taxes over government spending National saving is defined as the sum of private and public saving and is equal to the amount of the nation39s income or output that is not used for consumption or government spending Since all output is defined to be purchased by consumers firms the government and the foreign sector the output that is not used for consumption or government spending must be used for investment or net exports that is national saving is equal to investment plus net exports If national saving is less than investment therefore there is a trade deficit that is net exports must be negative providing the output required for the higher investment Define and calculate nominal GDP and real GDP As a measure of physical output of an economy during a given period GDP is useful in comparisons of economic activity in different places but is not as valuable for making comparisons over time To make comparisons of physical output in an economy over time GDP must be adjusted for price changes that would affect its value but not reflect changes in physical output To measure physical output and adjust for priice changes economists differentiate between nominal GDP and real GDP Nominal GDP measures the current dollar value of production in which the quantities of final goods and services produced are valued at currentyear prices Prices changes affect the value of nominal GDP Real GDP measures the actual physical volume of production in which the quantities of final goods and services produced are valued at baseyear prices Changes in current prices therefore do not affect the value of real GDP making it a measure of physical production Explain the relationship between real GDP and economic wellbeing While economists and policymakers often assume that a higher GDP is better real GDP is not the same as economic wellbeing With the major exception of governmentproduced goods and services real GDP captures only those goods and services that are priced and sold in markets There are many factors that contribute to people s economic wellbeing that are not priced and sold in markets Thus at best it is an imperfect measure of economic wellbeing Some important factors that are excluded from real GDP are leisure time environmental quality resource depletion nonmarket activities such as volunteer services homegrown foods homemaker services and underground economic activities from informal babysitting to organized crime quality of life issues such as crime traffic congestion civic organization open space and income inequality Nevertheless real GDP per person does tend to be positively associated with many things people value including a high material standard of living better health and life expectancies and better education Explain how the Bureau of Labor Statistics calculates unemployment A second macroeconomic measure that receives a great deal of attention from economists and policymakers as well as the general public is the rate of unemployment In the United States the Bureau of Labor Statistics BLS conducts a monthly survey of approximately 60000 households in order to calculate the official unemployment rate Each person in those households who is 16 years or older is placed in one of three categories employed unemployed or out of the labor force A person is employed if he or she worked full time or part time during the week preceding the survey or is on vacation or sick leave from a regular job A person is unemployed if he or she did not work during the week preceding the survey but made some effort to find work during the previous four weeks All other persons are considered out of the labor force In assessing the impact of unemployment on jobless people economists estimate how long individual workers have been without work The BLS asks respondents how long they have been continuously unemployed to determine the unemployment spell The length of an unemployment spell is called its duration The duration of unemployment rises during recessions and falls during expansions Calculate the unemployment rate and participation rate To calculate the unemployment rate the BLS first adds the total number of employed and unemployed people in the economy to determine the size of the labor force The unemployment rate is then calculated as the number of unemployed people divided by the labor force and expressed as a percentage Another useful statistic calculated by the BLS is the labor force participation rate or the percentage of the workingage population that is in the labor force Discuss the costs of unemployment Unemployment imposes economic psychological and social costs on a nation T he main economic cost borne by both the unemployed individuals and society is the output that is lost because the work force is not fully utilized The psychological costs of unemployment are felt primarily by the unemployed workers and their families and include a loss of selfesteem feelings of loss of control over one s life depression and suicidal behavior The social costs borne by both the unemployed individuals and society include increases in crime domestic violence and drug abuse Discuss the criticisms of the unemployment rate U3 There are some criticisms of the techniques used by the BLS to measure the rate of unemployment One criticism is that the official unemployment rate understates the true extent of unemployment because of socalled discouraged workers and involuntary parttime workers Discouraged workers are people who say they would like to have a job but have not made an effort to find one in the previous four weeks for job market reasons Some observers have suggested that treating discouraged workers as unemployed would provide a more accurate picture of the labor market Involuntary parttime workers are people who say they would like to work full time but are able to find only parttime work The U3 measure of unemployment is the official unemployment rate while U6 counts not only people without work seeking fulltime employment the more familiar U3 rate but also counts quotmarginally attached workers and those working part time for economic reasonsquot Note that some of these parttime workers counted as employed by U3 could be working as little as an hour a week And the quotmarginally attached workersquot include those who have gotten discouraged about being able to find a job and stopped looking but still want to work as well as those who have stopped looking for work for other reasons 9282012 45400 PM 1 1399 5 quot m 5339 m 5339 N 9039 1399 0 Output per person Measures standard of living Higher production per personhigher standard of living Standard of livingtota outputpopulation Output per worker amount of outputemployed workers Expansion rapid economic growth Inflationrate at which general prices are increasing Prior to recessions inflation rate rises Monetary Policy Determination of the nation s money supply Affects national output interest rate inflation Controlled by the Federal Reserve System Fiscal Policy Decisions that determine the gov budget Expenditures amp revenues of gov Structural Policy Gov policy aimed at changing the underlying structure or institutions of the nation s economy Ex Move away from a gov controlled economy to a market oriented one Positive Analysis Addresses the economic consequences of a particular event or policy Involves a testable assertion What is Normative analysis Judges whether results are desirable Address the question of where it should be used Involves values of person doing the analysis What ought to be Aggregationadding up individual economic variables to obtain economy wide totals ex Inflation rate GDP Capital good long lived good which is produced and used to produce other goods Gov counts as final goods ex Machinery Measuring GDP a Add up the market value of all the final goods produced 5339 09 UJ J Uquot 0quot I I l N 09w 1 N N lquot N UJ N N U m N N 9 5339 N 9 1 N 30 Add up expenditures on the output of final goods Add up income Add up total amount spent by 4 groups and subtract spending on imports Leakage private savings taxes imports Injectionsgov spending investment exports Stock Variable measure of an amount that exists at an instant of time Flow Variable measure of a process that takes place over a period of time Need quotper specific time period Durable goods car furniture Nondurable food clothing Services work done for consumers Investment spending spending by firms on newly produced capital goods and housing New machinery amp factories New homes amp apartments Change in business inventory Government purchases Purchases by gov of final goods does not include transfer payments ex No good in return Like SS Net exports exportsimports Private savings incometaxes consumption Public savingsTaxesgov purchases National savings income consumptiongov purchases Expenditureincome Firms pay out everything they receive as income Labor income Comprised of wages salaries income of self employed is 75 of GDP Capital Income Payments related to physical capital ex Rent profits of business owners interest gained by bondholders Payments related to intangible capital ex Royalties from copy rights Capital income is 25 of GDP Nominal GDPmeasures current dollar value of production doesn t account for inflation Multiply shmoos xvalue at current year Real GDP measures physical output adjusted for inflation m 5339 w 9 UJ UJ UJ UJ N 5 w P UJ U39I UJ 0quot L N w 9 w 30 J 9 5339 0 Multiply ii shmoos xvalue at base year Imperfect measure of economic well being ignores leisure time quality of life environmental quality Unemployment Measured by the Bureau of Labor Statistics each person 16 or older is asked questions and put into either employed unemployed or out of the labor force Comes out monthly Labor Forcesum of employed and unemployed Unemployment rate unemployedemployed Participation rate labor forcepopulation over 16 Unemployment understates true level because it doesn t not include discouraged workers or workers who want a full time job but only have a part time one Hyperinflationinflation rate is extremely high ex Over 50 a month Real refers to purchasing power Real value of money declines when prices increase Fixed nominal incomes decline in real value when prices rise GDP inflatorindex of prices obtained indirectly from the calculation of real GDP not used as much only comes out quarterly Consumer Price Index CPI Measure of the average of the prices paid for a fixed market basket relative to its cost in a base period Cost of CPI basket at current yearcost of CPI basket at base year x 100 Used to eliminate the effects of inflation from economic data 3 steps to constructing CPI Select CPI basket Conduct monthly price survey Calculate CPI Inflation CPI in current yearCPI in previous yearCPI in previous year Disinflation prices are rising but less rapidly 43 Adjusting for inflation