GDP and the Overall Health of the Economy Macroeconomics GDP and the Overall Health of the Economy

Macro vs. Micro Macroeconomics Overall economy GDP Inflation Unemployment Recessions Expansion, Growth Aggregate Supply/Demand Microeconomics Individual topics Business types Market structures Cost, revenue, profit Specific products Supply/Demand Pricing

Macro or Micro? Jobless Rate Actually Stands at 11.5% US Fiscal Path Unsustainable AIG in $15.5 billion unit sale to MetLife GM offers 661 dealers a second chance New credit card rules' double standard IPhone credit card swipe war heats up Economist: No Risk for Inflation

Macroeconomic Measurements How do we know how healthy a country’s economy is? MEASURE IT Major measurements: GDP: Gross Domestic Product (output) CPI: Consumer Price Index (inflation) Unemployment rate

GDP Primary measurement of economy’s health DOLLAR AMOUNT of all FINAL goods and services produced in a country’s BORDERS in a YEAR Used to identify growth, recessions, depressions Calculated by US Commerce Department

What’s not included? Intermediate products Secondhand sales The steel, tires, etc. in a new car (Counted: You buy new tires for your car) Secondhand sales A used car (Counted: The commission earned by salesman) Nonmarket transactions The chores you don’t get paid for at home Underground economy A sale of a stolen car

What’s included? Consumer sector (C) purchases Government sector (G) purchases Business investment (I) purchases Foreign sector (Exports-Imports) (X-M) GDP= C + G + I + (X-M)

Problems with Using Prices? What about inflation? Need for a Price Index Base Year (starting point) = 100% Market basket If year two is 150, then inflation rate is 50%

Important Price Indices Consumer Price Index (CPI) 80,000 items in 362 categories Bureau of Labor Statistics Producer Price Index (PPI) 100,000 input commodities Implicit GDP Price Deflator Turns Current GDP into Real GDP Real (adjusted for inflation)