Economic Indicators

Review Quiz O Production Possibilities curve O Law of supply and profit motive O Read the question completely O Ex. Oligopoly and Monopolistic Comp O Elasticity O Supply and demand curve

What are Economic Indicators? O What do they indicate? Recession or inflation O Why are they needed? In order to fix the economy, you have to know what problem you are facing. O What are the three? Gross Domestic product Consumer Price Index Unemployment

GDP O Gross Domestic product O Calculates the total value of all final goods and services produced in the US in one calendar year.

Looking at the definition.. O Value = calculating prices, not numbers O Final = adding the price tag, not each breaking apart to include the Factors of production O US = only count what US workers made, not workers from another country. O one calendar year = only new, current items counted, no purchases that are “used. Ex. A used car purchase.

The Formula O There is a formula to calculate GDP. It is sometimes called aggregate output. C + I + G + (x-m)= GDP

The formula C + I + G + (X-M)= GDP C = Consumer purchases I = Business investments G = Government purchases X-M = Exports – imports

Now you try.. O Complete the example of calculating GDP. O First categorized the parts of the formula (add the C’s, G’s, I’s, X-M’s) C = add all the consumer purchases (8) I = add all business purchases (2) G= add all the government purchases (4) X-M= total export (2) – total imports (2) O Then, add the categories together for GDP.

Answers C = 46,300 I = 9,000 G = 23,500 X-M =( X = 7,100) and (M = 21,200) X-M = -14,100 46, , ,500+ (-)14,100 = GDP = 64,700

Review of GDP 1. What does GDP calculate? 2. If McDonald’s has a franchise in Europe, do those sales count towards the US GDP? WHY 3. If Coca-Cola purchase a new delivery truck, which part of the formula would this purchase fall? 4. If I purchased a 2012 Honda Accord, where in the formula would this purchase fall? (GDP for 2012) 5. Calculate GDP Consumer 10,000Exports 5,000 Investments 4,000 Government 6,000 Imports 8,000 ANSWER TO GDP $17,000

GNP O Gross National Product O Just like GDP, but it includes production of American companies outside of the US. Ex. It would include production at the Coca-Cola factory in Mexico. O We stopped using this method of calculating output in 1991 because of the growth of international businesses. It distorted the picture of American worker production.

Watch this.. Antique toy

Answer the questions 1. How old was the camel and monkey? 2. How much did the woman pay when she purchased them? 3. What is the current estimated value now? 4. Was this a good purchase or bad? Use the Price calculator to make yourPrice calculator decision.

Inflation Cause – more money in the economy/circulation (money supply). There is more money in the economy than 50 years ago. That is why items are more expensive. Inflation is not rising prices, but an increase in the MS. The result is a rise in prices. What happens: increase in demand wages rise dollar is worth less ( the dollar buys less than it did before)

Types of inflation 1. Hyper – inflation at a rate of % 2. Demand pull – consumers’ high demand causes prices to rise 3. Cost push – cost of resources causes the producer to rise the price to ensure he/she will still make a profit. 4. Stagflation – prices rise during a recession

Recession Also called a Deflation (prices going down) Cause : The Money supply has lowered (not as much money is in circulation) A depression is a severe recession What is happening: Decrease in demand wages lower dollar is worth more (because it is scarce)

GDP and Recession/inflation What does it mean if GDP was $13 trillion in 2010 and $10 trillion in 2011? GDP increases = output increased = growth GDP decreases = output decreased = negative growth GDP increases could indicate inflation GDP decreases could indicate recession GDP drops for 2 quarters = textbook recession

review 1. What is the formula to calculate GDP? 2. What is the difference between GDP and GNP. 3. Give an example of Demand pull inflation. 4. What does the word aggregate mean? 5. GDP is an Economic indicator. How does it indicate an inflation or recession?

Consumer Price Index Prices change over time. They increase. To see how much, we use the Consumer Price Index (CPI). This is a calculator that shows how prices have changed. Price calculator

CPI as an indicator Average rate of inflation for the US is 3%. If prices increase above 3% = inflation If prices lower below 3% = deflation Base year is 100. it compares two market baskets of goods from the years you want to compare.

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Real GDP My son is a first degree level 2 Taekwondo black belt. He is 9 years old. If he sparred a 25 year man that is a 6 th degree black belt and 6 feet tall, would that be a fair sparring match? Why? Give me two reasons to support your answer.

Real GDP If you want to compare GDP between two years you can. We would do this to see how much we have grown (output). In order to see a true comparison, you have to adjust GDP. 1950vs bring up to 2000 bring down to 1950 prices

Nominal GDP Use to state current year GDP. GDP for If it isn’t being compared and since it is fairly current, nominal GDP is used.

Review 1. At what point on the business cycle would an inflation be at its worse? 2. If you wanted to compare 1980 to 1990, which GDP would you use? 3. I consumer purchased a new home, which part of the GDP formula would that fall? 4. What would demand and GDP be if we are in an inflation? 5. Why is saying inflation is a rise in prices be incorrect?

Unemployment rate Percentage of people unemployed in the economy. A good idea of what this percentage should be is around 5%. As of February 2013, 7.7%. The lowest since December For GA – As of January 2013, 8.7%

Types of Unemployment Structural – skills are outdated in the market Seasonal – normal for some careers. It is a time when the job is not used. Ex. Summer for teachers. Frictional – between jobs or underemployed Cyclical – the worst type and monitored constantly. Loss of jobs due to a recession.

Unemployment as an indicator Unemployment rate goes from 4.9%-7.7% Unemployment rate goes from 5% - 8%

Business Cycle Shows recession and inflation using real GDP. Business Cycle

Economic Growth Real GDP Time

Activity Complete the business cycle activity sheet.

Limitations of GDP 1. Accuracy – we know it isn’t perfect 2. Nonmarket activities – trade/barter/volunteer work/housework. Examples of productivity, but not reflected in GDP 3. Underground economy – illegal or unreported 4. “Good” and “bad” – This is just a number. Nothing else about an economy can be seen. Ex. Crime, good schools, great communities, clean cities, pollution, etc.

Economic growth is important 1. Trade increases which increases our pocket books. More money for our economy. 2. Increases our standard of living 3. Increases the government’s tax base. If more people are employed, people can pay their taxes. Taxes is how the government makes money to provide us with public goods and services.

Requirements for growth 1. Efficiency – always finding new ways to be productive 1. Human Capital – skilled laborers are more productive than unskilled 1. Technology – always increases output 2. Entrepreneurship - creativity

Determine this economy’s Economic sickness Doc! GDP has lowered CPI has deflated Unemployment risen………. Answer: Recession

Determine this economy’s Economic sickness Doc! GDP has dropped for two consecutive quarters. We are below the line of growth on the business cycle. Answer: Recession

Determine this economy’s Economic sickness Doc! GDP was $12 trillion, now it is $14 trillion CPI was 3.25%, now it is 5.5% Unemployment was 7.2%, now it is 5.7% Answer: Inflation

Determine this economy’s Economic sickness Doc! CPI is 2.5% Unemployment is 9.1% GDP has declined Answer: Recession

Test Review 1. Formula for GDP and what each category means 2. Types of inflation 3. Business cycle 4. Difference between GDP and GNP 5. Difference between Real GDP and nominal GDP 6. CPI 7. Types of unemployment 8. How the 3 Econ. Indicators tell what the economy is facing. 9. REVIEW REVIEW REVIEW