1 Sect. 3 - Measurement of Economic Performance Module 10 - The Circular Flow & GDP What you will learn: How economists use aggregate measures to track the performance of the economy The circular flow diagram of the economy What gross domestic product, (GDP) is and the three ways of calculating it

2 Sect. 3 - Measurement of Economic Performance Module 10 - The Circular Flow & GDP National Accounts - The Bureau of Economic Analysis keeps track of consumer spending, producer sales, investment, govt. spending, etc. Circular Flow Diagram - Representation of the Macro-economy showing the flow of money, goods & services, and factors of production Households - Person or group who share income & purchase goods Firms - Business that produces goods and services

3 Product Markets - Where goods and services are bought and sold Factor Markets - Where factors of production (resources) are bought and sold

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6 Product Markets - Where goods and services are bought and sold Factor Markets - Where factors of production (resources) are bought and sold - Expanded Circular Flow Model includes the 4 sectors of Households, Firms, Government, World

7 Circular Flow Video

8 Product Markets - Where goods and services are bought and sold Factor Markets - Where factors of production (resources) are bought and sold - Expanded Circular Flow Model includes the 4 sectors of Households, Firms, Government, World

9 Gross Domestic Product (GDP) - Total Value of all final goods and services produced in the economy during a given year (currently about $16 trillion) Does not include intermediate goods Example: - Car or computer are final goods - Steel or computer chip are intermediate goods 1) GDP as value of Final Goods and Services - Total value of all final goods and services produced by firms Value Added - The value of a good minus the cost of inputs to produce it

10 2) GDP as Spending - Total of all domestic spending on final goods and services GDP = C + I + G + X - IM (Consumer + Investments + Government + Net Exports) 3) GDP as Factor Income - Total income earned by factors of production = Labor + Interest + Rent + Profit of shareholders

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14 2) GDP as Spending - Total of all domestic spending on final goods and services GDP = C + I + G + X - IM (Consumer + Investments + Government + Net Exports) 3) GDP as Factor Income - Total income earned by factors of production = Labor + Interest + Rent + Profit of shareholders GDP

15 Module 11 - Real Gross Domestic Product What you will learn: The difference between Real GDP and Nominal GDP Why Real GDP is the appropriate measure of economic activity

16 Module 11 - Real Gross Domestic Product Aggregate Output - The total quantity of final goods and services produced in the economy - as aggregate output rises, GDP rises Nominal GDP - GDP measured in current prices to show current year output - Can be misleading due to inflation Real GDP - GDP adjusted for changing prices by using prices of a base year

BasketballsGallons of MilkHaircuts YearPrice Number sold Price Number sold Price Number sold 2000$ $ $ $ $ $ $ $ $15300 Nominal GDP: 2000 _______ 2004 _______ 2008 _______ Real GDP: 2000 _______ 2004 _______ 2008 _______ $7980 $10,935$11,950 $11,675$15,230 x ++ x x

BasketballsGallons of MilkHaircuts YearPrice Number sold Price Number sold Price Number sold 2004$ $ $ $ $ $15265 Nominal GDP: 2004 _______ 2008 _______ Real GDP: 2004 _______ 2008 _______ $10,935$10,574 $11,675$13,499

20 Module 11 - Real Gross Domestic Product Aggregate Output - The total quantity of final goods and services produced in the economy - as aggregate output rises, GDP rises Nominal GDP - GDP measured in current prices to show current year output - Can be misleading due to inflation Real GDP - GDP adjusted for changing prices by using prices of a base year

23 GDP Per Capita - GDP per person (GDP divided by population) - Used to compare nation to nation GDP Real GDP per Capita

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25 RFK on GDP

26 Module 12 - The Meaning and Calculation of Unemployment What you will learn: How unemployment is measured How the unemployment rate is calculated The significance of the unemployment rate for the economy The relationship between the unemployment rate and economic growth

27 Module 12 - The Meaning and Calculation of Unemployment Unemployed - Those who are not currently employed but are looking Labor Force - All people that are employed and unemployed - Does not include all people Bureau of Labor Statistics (BLS) compiles information on the labor force

28 Who are NOT part of the Labor Force?

29 Under 16

30 Have given up looking for work

31 Full time students

32 Stay at home parents

33 Retirees

34 Military personnel

35 Module 12 - The Meaning and Calculation of Unemployment Unemployed - Those who are not currently employed but are looking Labor Force - All people that are employed and unemployed - Does not include all people Bureau of Labor Statistics (BLS) compiles information on the labor force

36 Unemployment Rate - % of the Labor Force that is unemployed - good indicator of job market condition increases during recession - decreases during expansion Number of unemployed 7 million Labor force (Empl. + Unempl.) 150 million =.046 x 100 = 4.6% Labor Force Participation Rate - % of working age population that is in the labor force Labor Force 150 million Population over million =.75 x 100 = 75% X 100

Discouraged Worker - Those that have given up looking for work - Do not count in unemployment rate Underemployed - When workers are working part time when they desire full time - or in a job for which they are overqualified

Discouraged Worker - Those that have given up looking for work - Do not count in unemployment rate Underemployed - When workers are working part time when they desire full time - or in a job for which they are overqualified Growth and Unemployment - Relationship between unemployment and economic growth - GDP up = unemployment down

Discouraged Worker - Those that have given up looking for work - Do not count in unemployment rate Underemployed - When workers are working part time when they desire full time - or in a job for which they are overqualified Growth and Unemployment - Relationship between unemployment and economic growth - GDP up = unemployment down

42 Module 13 - Causes and Categories of Unemployment What you will learn: Three different types of unemployment and their causes The factors that determine the natural rate of unemployment

43 Module 13 - Causes and Categories of Unemployment Frictional Unemployment - Unemployment that occurs when people are looking for work - laid off, changing jobs, just out of school, returning to work Structural Unemployment - When workers’ skills do not match those needed as the job market changes - new technologies, consumer demand shift, outsourcing / offshoring, lack of proper education

44 Structural Unemployment

45 Module 13 - Causes and Categories of Unemployment Frictional Unemployment - Unemployment that occurs when people are looking for work - laid off, changing jobs, just out of school, returning to work Structural Unemployment - When workers’ skills do not match those needed as the job market changes - new technologies, consumer demand shift, outsourcing / offshoring, lack of proper education

46 Minimum Wage - Fair Labor Standards Act Established minimum wage Minimum price an employer can pay a worker for one hour of labor - Adds to Unemployment

0 Quantity of Workers Wage $ $6.00 $ Demand for Labor Supply of Labor Minimum Wage

48 Minimum Wage - Fair Labor Standards Act Established minimum wage Minimum price an employer can pay a worker for one hour of labor - Adds to Unemployment Labor Unions - Organization of workers that use “Collective Bargaining” to gain higher than equilibrium wages - Adds to Unemployment Collective bargaining

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50 Minimum Wage - Fair Labor Standards Act Established minimum wage Minimum price an employer can pay a worker for one hour of labor - Adds to Unemployment Labor Unions - Organization of workers that use “Collective Bargaining” to gain higher than equilibrium wages - Adds to “Structural Unemployment” Natural Rate of Unemployment - Unemployment rate caused by Frictional + Structural unemployment

51 Cyclical Unemployment - Unemployment that follows phases of “business cycle” - Actual Unemployment Rate = Natural + Cyclical Unemployment Full Employment is when there is no cyclical unemployment

Quick Check: Frictional Unemployment - Structural Unemployment - Cyclical Unemployment - A) Unemployment that follows phases of “business cycle” B) Unemployment that occurs when people are looking for work C) When workers’ skills do not match those needed as the job market changes B A C

53 Module 14 - Inflation What you will learn: The economic costs of inflation How inflation creates winners and losers Why policy makers try to maintain a stable rate of inflation The difference between real and nominal values of income, wages, and interest rates The problems of deflation and disinflation

54 Module 14 - Inflation Inflation ESC&adjust_yr=2013&p=.htm

55 Module 14 - Inflation Real Wages - In past 20 yrs. “real wages” have actually fallen due to inflation Real Income - Income divided by the price level *(mod. 15) - level of prices doesn’t matter - rate of change of prices does

56 Inflation Rate - The percent increase in the level of prices per year Inflation Rate = X Avg. U.S. inflation is around 3 - 4% per year Difference in Price Level Original Price level

59 Inflation Rate - The percent increase in the level of prices per year Inflation Rate = X Avg. U.S. inflation is around 3 - 4% per year Shoe Leather Cost - Increased cost of transactions caused by inflation - not a significant issue in U.S. Menu Costs - Cost to change posted prices frequently during period of High inflation Difference in Price Level Original Price level

Unit of Account Costs - Costs due to inflation making money a less reliable unit of measure Ex: Landlord loses money if your rent stays the same as inflation increases Taxes due on capitol gains that were less than inflation Nominal Interest Rate - Interest rate actually paid for a loan or received in interest Real Interest Rate - Nominal interest rate adjusted for inflation - Nominal Interest Rate minus Inflation Rate Ex: NIR of 8% - Inflation Rate of 5% = Real Interest of 3%

61 Module 15 - Measurement and Calculation of Inflation What you will learn: How the inflation rate is measured What a price index is and how it is calculated The importance of the consumer price index

62 Module 15 - Measurement and Calculation of Inflation Aggregate Price Level - A measure of the overall level of prices in the economy Market Basket - A group of goods and services in eight categories purchased by “typical” family - updated every ten years

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64 Module 15 - Measurement and Calculation of Inflation Aggregate Price Level - A measure of the overall level of prices in the economy Market Basket - A group of goods and services in eight categories purchased by “typical” family - updated every ten years Consumer Price Index - (CPI) Measure of the cost of the “market basket” of goods - Calculated each month by the Bureau of Labor Statistics

65 Calculating CPI - Current cost of “market basket” base period cost - Current base period is (CPI = 100) Example: $360 Base - $200 Inflation Rate - Inflation rate is percent change from year to year difference in CPI original CPI Example: 80 divided by 100 =.80 X 100 = 80% Avg. annual Inflation rate = 80% divided by 30 yrs. = 2.6% = 1.80 x 100 = 180 x 100 X 100

Quick Check ✔ 1) Calculate 2012 CPI Current cost of “market basket” base period cost $350 Base - $ X 100 = 175 2) Calculate Inflation rate from 2012 to 2013 (2013 CPI = 180) change in CPI original CPI =.028 X 100 = 2.8 CPI =X 100 Inflation Rate =

Quick Check ✔ 1) Calculate 2011 CPI $340 Base - $ X 100 = 170 2) Calculate Inflation rate from 2011 to 2012 (2012 CPI = 175) =.029 X 100 = 2.9

Producer Price Index - (PPI) Cost of a typical basket of goods purchased by producers - electricity, steel, coal, raw materials, etc. - used as an early warning sign of inflation GDP Deflator - Another price measure - Nominal GDP Real GDP X 100

69 The End