AP ECONOMICS UNIT 3:

MACROECONOMICS AND MEASURING THE ECONOMY

Day 1

Introduction to and discussion of economic measurement tools and statistics as well as broad

economic goals.

Slide Show: “Economic goals and measuring the economy”

Assign: Read “Numbers that make the news”.

Day 2

Introduce and analyzed the basic “Circular Flow” model of economic activity.

Recognize problems that can occur in an economy as related to the circular flow

Assign: NONE

Day 3

Given data, calculate the employment and unemployment rates

Given data, calculate inflation and the consumer price index

Given data, calculate the rate of economic growth

Assign: Activity 11 in workbook. Read pages 105-118 in textbook.

Day 4

Describe the role of national income accounting in economics

Define GDP and GNP as measures of national income

Determine what counts and what does not count into GDP calculation

Differentiate between the various components of GDP

Slide Show

Assign: Activity 12 Macro Read pages 118-121 in textbook Day 5

Evaluate the usefulness of GDP as a measure of well being and national income. (Slide Show)

Power Point Show

Assign: Read pages 129-134 in textbook Day 6

Define and provide examples of the main types of Unemployment (Slide Show: Unemployment

Information)

Analyze the causes of major types of unemployment.

Assign: Activity 16 Macro Read pages 134-142 in textbook

Day 7

Define inflation and consider it’s significance in the economy

Analyze and evaluate the reasons that inflation hurts some and helps others.

Define and construct a price index from raw data, after construction use the index to calculate

inflation.

Assign: Activity 13 Macro and complete “Inflation: Who wins and who loses” in packet.

Day 8

Differentiate between Real and Nominal values of GDP and interest rates.

Differentiate between demand pull and cost push inflation.

Recognize some limits of the CPI as a measure of inflation.

Assign: Activity 15 Macro Read pages 125-129 in textbook

Day 9

Review the answers to Activity 15 as a review of the CPI limitations and winners/losers from

inflation

Assign: Study Inflation Data in the packet and answer accompanying questions.

Day 10

Discuss student answers to questions as a final analysis of current economic data

Assign: NONE

Day 11

Define the business cycle and identify its four phases.

Characterize inflation and unemployment in each phase of the cycle.

Given data, identify economic periods as phases of the business cycle.

Assign: Activity 17 Macro

Day 12

Review for Unit 3 Examination, make sure to finish VOCABULARY SHEET

Day 13:

Unit 3 Examination

**Textbook readings in the unit are a little out of order and are put together by pages due to the difference in when we cover ideas in class

and where they are presented in the book.

INFLATION: WHO WINS AND WHO LOSES

Inflation, or a general rise in the overall price level, is one of the more important concepts in all of

economics. The primary concern of economists as it relates to inflation is the effect that inflation has on the

money value of goods and services over time. In addition to changing the prices of goods and services, inflation

also affects the value of the money that we save for future use, be it in the bank or in a piggy bank hidden

around the house. The following problem will illustrate the how inflation can change the value of things, and at

the same time, create arbitrary "winners" and "losers" in the economy. Take a few minutes to complete the

following problem, and you will see exactly why we should be concerned with inflation.

ASSUMPTIONS:

The current rate of inflation is 7%

The bank is currently giving 3% interest for you to deposit your money

The bank is currently charging 6% interest to borrow money to make a purchase

Assume that you have $1000, and are currently debating whether to buy a new TV or to deposit the

money in the bank to collect interest. In making your decision you are aware of the interest rates in the

market, and have three options:

OPTION # 1: You can either go out and buy the new TV for $1000, and have it to use now.

OPTION # 2: You can put your money in the bank, collect interest for a year, then buy the television.

OPTION # 3: You can keep your $1000 in a "rainy day" fund, borrow $1000 to buy the television now,

and pay the money to the bank over the next year.

1. Which option would you choose? Why this one?

2. How do expectations play a role in your decision making process?

3. How does the bank fare in all of this, no matter which option you choose?

4. Ultimately, who is hurt, and who is helped by inflation?

5. How might interest rates change to reflect the reality of inflation in this situation?

FORMULAS FOR AGGREGATE MACRO MEASURES

# OF UNEMPLOYED

1. UNEMPLOYMENT= ------------------------------ X 100

LABOR FORCE

# OF EMPLOYED

2. EMPLOYMENT RATE= ------------------------------ X 100

CIVILIAN NON INSTITUTIONAL

POPULATION OVER 16

CURRENT YEAR

PRICE

3. PRICE INDEX= ---------------------------- X 100

BASE YEAR PRICE

CPI Y2 – CPI Y1

4. % CHANGE IN PRICES= -------------------------------- X 100

CPI Y1

5. REAL GDP= NOMINAL GDP

--------------------- X 100

CPI

RGDP Y2- RGDP Y1

6. % CHANGE IN REAL GDP= --------------------------- X 100

RGDP Y1

AP ECONOMICS UNIT 3 VOCABULARY

1. Microeconomics

2. Macroeconomics

3. Aggregation

4. Unemployment

5. Labor Force

6. Underemployed

7. Discouraged Worker

8. Gross Domestic Product

9. Final Goods and Services

10. Intermediate goods and Services

11. Real GDP

12. Nominal GDP

13. Consumption

14. Investment

15. Government Spending

16. Net Exports (X-M)

17. Inflation

18. Deflation

19. Price Level

20. CPI

21. Real Interest Rates

22. Nominal Interest Rates

23. Purchasing Power

24. Cost Push Inflation

25. Demand Pull Inflation

26. Business Cycle

27. Trough

28. Expansion

29. Peak

30. Recession

THE TIPS AND QUESTIONS ON THIS PAGE ARE FOR THE CPI DATA

TIPS FOR INTERPRETING DATA:

A. The first column on the data sheet tells you the relative importance of each category of item included in the

CPI. For example: If you look at the line labeled “food and beverages” you will see the number 16.198.

This means that of the total CPI market basket, 16.198% of the total is food and beverage.

B. In columns 2 and 4 you will see “Unadjusted Indexes” for August 2011 and August of 2012. These are

index numbers which you will use to calculate percentage changes in prices over this ONE YEAR period.

C. I have placed marks beside the lines of the CPI components that I want you to pay attention to, there are 8

total lines that I want you to focus on. When asked to comment on WEIGHT VALUES or PERCENTAGE

CHANGES, include answers for ALL 8 LINES!!!!!

D. The index numbers in the current year (columns 2 and 3) are calculated on a base year that average value of

the dollar for the years 1982-1984.

QUESTIONS FOR CPI DATA:

1. In which categories were prices increasing between Jul. and Aug.? In which categories were they

decreasing?

2. Based on the weights given to each category in column , would you say that this index is an accurate

measure of the cost of living? Explain

3. Are their any weights in any of the categories that you would change to better reflect where people actually

spend their money? If so which ones and to what percentages?

4. Go to the last two rows at the bottom of the second page. How much purchasing power does a current

dollar have compared to the 82-84 dollar? How much compared to the 1967 dollar? Is this surprising?

5. IDENTIFY at least 5 (FIVE) things that you find interesting after looking more closely at all the data on the

pages. Expand beyond the listed categories for this one!

Table A. Major indicators of labor market activity, seasonally adjusted

(Numbers in thousands)

_______________________________________________________________________________

| | |

| Quarterly | |

| averages | Monthly data | Aug.-

Category |_________________|__________________________| Sept.

| | | | | | change

| II | III | July | Aug. | Sept. |

| 2009 | 2009 | 2009 | 2009 | 2009 |

_________________________|________|________|________|________|________|________

|

HOUSEHOLD DATA | Labor force status

|_____________________________________________________

| | | | | |

Civilian labor force ....| 154,912| 154,362| 154,504| 154,577| 154,006| -571

Employment ............| 140,591| 139,518| 140,041| 139,649| 138,864| -785

Unemployment ..........| 14,321| 14,844| 14,462| 14,928| 15,142| 214

Not in labor force ......| 80,547| 81,730| 81,366| 81,509| 82,316| 807

|________|________|________|________|________|________

|

| Unemployment rates

|_____________________________________________________

| | | | | |

All workers .............| 9.2| 9.6| 9.4| 9.7| 9.8| 0.1

Adult men .............| 9.7| 10.1| 9.8| 10.1| 10.3| .2

Adult women ...........| 7.4| 7.7| 7.5| 7.6| 7.8| .2

Teenagers .............| 22.7| 25.1| 23.8| 25.5| 25.9| .4

White .................| 8.4| 8.8| 8.6| 8.9| 9.0| .1

Black or African | | | | | |

American ............| 14.9| 15.0| 14.5| 15.1| 15.4| .3

Hispanic or Latino | | | | | |

ethnicity ...........| 12.0| 12.7| 12.3| 13.0| 12.7| -.3

|________|________|________|________|________|________

|

ESTABLISHMENT DATA | Employment

|_____________________________________________________

| | | | | |

Nonfarm employment.......| 132,125|p131,189| 131,411|p131,210|p130,947| p-263

Goods-producing (1)....| 19,041| p18,586| 18,713| p18,581| p18,465| p-116

Construction ........| 6,303| p6,101| 6,162| p6,102| p6,038| p-64

Manufacturing .......| 12,008| p11,775| 11,836| p11,770| p11,719| p-51

Service-providing (1)..| 113,084|p112,603| 112,698|p112,629|p112,482| p-147

Retail trade (2)...| 14,814| p14,728| 14,747| p14,738| p14,700| p-39

Professional and | | | | | |

business services .| 16,731| p16,609| 16,624| p16,605| p16,597| p-8

Education and health | | | | | |

services ..........| 19,213| p19,294| 19,262| p19,308| p19,311| p3

Leisure and | | | | | |

hospitality .......| 13,180| p13,165| 13,177| p13,163| p13,154| p-9

Government ..........| 22,585| p22,445| 22,475| p22,456| p22,403| p-53

|________|________|________|________|________|________

QUESTIONS FOR UNEMPLOYMENT DATA

TIPS FOR INTERPRETING DATA:

1. HOUSEHOLD DATA:

A. Under household data there are two categories, each of which is divided up into several sub-categories:

Labor Force Status: This category gives us information regarding the size of the labor force; it then

breaks the labor force down into the employed, the unemployed, and not in the labor force. These

numbers are used to calculate the actual unemployment rate.

Unemployment Rates: This tells us the percentage of people who are officially unemployed; then

breaks it down into several sub categories (Gender, race, ethnicity, etc.)

2. ESTABLISHMENT DATA:

A. Under establishment data there is one main category (Non Farm Labor), two sub-categories, each of

which has several under-categories.

Goods Producing: These are jobs that create some sort of tangible good that we can purchase at

a local retail outlet. Under this are two main sub-groups. Construction, which produces

buildings and other structures. Manufacturing, which produces actual goods that we want or

need for everyday life

Service Providing: These are jobs that create a service that we use in everyday life such as

doctors, accountants, waiters/waitresses, etc. There are several sub-groups under this category,

each of which is self explanatory.

QUESTONS FOR THE DATA:

1. What happened to the labor force between August and September? What happened to the overall

unemployment rate from August to September? Based on numbers, why did this happen to the

unemployment rate?

2. Which sub groups have the lowest unemployment rate? Which have the highest? Why do you think

these trends among sub-groups exist, and why are some groups so much higher than others?

3. Within employment data: Which sub-groups have the largest number of employees?

4. Think of America 100 years ago and compare it to today. How do you think the mix of job types and

employment levels would be different 100 years ago? Why?

5. After studying the data, what stats and numbers do you find the most surprising or interesting? Why?

U.S. MISERY INDEX

The misery index was initiated by economist Arthur Okun, an adviser to President Lyndon Johnson in the

1970's. It is simply the unemployment rate added to the inflation rate. It is assumed that both a higher rate of

unemployment and a worsening of inflation both create economic and social costs for a country. A combination

of rising inflation and more people of out of work implies a deterioration in economic performance and a rise in

the misery index.

Misery index - era by U.S president

Index = Unemployment rate + Inflation rate

Rank President Time

Period Average Low High Start End Change

5 Harry Truman 1948–1952 7.88 Dec 1952 =

3.45

Jan 1948 =

13.63 13.63 3.45 -10.28

1 Dwight D.

Eisenhower

1953–1960 6.26 Jul 1953 =

2.97

Apr 1958 =

10.98 3.28 7.96 4.68

3 John F. Kennedy 1961–1962 7.14 Jul 1962 =

6.40 Jul 1961 = 8.38 8.31 6.82 -1.49

2 Lyndon B. Johnson 1963–1968 6.77 Nov 1965 =

5.70 Jul 1968 = 8.19 7.02 8.12 1.10

7 Richard Nixon 1969–1973 10.57 Jan 1968 =

7.80

Dec 1973 =

13.61 7.80 17.01 9.21

10 Gerald Ford 1974–1976 14.93 Dec 1976 =

12.66

Jan 1975 =

19.90 16.36 12.66 -3.70

11 Jimmy Carter 1977–1980 20.27 Apr 1978 =

12.60

Jun 1980 =

21.98 12.72 19.72 7.00

9 Ronald Reagan 1981–1988 11.19 Dec 1986 =

7.70

Sep 1981 =

19.33 19.99 9.72 -10.27

8 George H. W. Bush 1989–1992 9.68 Sep 1989 =

9.64

Nov 1990 =

12.47 10.07 10.30 +0.23

4 Bill Clinton 1993–2000 8.80 Apr 1998 =

5.74

Jan 1993 =

10.56 10.56 7.29 -3.27

6 George W. Bush 2001–2008 8.10 Oct 2006 =

5.71

Aug 2008 =

11.47 7.93 7.29 -0.64

N/A Barack Obama

2009–

Present

8.00 Incomplete

data

July 2009 =

7.30

Feb 2009 =

8.34 7.63

N/A (8.92 Aug

2010)

1.29

USE THE DATA ABOVE AND BELOW TO ANSWER THE FOLLOWING QUESTIONS:

1. How do you think the “Misery Index” got its name, and is it a fitting one for the index?

2. What were the worst and best DECADES for the misery index in the last 45 years?

3. Which Presidents have enjoyed (?) the best and worst misery index numbers in the last 45 years?

4. Why might the misery index numbers be important in Presidential politics?

5. Based on the election/re-election of the above listed Presidents, want correlation can you make between the misery index and the chances of a President being re-elected?

6. Do you think that a President should be judged by the misery index? Why or why not?