Macroeconomics
Macroeconomics The study of how countries work
How do we measure our economy? Three ways: Gross domestic product (GDP) Consumer Price Index (CPI) Unemployment
How do we measure the size of our economy? Gross domestic product (GDP) Adds total value of all final goods and services produced in the economy in one year.
GDP Around the World Guess—put these in order from highest GDP to lowest 1. Australia 2. United States 3. Mexico 4. Germany 5. Japan 6. Russia 7. China 2, 7, 5, 4, 6, 3, 1
Prices in our country and the CPI Everything gets more expensive over time But not everything raises the same amount at the same time…
How do we measure how much prices change in our economy? The consumer price index (CPI) Look at change in prices for a basket/set of goods
What should the CPI’s Basket Include? The CPI includes a set of goods that “everyone” buys. What do you think should be included in the CPI basket???
Examples of Stuff Included in CPI FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) RECREATION (televisions, toys, pets and pet products, sports equipment, admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
So what is the problem with rising prices? When prices rise, it is called inflation. It reduces the value of money.
How do you calculate inflation? Inflation Rate = [Current Year's Price Level – Previous Year's] divided by (Previous Year’s Price Level) x 100 Let's try an example. If the CPI was 212 in 2010 and 200 in 2009, what was the inflation rate? Inflation Rate = [212 – 200] /(200) x 100 = 6%
How do we measure unemployment in this country? The unemployment rate The percentage of the labor force (16 and up) who are not working, but are looking for work.
Unemployment in our country
How do you calculate unemployment? Unemployment Rate = [Number of Unemployed] ÷ (Labor Force) × 100 For example, suppose 7 million people are unemployed in a labor force of 140 million people. What is the unemployment rate? Unemployment Rate = [7 million] ÷ (140 million) × 100 = 5%
Problems measuring unemployment Does not include workers who have given up looking for work
Problems measuring unemployment Does not include “under-employed”—people who are part-time who want to be full-time
So what is the problem with unemployment? When unemployment is high, the economy will not produce as much as it could.
So what is the problem with unemployment? Unemployment is often higher for certain groups