Economic Stability. Economic Indicators Business cycle Durable goods purchase Housing starts ...

Economic StabilityEconomic Stability

Economic IndicatorsEconomic Indicators

Business cycle Durable goods purchase Housing starts Jobless claims Consumer price index, Real

GNP/GDP

Business cycle Durable goods purchase Housing starts Jobless claims Consumer price index, Real

GNP/GDP

Business cycleBusiness cycle

• Real GNP • Peak

Business activity is at it maximum, economy is close to full employment

Recession Total output of GNP declines

Trough Output and employment reach their lowest

level in the cycle Recovery

Output and employment expands to full employment

• Real GNP • Peak

Business activity is at it maximum, economy is close to full employment

Recession Total output of GNP declines

Trough Output and employment reach their lowest

level in the cycle Recovery

Output and employment expands to full employment

Durable goodsDurable goods

Big ticket items not including houses

Household appliances Automobiles Recreational vehicles

Big ticket items not including houses

Household appliances Automobiles Recreational vehicles

Housing starts Number of housing permits issued

Jobless claims Decreasing in claims=low

unemployment= economic growth

Housing starts Number of housing permits issued

Jobless claims Decreasing in claims=low

unemployment= economic growth

Index of leading economic indicators

Index of leading economic indicators

Real GDP Includes all final goods only Includes production within our country Includes foreign companies in our

country Consumer Price Index (CPI)

Measures the price of “market basket” of 30 specific goods that typical consumers purchase

Real GDP Includes all final goods only Includes production within our country Includes foreign companies in our

country Consumer Price Index (CPI)

Measures the price of “market basket” of 30 specific goods that typical consumers purchase

Why is CPI better than GDP?

Why is CPI better than GDP?

It ties to common, everyday products people buy

Affect many people These payments increase when

the CPI increases

It ties to common, everyday products people buy

Affect many people These payments increase when

the CPI increases

What goods and services does the CPI cover?

What goods and services does the CPI cover?

The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

* FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, service meals and snacks)

* HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

* APPAREL (men's shirts and sweaters, women's dresses, jewelry)

* TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

* FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, service meals and snacks)

* HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

* APPAREL (men's shirts and sweaters, women's dresses, jewelry)

* TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

* RECREATION (televisions, pets and pet products, sports equipment, admissions);

* EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);

MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

* RECREATION (televisions, pets and pet products, sports equipment, admissions);

* EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);

* * OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services.

* * OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services.

However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.

The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.)

However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.

The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.)

Problems with Gross Domestic Product

Problems with Gross Domestic Product

•Nominal GDPGDP reported in current prices

•Inflations can distort GDPReal GDP or the GDP expressed in constant dollars

•Nominal GDPGDP reported in current prices

•Inflations can distort GDPReal GDP or the GDP expressed in constant dollars

GDP does not account for population change Per capita GDP (GDP/total population)

Quality changes are not considered in GDP

Used goods are not included in the GDP

GDP does not account for population change Per capita GDP (GDP/total population)

Quality changes are not considered in GDP

Used goods are not included in the GDP

GDP does not include non market production

GDP does not include illegal drugs

GDP does include harmful goods and services

GDP does not include non market production

GDP does not include illegal drugs

GDP does include harmful goods and services

GDP expenditure approach

GDP expenditure approach

GDP=C+I+G+NX

C= consumption expenditures by households

I= Spending for new capital good G= Government purchases of goods

and services NX= net exports (E-I)

GDP=C+I+G+NX

C= consumption expenditures by households

I= Spending for new capital good G= Government purchases of goods

and services NX= net exports (E-I)

Factors which show returns from GDP

Factors which show returns from GDP

Land rent

Labor Wages and salaries

Capital interest

Management profits

Land rent

Labor Wages and salaries

Capital interest

Management profits

UnemploymentUnemployment

Unemployment rate Divide unemployed workers by

the total labor force % of those in the labor force, over

16, actively seeking work but unable to find jobs.

Unemployment rate Divide unemployed workers by

the total labor force % of those in the labor force, over

16, actively seeking work but unable to find jobs.

Down fall of unemployment rate

Down fall of unemployment rate

Discouraged workers People who say they are

unemployed, but not really looking for a job

Statistics will show a large increase in total employment, but the unemployment rate will increase at the same time.

Discouraged workers People who say they are

unemployed, but not really looking for a job

Statistics will show a large increase in total employment, but the unemployment rate will increase at the same time.

Types of unemploymentTypes of unemployment

Frictional Temporary, unavoidable

unemployment

Seasonal Spend part of the year in

VOLUNTARY unemployment

Frictional Temporary, unavoidable

unemployment

Seasonal Spend part of the year in

VOLUNTARY unemployment

Types of UnemploymentTypes of Unemployment

Structural Lack of skills to fill the jobs

Cyclical Economy-wide shortage of jobs

Structural Lack of skills to fill the jobs

Cyclical Economy-wide shortage of jobs

Full EmploymentFull Employment

Natural rate of unemployment Frictional and structural

unemployment are expected

Actual rate of unemployment = natural rate this is said to be considered FULL EMPLOYMENT

Natural rate of unemployment Frictional and structural

unemployment are expected

Actual rate of unemployment = natural rate this is said to be considered FULL EMPLOYMENT

Fiscal PolicyFiscal Policy

The use of government ( congress and

the President) spending and taxation to stabilize the economy

The use of government ( congress and

the President) spending and taxation to stabilize the economy

Expansionary Fiscal PolicyExpansionary Fiscal Policy

What is happening in a recession? Consumer spending? Business spending and investments? GDP?

What can the government do? Increase government spending and /or tax reduction.

What is happening in a recession? Consumer spending? Business spending and investments? GDP?

What can the government do? Increase government spending and /or tax reduction.

Contractionary Fiscal Policy

Contractionary Fiscal Policy

What is happening in a Inflationary time?

Consumer spending? Business spending and investments? GDP?

What can the government do? Reducing government spending and/or increasing

taxes .

What is happening in a Inflationary time?

Consumer spending? Business spending and investments? GDP?

What can the government do? Reducing government spending and/or increasing

taxes .

Automatic StabilizersAutomatic Stabilizers

Personal income tax Nations unemployment Welfare benefits

Personal income tax Nations unemployment Welfare benefits

Flaws of fiscal policyFlaws of fiscal policy

Government revenues decrease with tax reduction

Because of this government may borrow from the public and crowd the market

Problem if government prints currency

Government revenues decrease with tax reduction

Because of this government may borrow from the public and crowd the market

Problem if government prints currency

Monetary PolicyMonetary Policy

Government (Federal Reserve System) affects interest rates and the quantity of money in circulation

Government (Federal Reserve System) affects interest rates and the quantity of money in circulation

Monetary policy controls the money supply


Open- market operations Purchase and sale of government securities

When OMC directs FED to buy government securities from banks and other investors it injects money into economy.

When OMC directs FED to sell government securities from banks and other investors it takes money out of the economy.

Open- market operations Purchase and sale of government securities

When OMC directs FED to buy government securities from banks and other investors it injects money into economy.

When OMC directs FED to sell government securities from banks and other investors it takes money out of the economy.



Discount rate The interest rate the FED’s charge

banks and other financial institutions on loans

Higher interest rates discourage borrowers

Lower interest rate encourages borrowers

Discount rate The interest rate the FED’s charge

banks and other financial institutions on loans

Higher interest rates discourage borrowers

Lower interest rate encourages borrowers



Reserve Ratio The percentage of deposits that

banks must hold in reserve

Higher percentage rate less money to loan

Lower percentage rate more money to loan

Reserve Ratio The percentage of deposits that

banks must hold in reserve

Higher percentage rate less money to loan

Lower percentage rate more money to loan

Limitations of Monetary Policy

Limitations of Monetary Policy

During rapid expansion Fed may try to hold down spending but consumers and business continue to spend

During recession Fed may try to inject money and consumers and businesses may be afraid to borrow

During rapid expansion Fed may try to hold down spending but consumers and business continue to spend

During recession Fed may try to inject money and consumers and businesses may be afraid to borrow

Monetary vs. Fiscal Policy thought


Adam Smith “The best thing government could do to help

the economy was to keep its hands off. (Invisible hand) The forces of supply and demand would balance.

John Maynard Keynes It is possible for total supply and demand to be

at equilibrium at a point well under full employment. Unemployment would continue unless government stepped in to spend money on public works.

Adam Smith “The best thing government could do to help

the economy was to keep its hands off. (Invisible hand) The forces of supply and demand would balance.

John Maynard Keynes It is possible for total supply and demand to be

at equilibrium at a point well under full employment. Unemployment would continue unless government stepped in to spend money on public works.



Monetarists Favor the monetary side of the

picture

Keynesians Favor the fiscal side of the picture

Monetarists Favor the monetary side of the

picture

Keynesians Favor the fiscal side of the picture

Monetary vs. Fiscal Policy Monetary vs. Fiscal Policy

Fiscal policy Difficult to implement

Monetary policy Can be changed or adjusted

quickly

Fiscal policy Difficult to implement

Monetary policy Can be changed or adjusted

quickly

Economic Stability. Economic Indicators Business cycle Durable goods purchase Housing starts ...

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