Longwood University Personal Finance Scott Wentland Longwood University 201 High Street Farmville, VA 23901

Longwood University Macroeconomic Indicators Part 1: GDP

Longwood University Overview of Macroeconomics What do we mean by “the economy”? – How do we measure the national economy’s health? GDP Unemployment Inflation (CPI) What is the source of economic booms and busts? – Business cycle Strategies for achieving national economic goals – Laissez faire vs. intervene with government policy?

Longwood University The Economy What is “the economy”? – To this point, we’ve talked about “markets” From a “micro” standpoint, talking about specific markets – “The economy” generally refers to the “macroeconomy,” which is all market activity within a country – How might we measure this?

Longwood University Gross Domestic Product Gross domestic product (GDP)— the market value of all final goods and services produced within a country in a year. – Real GDP: the measure has been adjusted for inflation (more on inflation in a later lecture) GDP per capita is GDP divided by a country’s population.

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GDP GDP is a Market Value measure… – Market value solves two problems: How do you add up different goods and services and get a number that makes sense? Some goods are more important than others; e.g., producing two houses is more important than producing two packs of gum. – Solution: Multiply the quantities of final goods and services by their market prices and add up these values.

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GDP: Why is it important? GDP is a measurement of the entire economy – the market value of all final goods and services produced within a country in a year. – It is also a measure of the entire income of a country Why? For every good or service purchased, there is someone on the other end of that transaction receiving that money as income Measuring all purchases = measuring all income GDP per capita is like “income per person” – Helps us understand the health of the economy Is it growing? Shrinking?

Longwood University Unemployment Is GDP the only measure of our economy’s health? – We care about our nation’s income (and our own income!), but don’t we also care about who has job? Next part: We also measure employment and unemployment

Longwood University Macroeconomic Indicators Part 2: Unemployment and the Business Cycle

Longwood University Unemployment & Recessions The macroeconomy is most on our minds when times are tough – Slow or even negative GDP growth – People lose their jobs  unemployment – If this occurs for a prolonged period of time, we call this a recession The economy eventually recovers… – Economists have noted that this tends to be cyclical, calling this process a business cycle This lecture: unemployment, recessions, and the business cycle

Longwood University Unemployment Measuring Unemployment – In the US, measured by the Bureau of Labor Statistics – A person is counted as unemployed if they… Are 16 years of age or older. Are not institutionalized (e.g., not in prison). Are not in the military. Are looking for work. – The unemployment rate is the % of the labor force without a job, given by:

Longwood University Unemployment: How Good Is It? How Good an Indicator Is the Unemployment Rate? – Does not account for discouraged workers. These are workers that have given up looking for work who would still like to have a job. For long recessions the number of discouraged workers will be higher. – Implication: In recessions that last a long time, the unemployment rate is not as good an indicator. – Doesn’t measure the quality of jobs or how well people are matched to their jobs. Examples: – A taxi driver with a PhD in chemistry is counted as fully employed. – A worker with a part-time job who wants to work full- time is counted as fully employed.

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The Business Cycle In the US, usually our economy (GDP) grows by 2-3% each year Usually our unemployment rate around 5% or 6% or so Both GDP and the unemployment rate tend to fluctuate (usually around the same time)

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The Business Cycle When GDP and unemployment are around “normal” rates, we call this a “boom” or economic expansion When GDP falls and unemployment rises (usually together), we call this a “bust” or recession or contraction The “booms and busts” our economy experiences is called the business cycle

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The Business Cycle Recessions, as a rule of thumb, are generally two quarters (6 months) of negative GDP growth Officially, the dating of a recession is done by the National Bureau of Economic Research (NBER), which has a group of expert economists studying all kinds of macroeconomic data (not just GDP and unemployment) – The average duration of the 11 recessions between 1945 and 2001 is 10 months, – Compared to 18 months for recessions between 1919 and 1945, and 22 months for recessions from 1854 to 1919

Longwood University What Causes the Business Cycle? Most of the macroeconomics field is concerned with exactly this question, what causes fluctuations in unemployment, inflation, and reduced economic growth? – May vary depending on the nature of the recession – Supply-side explanations (referring to aggregate supply conditions) – Demand-side explanations (referring to aggregate demand conditions) Economists have different models, or ways of thinking about the economy – Depending on which model you use, you may see the data differently – More on this in a full Principles of Macroeconomics course…

Longwood University What to do? Economists not only view the causes of recessions differently, but we also disagree about what to do about them – Laissez faire approach The government leaves the market alone, more or less Lets markets find a new equilibrium and self-correct – Interventionist approach The government should actively try to “smooth out” the business cycle How? – Fiscal policy (Congress, the President, and the federal budget) – Monetary policy (the Federal Reserve) » More on all of the above in later lectures

Longwood University What to do? Critiques – Laissez faire approach The correction process may take too long (or not occur) There may be too much suffering, and something should be done May not be equitable – Interventionist approach There is a lot of disagreement about how to intervene (e.g. how much? And in what ways? Fiscal policy? Monetary policy? Which policy?) What if the cure is worse than the disease? – Macroeconomics is complex, how do we know we can get it right? Most economists advocate some form of intervention, the difference is usually what and how much – There can be very large differences – More on this in a Principles of Macroeconomics course…

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