UNIT 4 Measuring the economy GDP, Unemployment, and Inflation Notes QOD: What do you think it means when an economy is “sick” and when it is “healthy?”

1st Economic Indicator - GDP Gross Domestic Product Market value of all final goods and services produced within a country during a given period of time. Excluded – intermediate goods, used and illegal goods

C (household consumption) + I (Business investment) + G (government purchases) + NX net exports (exports – imports) = GDP Calculating GDP

Practice Write C, I, G, EX, IM, or not included The U.S. Gov’t spends $5 billion to improve highways. Todd buys a new washing machine for his home. Judy buys a new computer for her engineering firm. Pfizer sells pharmaceuticals to a company in Germany. Bruce buys a Honda that was made in Japan. General Electric spends $10 million to build a new factory in New York. Lisa buys a 2009 Nissan Murano. The U.S. Gov’t pays your grandfather $500 as part of his Social Security benefits. Melissa pays her hair stylist $50 for a haircut. Widgets, Inc. buys new vans to update its aging delivery vehicles. Practice

MEASURING GDP Nominal – measures in current dollars What is the total amount produced and sold this year compared to last year? Real - measures in constant dollars (takes into account change in price – inflation) Have we really produced more or did prices go up?

How do we know if GDP has gone up, or if prices have gone up How do we know if GDP has gone up, or if prices have gone up? =compare real and nominal GDP Example: 2012: bag of chips = 4 for $1 100 students buy = $100 2013: bag of chips = 4 for $2 100 students buy = $200 Application

Measuring GDP continued… Per capita GDP – GDP/population “per person” One of the measures for a societies standard of living Quality of life – life expectancy, technological innovations, advancements in medicine, etc.

Duck Tales Inflation Lesson – YouTube What is the moral of the cartoon?

Moral of the cartoon More money printed and in circulation decreases the value of it, causing prices to go up.

2nd Economic Indicator - Inflation rate Percentage increase in the average price level of goods and services from one month or year to the next. Creeping (slightly increasing) inflation is a good thing! Shows people have money and are spending it! Cartoon shows hyperinflation Filling for a cavity = $40,000

Measuring inflation Consumer price index a.k.a. cost-of- living measure Measures change in prices of “market basket” of consumer goods and services Largest expense = Housing 42% (rent or mortgage, property taxes, heat, electricity, furniture) Source – Bureau of Labor Statistics

Nominal vs. real Cost-of-living Wages Do things cost more now than they did 50 years ago? http://www.bls.gov/data/inflation_calculato r.htm

Answer Many times – NO Why? Adjust for inflation Ex. 1958 – pair of shoes $4, wages $2/hr. 2008 – $40, wages $20/hr.

Reasons for inflation Increase in money supply Demand-pull – increase in overall demand Cost-push – rising costs of factors of production EX. pay raises

Economic cost of inflation Higher interest rates (fee for loaning $) Loss of purchasing power People on a fixed income hurt the most Consumers will save more and spend less! Loss of economic efficiency

3rd Indicator - Unemployment Unemployment rate - % of the labor force that is seeking work. Understated because it does not count discouraged workers who have given up High unemployment rate = unhealthy economy

Has the current unemployment rate decreased or increased? Why? Current Events