1. Measuring Economic Performance
GDP, Unemployment
and Inflation
Measuring Economic Performance

2. Importance of Macroeconomic Measurement:
Describes and gives the causes of current economic conditions
Compares economic conditions over time
Provides a basis for formulating public policies to improve economic performance

3. Macroeconomic Goals Full Employment (as measured by unemployment)
Price Stability (as measured by inflation)
Economic Growth (as measured by GDP)

4. GDP Defined
Gross Domestic Product is the total market value of all final goods and services produced in the economy in one year.
The economy is defined as all goods and services produced within the borders of the United States, regardless of who owns the means of production.

5. Gross Domestic Product
GDP is a monetary value – 2012 GDP was $17,420,000,000, (adjusted for inflation)
Sale of final goods is included
Sale of intermediate goods excluded
Avoids double counting
The “value-added” approach

6. Final and Intermediate Goods
Final Goods and Services
Are not used as inputs into the production of another good or service
Are bought by their final users

7. Final and Intermediate Goods
Are used as inputs into the production of another good or service
Examples
Intermediate goods – windshields, gearboxes, batteries
Intermediate services – banking and insurance services bought by a car producer

8. Final and Intermediate Goods
How to tell
Look at who buys it and for what purpose
Example: electric power
Intermediate when bought by car producer
Final when bought for your home

9. What GDP Includes (Two Approaches that will be equal)
All the income earned in the country during the year (wages and salaries, interest, corporate profits, etc.) OR
All the spending in the economy during the year (consumer spending, investment spending, government spending and net exports)

10. What GDP excludes Secondhand sales Purely financial transactions
Do not represent current output
Purely financial transactions
Public transfer payments (Social Security)
Private transfer payments (money and gifts)
Securities transactions
Stocks (dividends and brokerage fees are counted)
Private bonds (interest payments are counted)
Public bonds (interest payments are transfer payments)

11. What GDP does not include
Non-market production (housewives, etc.)
Changes in product quality/disproducts
Unreported tips or sales
Barter activity
Illegal activities
“Underground Activities may be
as much as 15% of GDP!”

12. Unemployment Criteria for Success:
Define the labor force and the unemployed
Identify how unemployment rates are calculated
Identify the natural rate, average rate and highest recorded rate of unemployment in the U.S.
Explain why unemployment figures might be misleading
Describe the 4 types of unemployment and give examples of each

13. Unemployment The Labor Force:
All adults 16 and older who are able and willing to work.
The Unemployed:
The percentage of the labor force that is without a job.

14. Unemployment Insurance
A government program
Your employer contributes on your behalf
Acts as an income replacement program for a limited time should you become unemployed through no fault of your own

15. Unemployment Figures
How unemployment rates are calculated – Bureau of Labor Statistics
Natural Rate of Unemployment
Average rate
Current rates
Highest recorded rate

16. Why unemployment figures you hear may be misleading:
Unrealistic wage expectations
Discouraged workers (jobless) are not counted
All part-time workers are considered fully employed

17. Types of unemployment
Frictional: happens when a person seeks to enter the workforce or quits one job to seek another
Structural: happens when advances in tech eliminate jobs
Cyclical: happens when there is a decline in business activity during an economic downturn
Seasonal: happens when businesses shut down or slow down for part of the year

18. Inflation Criteria for Success:
Define inflation, deflation and disinflation
Explain why we measure inflation
Identify different types of inflation
Explain how to measure inflation
Evaluate the effects of inflation on different groups within an economy

19. Inflation A general rise in the level of prices
Does not mean all prices are rising at the same time
Not the result of a one-time shock

20. Deflation Opposite of Inflation
A general decline in the level of prices
Rarely occurs
Indicates a serious recession

21. Disinflation The better option A decrease in the inflation rate
Generally a sign of a healthy economy

22. Why we measure inflation
One of our economic goals is to achieve price stability
Nominal vs. Real Income – inflation allows us to know if our ability to buy goods and services is going up or down

23. Types of Inflation
Demand-Pull: Spending increases faster than output can keep up with – “too many dollars chasing too few goods”
Cost-Push: results from an increase in costs that cause producers to produce less
Expected Rate (1-2%): caused by rising resource costs
Hyperinflation: extremely rapid rise in prices, very rare

24. Measuring Inflation Producer Price Index (PPI)
Price Index: a comparison of the general level of prices in a given year with the prices of an earlier year
Consumer Price Index (CPI)
The most widely reported measure of inflation for cost of living
Measures a market basket of about 300 goods and services purchased by an urban family of four
Producer Price Index (PPI)
Reports on resource prices to producers
A leading indicator of consumer prices

25. Effects of Inflation Groups that are hurt: Lenders Savers
Anyone on a fixed income
Groups that benefit:
Borrowers
Business Owners
Owners of Real Assets
Federal Government

26. The Business Cycle
Putting GDP, Unemployment and Inflation together and creating a picture of economic conditions.

27. Economic Growth Historically, we have experienced tremendous growth
Technological Progress
Rapid increases in productive capacity
Achieved the highest standard of living in the world

28. Economic Growth Long-run growth has not been steady
Interrupted and complicated
Caused by unemployment and inflation

29. The Business Cycle Defined
The recurrent ups and downs in the level of economic activity that extends over several years.

30. The Business Cycle Diagram

31. The Phases of the Business Cycle
Vary greatly in duration and intensity

32. The Phases of the Business Cycle
Expansion (Recovery)
Spending increases
Output (GDP) increases
Unemployment decreases
Incomes increase
Price level (inflation rate) increases

33. The Phases of the Business Cycle
Peak (Prosperity)
Spending and income at a temporary maximum
Output (GDP) at full-employment
Unemployment at the natural rate
Price Level (inflation rate) high

34. The Phases of the Business Cycle
Contraction (Recession)
Spending decreases
Output (GDP) decreases
Unemployment increase
Incomes decrease
Price Level (inflation rate) decreases

35. The Phases of the Business Cycle
Trough (only if very prolonged, becomes depression)
Spending and incomes bottom out
Output (GDP) at lowest levels
Unemployment at highest levels
Price Level (inflation rate) at expected rate

36. What causes Business Cycles?
External Causes
Population changes
Inventions/innovations
Wars/political events

37. What causes Business Cycles?
Internal Causes
Consumer spending
Investment spending
Government spending
Net exports (exports – imports)

38. Measuring Economic Performance Essay
Research current levels of GDP, unemployment and inflation (cite your sources!)
Evaluate the data you find, and determine the current state of the US economy.
Draw and label a business cycle diagram and indicate where the US economy is based on your analysis of the current data.
This will count as a test grade!!!