1. Inflation, GDP, and Unemployment
Unit 2
Inflation, GDP, and Unemployment

2. Inflation

3. McDonald's Hamburger Prices
[1955]--15 cents
[1964]--15 cents
[1968]--18 cents
[1974]--30 cents
[1979]--38 cents
[1984]--50 cents
[1987]--62 cents
[1990]--75 cents
[1991]--59 cents
[1995]--85 cents
[2000]--89 cents
[2007]--89 cents
Why did the price of these hamburgers increase over time?
Did the hamburgers get bigger?
Did the quality improve?

4. Inflation
Price level – the weighted average of the prices of all goods and services in an economy
Inflation – a rise in the general level of prices

5. Inflation Price level – the balloon
Inflation – the guy blowing up (inflating) the balloon

6. Inflation
Inflation and deflation measure the average or general tendency of price changes
Prices of individual goods and services rise and fall at different rates
The prices of some goods may fall during periods of inflation, even though most prices are rising
The U.S. has not experienced a period of significant inflation since the 1970s & 80s

7. Inflation How does inflation affect the value of a dollar?
Inflation decreases the value (purchasing power) of a dollar

8. Inflation
What movie made the most money all-time?

9. Inflation Would that answer change if we adjusted for inflation?

10. Nominal vs. Real Nominal Real
An unadjusted rate, value, or change in value
What movie made the most in nominal terms?
Rate, value, or change in value adjusted for inflation
What movie made the most in real terms?

11. Real
Real values are more important than nominal values for economic measures, such as GDP and personal incomes, because they help ascertain the extent to which increases over time are driven by inflation and what is driven by actual growth.

12. Inflation
What would happen if prices increase at a faster rate than people’s salaries or wages?
Real wages - Income of an individual after taking into consideration the effects of inflation on purchasing power

13. Consumer Price Index (CPI)
A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services
Measures changes in price levels as experienced by consumers in their day to day purchases of goods and services
A way to compare purchasing power and measure inflation

14. Consumer Price Index
May 30, 2018.

15. Calculation Inflation rate – the percentage change in the price level
(CPI year 2 – CPI year 1)/CPI year 1

16. Unanticipated Inflation
Winners
Losers
Debtors (Borrowers)
Holders of assets that rise in value faster than other assets (i.e. gold)
Savers (at a fixed rate)
Creditors (Lenders)
Individuals living on a fixed income
Unless there’s a COLA (Cost of Living Adjustment)

17. Demand Pull & Cost Push Demand Pull Inflation Cost Push Inflation
Prices rise because demand shifts to the right
Increase in the number of products produced and sold
What is the overall impact on the economy?
Prices rise because supply shifts to the left
What could cause this?
Decrease in the number of products produced and sold
What is the overall impact on the economy?
Stagflation – increasing inflation & unemployment

18. Deflation
Deflation – a general downward movement in the prices of goods and services
May sound good, but…
Often accompanied by falling wages and increasing unemployment

19. Deflation
During periods of deflation, debtors have to repay their loans with dollars that are more valuable (have more purchasing power)
Debtors have borrowed cheap dollars and are repaying with dollars that will buy more
Consumers and producers who are in debt suffer
As their income drops, their loan payments remain the same

21. Visual 1.3
Compare the decade with How would you describe each decade?
Refer to the second graph. During the period , in which years did the price level rise relative to the previous year and during which years did the price level fall relative to the previous year?

22. Gross Domestic product

23. Gross Domestic Product
The market value of all the final goods and services produced in an economy in a year
Sometimes called National Income
Economists use real GDP data to measure the growth of the economy by comparing the change in real GDP from one year to the next
U.S. average growth of 3 to 3.5% annually
GDP is called Output and abbreviated Y
Potential GDP or Full Employment Output
Maximum level of output an economy can sustain over the long run

24. Which country has the highest GDP?

25. NOT included in GDP Sale of used goods Financial transactions
Sale of stocks and bonds
Products made overseas
Ford cars made in Japan
Products that are not finished
dye bought by a factory for sheets
Products that are not paid for with money
Unpaid housework, leisure time, work you do for yourself, goods acquired via barter, social well-being
Government transfer payments (social security, etc.)
Negative costs like pollution

26. What makes up GDP?
Y = C + I + G + NX

27. C = Consumption Money that is spent by consumers to buy consumer goods
Who are consumers? Who buys the final goods and services produced in our economy?
Households and Individuals

28. I = Investment
Money that is spent on increasing the productivity of a business
Capital (goods used to make more goods)
Capital Goods (factories, bulldozers, tools)
Who invests? Who spends money on increasing business productivity?
Businesses
Purchase of a new home
Increase in business inventories
This “Investment” does not include transfers of stock ownership

29. G = Government Spending
Money spent by government
Raised via taxes (taxation)
Raised via borrowing (bonds, securities, etc)
Spent on:
Military
Police protection
Court System
Infrastructure (roads, water, electricity, etc)
This “Government Spending” does not include transfer payments (i.e. Social Security)

30. NX = Net Exports
Exports minus imports

31. Y = C + I + G + NX Notice that the components of GDP are spent by…
Households and Individuals
Businesses
Governments
People in foreign countries

32. GDP is not a perfect measure: INFLATION
Need to adjust for inflation to compare GDP from different time periods
Real GDP = (nominal GDP x 100)/CPI

33. GDP is not a perfect measure: POPULATION
Need to adjust for population to compare economies from different countries
GDP per capita = GDP divided by population
Per capita means per person

34. Adjusting for Inflation and Population
Real GDP per capita

35. Visual 1.5 What does the trend line on the first graph indicate?
What period is most noticeably below the trend?
What does this suggest happened during that time?
GDP growth was below the trend during all of the years shown on the second graph. During which years was GDP growth the lowest?

36. unemployment

37. Unemployment
Civilian, non-institutionalized persons 16 years of age or older are classified as unemployed if they…
Do not have jobs &
Have actively looked for work in the prior 4 weeks

38. Definitions of Employed, Unemployed and Unemployment Rate
Employed = everyone currently working, including part-time workers
Unemployed = people looking for work or temporarily laid off from work
Discouraged workers = want a job, but gave up looking
Unemployment Rate = unemployed
labor force
Labor force = employed + unemployed
Labor force participation rate = labor force
population aged 16 and older

39. May 31, 2018.
Unemployment Rate

40. Labor Force Participation Rate
May 31, 2018.
Labor Force Participation Rate

41. Visual 1.6
During what years did the economy experience the lowest rates of unemployment?
What events were occurring from 1943 to 1945?
Why would unemployment be lowest at this time?
During what year did the economy experience the highest rate of unemployment?
What was the rate?

42. Types of Unemployment Frictional Unemployment Short-run unemployment
Fired/laid off/quit and are looking for another job
Just entered the labor force
Seasonal unemployment

43. Types of Unemployment Structural Unemployment Long-run unemployment
Job has become obsolete
Don’t have the skills needed in the job market

44. Types of Unemployment Cyclical Unemployment
Unemployment associated with economic downturns
Lost job in the recession
Fluctuations in the business cycle

46. Other Employment Concepts
Natural Rate of Unemployment
Lowest rate of unemployment that an economy can sustain over the long run
Structural + Frictional
No cyclical unemployment
Approximately 5% in the U.S.
Full Employment
GDP Gap
The amount by which potential GDP exceeds actual GDP – shows the cost of unemployment

47. Phases of the Business Cycle

48. Real GDP
May 31, 2018.

49. May 31, 2018.
Real GDP

50. Circular Flow
Leakages – anything outside the model (e.g. savings, imports)

51. Macroeconomic Goals
Full Employment
Price Stability
Economic Growth