Macroeconomics

BY Dan Lapidus

Macroeconomic Issues

• There are 3 major components to measuring macroeconomic output

• Unemployment- the percentage of the labor force who would like to work but cannot find a job

• Inflation- when the price of consumables goes up uniformly• GDP- Gross Domestic Product, the value of all final goods and

services produced, in an economy, over a fixed period of time

Unemployment

• The definition of unemployment is on the previous slide, if you did not get it copy it from someone else

• The labor force is comprised of all individuals who are employed or unemployed

• Figure 35 in your packet charts the unemployment rate since the turn of the 20th century

• You will notice firstly that the unemployment rate is never zero. This reflects the changing fortunes of industry and the continual entry of new job seekers into the labor force.

• You will also observe that the unemployment rate was 5% in 1900 and in 2008 had only increased slightly; this indicates that whilst there were huge jumps in the 30s and 70s and in the mid-80s there is nothing to indicate a long term increase.

Inflation

• There was a definition of inflation on the first slide, copy if you haven’t already.

• Inflation reduces the purchasing power of regular consumers

• Figure 36 in your packet shows the inflation rate since 1901

• One thing to notice is that all changes in inflation are short-term the inflation rate in 2006 was roughly the same as in 1901

• There are a few noticeable stalactites and stalagmites on this graph

• These changes are a result of hyper inflation

• Hyperinflation is a result of an increase in nominal GDP (GDP calculated in current year prices instead of using a base year…will talk about more later) without a corresponding increase in output.

• Deflation which occurred in the early-20s and early-30s is quite rare in the developed world and that is when the real buying power of money increases.

GROSS DOMESTIC PRODUCT(über important the taking of notes is

recommended)

• Definition was on the first slide copy if you haven’t done so• GDP is the most important way or measuring macroeconomic

success• GDP was first developed by Simon Kuznets in 1934, he would

receive a Nobel Prize for his troubles in 1971.• GDP is measured by a formula indicated in your packet on page 68• The formula reads as follows C+I+G+NX=GDP• Where C is consumption, I is investment, G is government

spending and NX is net exports •

GDP Cont.

• The top of the right-hand column on page 67 discusses that one of the ways to measure GDP is Expenditures=Production

• The basic theory is that all goods which are produced are purchased then you can think of GDP as the total expenditures within a country.

• Economists divide purchasers into 4 categories: households, firms, government, and the foreign sector

• Correspondingly there are 4 categories of spending usually linked to one of the categories: consumption expenditures, this can be nondurable goods (food, clothing etc.), durables (house, car etc.) and services (intangible goods, education, legal services, etc.)

GDP Cont.

• Spending by firms on final goods comprises investment• Investment is further subdivided into business fixed investment

(factories, offices, machinery etc.), residential fixed investment (new homes and apartment buildings etc.), and inventories (company goods that haven’t been sold)

• In economics investment is used only to describe the purchase of new capital goods

• Government purchases of goods and services include, paying Mrs. Mal’s salary, paying of other workers (firefighters, cops and the like) and buying equipment for government agencies (such as buying fighter planes for the military)

GDP cont. (yes, I know it gets old)

• Net Exports is the difference between the value of domestically produced goods sold to foreigners, and the value of foreign-produced products purchased by domestic buyers (page 67 bottom right corner).

The two types of GDP (Groan) :((((

• There are two types of GDP: real GDP and nominal GDP• Real GDP, recall the definition of GDP, as a result of said definition

the resulting sum (GDP) depends on both the quantity of goods purchased, and their prices

• If you look at the top panel of figure 38 on page 68 you will notice that whilst GDP tripled, production only doubled

• Economists want to separate these two phenomena and they came up with real GDP

• Real GDP involves taking a year and basing production in subsequent years off of that year (we will call this the base year)

• Real GDP is useful in isolating change in production from change in price

The Two Types of GDP (Groan) :((((( Cont.

• If you look at figure 38 and take the prices in 2000 as the base year, then you calculate real GDP by taking 2005 production x 2000 prices of each good. Thus real GDP will increase by the same rate as prices

• Nominal GDP is simply GDP calculated with current year prices

The Cost of Living

• In order to measure inflation the USBLS came up with the Consumer Price Index (CPI)

• CPI calculation can be observed in Figure 39 on page 69• The CPI is measured by calculating the cost of basic consumption

goods called a market bundle.• The BLS conducts periodic surveys to determine the prices of these

goods and what they are.• CPI is calculated by the following formula CPI in year t=100x(cost of

bundle in year t)/(cost of bundle in base year)

GDP Deflator

• The GDP deflator measures the value of all new, domestically produced, final goods and services in an economy.

• GDP Deflator=100x(real GDP/Nominal GDP)• Measures relationship between real and nominal GDP

A Quick Revisiting of Unemployment

• To calculate the unemployment rate the BLS surveys 60,000 households and classifies all persons 16 or older as one of the following:– Employed- If that person worked for pay either full- or part-time

during the previous week or is on vacation or sick leave from a regular job.

– Unemployed- If that person did not work during the previous week but made some effort to find paid employment during the past four weeks.

– Out of the labor force- If that person did not work during the past week and did not actively seek work during the previous four weeks.

Types of Unemployment

• Frictional Unemployment is when people are in transition from job to job

• Structural unemployment is when available jobs do not line up with the skill set of workers or they don’t live near the vacancies

• Cyclical unemployment is similar to our current economic state and is when there are high layoffs and workers find it hard to get employed

Circular Flow (last slide)

• If you look at figure 42 on page 73 it shows how goods and capital move throughout the economy

• The faster money and goods can go the more economic growth is taking place