2. AP Week 7- section 3 measuring the economy
This week we will wrap up unemployment, inflation and economic growth and test on Friday.

3. Zero hour you have 5 min to answer the following questions.
Describe the 3 different types of inflation: demand push, cost pull and political inflation.
The Labor Force (LF) includes

4. 5th period you have 5 min to answer two of the following 3 questions
List and describe the 3 different types of unemployment
List and explain the components of GDP for the expenditure approach
Explain the difference between nominal and real GDP

5. 6th period you have 5 minutes to answer two of following 3 questions.
List and explain the 2 primary markets in the CFM and then show the flow between households and firms in these markets. Who owns the resources? What does the R W I P stand for in connection to the 4 resources?
What is government transfers? List some examples 2 at least
What happens to unemployment during a recession? During an expansion

6. 7th period you have 5 minutes to answer two of the following 3 questions
What are the 3 ways to calculate GDP? Which is used on the AP test?
List and describe the 3 different types of unemployment
The Labor Force (LF) includes

7. Monday- We will not cover all the slides, this is in the textbook or you can read and process the slides at home.
Today you will demonstrate your understanding of how the economy is measured by creating a poster from an assigned topic that was covered in your readings
You will work with a group to create a poster that defines the topic and uses illustrations to explain the topic.
Do Now: put your name and period on an index card to prepare for the quiz.
EQ: How is the economy measured? What are the 3 goals? How well do I understand these topics? What am I not clear on?

8. Zero hour- divide into 5 groups first come on topics below
You have the following topics to decide from:
1. a poster on frictional unemployment
2. a poster on structural unemployment
3. a poster on cyclical unemployment
4. who is included in the labor force and who is not, along with the formulas for Labor Force, Unemployment rate, Labor Force participation rate
5. a poster that shows the problems with the unemployment numbers

9. 5th period divide into 4 groups, first come on topics
You will chose from the following
1. natural rate of unemployment- define and show what impacts the rate
2. the formula and definition of nominal and real interest rates and show what that means to the borrowers and lenders
3. inflation is- define and then show what inflation is
4. who is hurt and who is helped by inflation

10. 6th period divide yourself into 3 groups, topics are first come
You will choose from the following:
1. the market basket, CPI, show what it is and make sure you include the formulas for CPI – make sure you show that this measures consumption
2. explain and show in illustration what shoe leather, menu and unit of account inflation is
3. explain and show in illustration what nominal and real GDP are and the GDP deflator make sure that you show this measures production and that real GDP is the best measurement. You can include per capita if you want

11. 7th period divide into 3 groups, topics are first come
You will choose from
1. demand pull inflation
2. cost push inflation
3. government policy inflation – include the terms hyperinflation, and the quantity theory of money with the formula

12. Questions are random for the different classes
Quiz over section 3
Questions are random for the different classes

13. Goal #2
Limit Unemployment 13

14. The labor force = employed + unemployed (watch carefully the definition of unemployed)
This is the civilian work force, military is separate

15. Why is a stay at home mom not unemployed?
What is Unemployment?
The Unemployment rate
The percent of people in the labor force who want a job but are not working.
Unemployment
rate
# unemployed
# in labor force x
100 =
Who is in the Labor Force?
Above 16 years old (looking for work or employed)
Able and willing to work
Not institutionalized (jails, hospitals)
Not in military, in school full time, or retired
Why is a stay at home mom not unemployed? 15

16. Three Types of Unemployment16

18. #1. Frictional Unemployment
3 Types of Unemployment
#1. Frictional Unemployment
“Temporarily unemployed” or being between jobs.
Individuals are qualified workers with transferable skills but they aren’t working.
Examples:
High school or college graduates looking for jobs.
Individuals that were fired and are looking for a better job.
Individuals that moved and are looking for a new job. 18

19. 3 Types of Unemployment Seasonal Unemployment
This is a specific type of frictional unemployment which is due to time of year and the nature of the job.
These jobs will come back
Examples:
Professional Santa Clause Impersonators
Construction workers in Michigan 19

20. #2. Structural Unemployment
3 Types of Unemployment
#2. Structural Unemployment
Changes in the structure of the labor force make some skills obsolete.
Workers DO NOT have transferable skills and these jobs will never come back.
Workers must learn new skills to get a job.
The permanent loss of these jobs is called “creative destruction.”
Examples:
VCR repairmen
Carriage makers 20

21. 3 Types of Unemployment Technological Unemployment
Type of structural unemployment where automation and machinery replace workers causing unemployment
Examples:
Auto assemblers fired as robots take over production
Producers of Capital Goods (tractors) fire assemblers 21

22. #3 Cyclical Unemployment
3 Types of Unemployment
#3 Cyclical Unemployment
Unemployment that results from economic downturns (recessions).
As demand for goods and services falls, demand for labor falls and workers are fired.
Examples:
Steel workers laid off during recessions.
Restaurant owners fire waiters after months of poor sales due to recession.
This sucks! 22

23. The Natural Rate of Unemployment
Two of the of the three types of unemployment are unavoidable:
Frictional unemployment
Structural unemployment
Together they make up the natural rate of unemployment (NRU).
We are at full employment if we have only the natural rate of unemployment.
This is the normal amount of unemployment that we SHOULD have.
The number of jobs seekers equals the number of jobs vacancies. 23

24. Natural rate of unemployment
Currently is at 4-6%
Is never zero- there would be no individuals to hire if you started a new company or needed to increase your work force
Changes over time from it has fluctuated between 5.3%-6%
1. due to changes in the labor force characteristics- younger workers entering the work force are more likely to change jobs and have higher frictional unemployment. Also when more women enter the work force.
2. changes in the labor market institutions- like unions that set wages above equilibrium creating a surplus of workers who are not able to get a job at the higher wages. An increase in temporary work force agencies link unemployed to jobs, the creation of online job websites like monsters.com, technology can cause a demand for certain skilled people and those without the skills are more likely to be unemployed.
3. changes in government policy- Minimum wages result in increased structural unemployment, on the other hand job training programs and government subsidies could lower the NRU

25. Full employment means NO Cyclical unemployment!
The Natural Rate of Unemployment
Full employment means NO Cyclical unemployment!
Economists generally agree that an unemployment rate of around 4 to 6 % is full employment.
4-6% Unemployment = NRU
Okun’s Law: When unemployment rises 1 percent above the natural rate, GDP falls by about 2 percent
Currently the U.S. is at _______%
California is at ______% 25

26. Unemployment benefits in the U. S
Unemployment benefits in the U.S. are often extended to 9 months or 1 year during periods of high unemployment. 26

27. The Natural Rate of Unemployment
The natural rate in France and Germany is around 8–10%. Why?
Some economists attribute the difference to more generous unemployment benefits in European countries
In the U.S. unemployment benefits last for 6 months
Unemployment benefits in some European countries are indefinite
The generous benefits reduce incentives to search for a job
Unemployment benefits in the U.S. are often extended to 9 months or 1 year during periods of high unemployment. 27

29. Criticisms of the Unemployment Rate
What is wrong with the unemployment rate?
It can misdiagnose the actual unemployment rate because of the following:
Discouraged job seekers-
Some unemployed people stop looking for a job so they are no longer counted in the labor force.
Part-Time (Underemployed) Workers-
Someone who is part-time but wants to be full-time is still considered fully employed.
Race/Age Inequalities-
Hispanics – _______
African American- _______
Teenagers- _______
Illegal Labor-
Many people work under the table. 29

30. Annual Inflation Rate- Time for Prices to Double-
Goal #3
LIMIT INFLATION
Country and Time-
Zimbabwe, 2008
Annual Inflation Rate-
79,600,000,000%
Time for Prices to Double-
24.7 hours

31. What is Inflation? Inflation is rising general level of prices
Inflation reduces the “purchasing power” of money
Examples:
It takes $2 to buy what $1 bought in 1982
It takes $6 to buy what $1 bought in 1961
When inflation occurs, each dollar of income will buy fewer goods than before.

32. How is Inflation measured?
The government tracks the prices of the same goods and services each year.
This “market basket” is made up of about 300 commonly purchased goods
The Inflation Rate-% change in prices in 1 year
They also compare changes in prices to a given base year (usually 1982)
Prices of subsequent years are then expressed as a percentage of the base year
Examples:
2005 inflation rate was 3.4%
U.S. prices have increase 98.3% since 1982 (base year).
The inflation rate in Bolivia in 1985 was 50,000%
This is called Hyperinflation
A $25 meal today would cost $12,525 a year later

33. World Inflation Rates

34. Historic Inflation Rates

36. Identify which people are helped and which are hurt by unanticipated inflation?
A man who lent out $500 to his friend in 1960 and is still waiting to be paid back.
A tenant who is charged $850 rent each year.
An elderly couple living off fixed retirement payments of $2000 a month
A man that borrowed $1,000 in 1995 and paid it back in 2006
A women who saved a paycheck from 1950 by putting it under her mattress

37. Make a T-Chart Hurt by Inflation Helped by Inflation
Lenders-People who lend money (at fixed interest rates)
People with fixed incomes
Savers
Borrowers-People who borrow money
A business where the price of the product increases faster than the price of resources
Cost-of-Living-Adjustment (COLA)
Some works have salaries that mirror inflation.
They negotiated wages that rise with inflation

38. Consumer Price Index (CPI)
Measuring Inflation
Consumer Price Index (CPI)

39. Consumer Price Index (CPI)
The most commonly used measurement inflation for consumers is the Consumer Price Index
Here is how it works:
The base year is given an index of 100
To compare, each year is given an index # as well =
Price of market
basket in base year
x 100
CPI
Price of market basket
Market Basket: Movie is $6 & Pizza is $14
Total = $20 (Index of Base Year = 100)
Market Basket: Movie is $8 & Pizza is $17
Total = $25 (Index of )
125
This means inflation increased 25% b/w ’97 & ‘09
Items that cost $100 in ’97 cost $125 in ‘09

41. Problems with the CPI
Substitution Bias- As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket. (Result: CPI may be higher than what consumers are really paying)
New Products- The CPI market basket may not include the newest consumer products. (Result: CPI measures prices but not the increase in choices)
Product Quality- The CPI ignores both improvements and decline in product quality. (Result: CPI may suggest that prices stay the same though the economic well being has improved significantly)

42. Calculating Nominal GDP, Real GDP, and Inflation

43. CPI/ GDP Deflator (Year 1 as Base Year) Make year one the base year
Calculating CPI
CPI/ GDP Deflator (Year 1 as Base Year)
Nominal,
GDP
Inflation Rate
Real,
GDP
Price
Per Unit
Units of
Output
Year 1 2 3 4 5 10 15 20 25
$ 4 5 6 8 4
Make year one the base year =
Price of the same market
basket in base year
x 100
CPI
Price of market basket in the particular year

44. CPI/ GDP Deflator (Year 1 as Base Year)
Calculating CPI
CPI/ GDP Deflator (Year 1 as Base Year)
Nominal,
GDP
Inflation Rate
Real,
GDP
Price
Per Unit
Units of
Output
Year 1 2 3 4 5 10 15 20 25
$ 4 5 6 8 4
$40 50 90
160
100
$40 40 60 80
100
100
125
150
200
N/A
25%
20%
33.33%
-50%
Inflation Rate
% Change
in Prices =
Year 2 - Year 1
Year 1
X 100

45. Make year three the base year
Practice
Nominal,
GDP
Real,
GDP
Consumer Price Index
(Year 3 as Base Year)
Units of
Output
Price
Per Unit
Year 1 2 3 4 5 5 10 20 40 50
$ 6 8 10 12 14
$30 80
200
480
700
$50
100
200
400
500 60 80
100
120
140
Make year three the base year =
Price of the same market
basket in base year
x 100
CPI
Price of market basket in the particular year

46. CPI vs. GDP Deflator
The GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.
An increase in the price of goods bought by firms or the government will show up in the GDP deflator but not in the CPI.
The GDP deflator includes only those goods and services produced domestically. Imported goods are not a part of GDP and therefore don’t show up in the GDP deflator. =
Real GDP
x 100
GDP
Deflator
Nominal GDP
If the nominal GDP in ’09 was 25 and the real GDP (compared to a base year) was 20 how much is the GDP Deflator?

47. Calculating GDP Deflator=
Real GDP
x 100
GDP
Deflator
Nominal GDP =
100
Nominal
GDP
(Deflator) x (Real GDP)

48. Calculations
In an economy, Real GDP (base year = 1996) is $100 billion and the Nominal GDP is $150 billion. Calculate the GDP deflator.
In an economy, Real GDP (base year = 1996) is $125 billion and the Nominal GDP is $150 billion. Calculate the GDP deflator.
In an economy, Real GDP for year 2002 (base year = 1996) is $200 billion and the GDP deflator 2002 (base year = 1996) is Calculate the Nominal GDP for 2002.
In an economy, Nominal GDP for year 2005 (base year = 1996) is $60 billion and the GDP deflator 2005 (base year = 1996) is 120. Calculate the Real GDP for 2005.
GDP deflator=150
GDP deflator=120
Nominal GDP=$240 billion
Real GDP=$50

49. Review Identify the 3 goals of all economies
Define Natural Rate of Unemployment
Define inflation rate
What is a market basket?
Explain the difference between nominal and real interest rates
How do you calculate CPI?
What does a CPI of 130 mean?
Who is helped and hurt by inflation?
Why did Bolivia experience hyperinflation?
List 10 old-school Nintendo games

50. Three Causes of Inflation
If everyone suddenly had a million dollars, what would happen?
What two things cause prices to increase? Use Supply and Demand

51. 3 Causes of Inflation
1. The Government Prints TOO MUCH Money (The Quantity Theory)
Governments that keep printing money to pay debts end up with hyperinflation.
There are more “rich” people but the same amount of products.
Result: Banks refuse to lend and GDP falls
Examples:
Bolivia, Peru, Brazil
Germany after WWI

52. Quantity Theory of Money
If the real GDP in a year is $400 billion but the amount of money in the economy is only $100 billion, how are we paying for things?
The velocity of money is the average times a dollar is spent and re-spent in a year.
How much is the velocity of money in the above example?
Quanity Theory of Money Equation:
M x V = P x Y
M = money supply P = price level
V = velocity Y = quantity of output
Notice that P x Y is GDP 52

53. M x V = P x Y Why does printing money lead to inflation?
Assume the velocity is relatively constant because people's spending habits are not quick to change.
Also assume that output (Y) is not affected by the amount of money because it is based on production, not the value of the stuff produced.
If the govenment increases the amount of money (M) what will happen to prices (P)?
Ex: Assume money supply is $5 and it is being used to buy 10 products with a price of $2 each.
1. How much is the velocity of money?
2. If the velocity and output stay the same, what will happen if the amount of money is increase to $10?
Notice, doubling the money supply doubles prices 53

54. What would happen if the government printed money to pay off the national debt all at once?

55. 3 Causes of Inflation 2. DEMAND-PULL INFLATION
“Too many dollars chasing too few goods”
DEMAND PULLS UP PRICES!!!
Demand increases but supply stays the same. What is the result?
A Shortage driving prices up
An overheated economy with excessive spending but same amount of goods.

56. Higher production costs increase prices
3 Causes of Inflation
3. COST-PUSH INFLATION
Higher production costs increase prices
A negative supply shock increases the costs of production and forces producers to increase prices.
Examples:
Hurricane Katrina destroyed oil refineries and causes gas prices to go up. Companies that use gas increase their prices.

57. Cost-Push Inflation

58. The Wage-Price Spiral A Perpetual Process: 1.Workers demand raises
2.Owners increase prices to pay for raises
3. High prices cause workers to demand higher raises
4. Owners increase prices to pay for higher raises
5. High prices cause workers to demand higher raises
6. Owners increase prices to pay for higher raises

59. Interest Rates and Inflation
What are interest rates? Why do lenders charge them?
Who is willing to lend me $100 if I will pay a total interest rate of 100%?
(I plan to pay you back in 2050)
If the nominal interest rate is 10% and the inflation rate is 15%, how much is the REAL interest rate?
Real Interest Rates-
The percentage increase in purchasing power that a borrower pays. (adjusted for inflation)
Real = nominal interest rate - expected inflation
Nominal Interest Rates-
the percentage increase in money that the borrower pays not adjusting for inflation.
Nominal = Real interest rate + expected inflation

60. Nominal vs. Real Interest Rates
Example #1:
You lend out $100 with 20% interest. Inflation is 15%.
A year later you get paid back $120.
What is the nominal and what is the real interest rate?
Nominal interest rate is 20%. Real interest rate was 5%
In reality, you get paid back an amount with less purchasing power.
Example #2:
You lend out $100 with 10% interest. Prices are expected to increased 20%. In a year you get paid back $110.
Nominal interest rate is 10%. Real rate was –10%

61. Tuesday
Objective: be able to discuss the posters created yesterday using economic terms with your group. Note which concepts you are not comfortable with and what you do not feel you know.
Be able to read the posters, both in words and diagrams, to test your ability to explain that concept
Do Now: Go back over your notes from your reading or from the pp
Highlight the key terms and formulas
EQ: How is economic growth measured? How does that reflect on the PPC and the Business cycle? How is unemployment measured? How does changes there reflect on the PPC and the Business cycle? How is inflation measured? Where is that reflected on the PPC and the BC?

62. As you walk around the posters
Record all the formulas
Note the terms and make sure you have those defined in your notes and that you are comfortable with them
Fill out the sheet provided
After the walk come back and get into your groups and discuss the areas you are not sure of- have your group mates explain it, if no one knows check the textbook or your notes
I will be around to help

63. As you walk around ask yourself:
Unemployment:
Formula for Labor Force LF, Participation rate, and Unemployment rate
3 types of unemployment
Issues/concerns of unemployment rates
Natural rate of unemployment- what is the % now- what can change it
Interest rates
What is nominal and real interest rates
Formulas for both
Who is hurt and who is helped
Price Indexes
CPI what it is and formulas
GDP deflator- what it is and formula
Difference between them
Inflation
What it is
3 types
And explain shoe leather, menu, and unit of account
What does inflation do to cash on hand
GDP
Components
What is included and what is not
Nominal
Real
formulas

64. There ae practice slides to determine what is or is not included in unemployment, GPD sheets and inflation
Quiz them at end of the class.

65. Wednesday- TEST Friday
You will be able to match the terms with an appropriate picture, be able to share in your group why you made that selection
Work together, talking it out so that each term has an appropriate picture. Discuss the term and its meaning so that all the team members know the terms concept
Do Now: Look over your notes from either the readings or from the PP. Do you have questions? Do you have them summarized?
EQ: Do I know all the terms and formulas for this unit? Can I determine nominal GDP, RGDP, CPI, Price index, nominal wages, real wages, nominal interest rates and real interest rates, unemployment rate, labor force, employment participation rate, inflation rate, velocity of money?

66. Thursday
Objective: Be able to create graphs and calculate problems using the formulas to answer practice questions
You will work with your group to answer one question that I will give you. You will need to read the question and identify the key terms that will help you answer that question and then proceed out to the hallway where there are chart papers posted. Put your question number on the chart poster in the right hand upper corner and then proceed to answer the question on the graph. You will also use the laminated graph paper to create the graph(s).
Do Now: Go back over your notes from yesterday
EQ: How do I read questions and translate that into a graph or calculation. How do I identify what I don’t understand and ask questions to determine the answer?

67. Take 2 min. to read the question and graph assigned to you
Take 2 min. to read the question and graph assigned to you. As a group decide on how to answer, you can do a quick sketch.
Take 10 min. to answer the question and draw the graph that was assigned to you.
Once you are finished with your assignment- go by the other posters. Read the question and the graph assignment. Determine if you agree with the answers and if you completely understand how the questions was answered. Make note of questions you have.
After you have gone by all the posters then regroup in the room with your group and share your questions on the other posters so that you understand how to do every one of the questions and posters. MAKE SURE EVERY TEAM MEMBER UNDERSTANDS.

68. Friday-Remember that you can complete the first 4 graphs on your yellow sheets anytime. Those 4 will be due no later than the end of the 3 weeks, they will go on the progress report.
Demonstrate your knowledge on the basic concept of economics, supply and demand as well as measuring the economy
Read the question with understanding and use the skills you learned this week to determine the answer.
Do Now: Get a new scan tran and put your name on the blue side one. Put Section 3 Macro measurements for title and class period
Put away your phones (turn them off), get a pencil and clear your desk.
EQ: Did you read the modules? Did you take notes? Did you do the vocabulary cards? Did you study the formulas?