Module 2

In This Lecture…..

ØMeasuring Prices
ØUnemployment and
Employment

To select a topic, click on its link above

 Macroeconomic Problems
ØHigh inflation rate
ØHigh unemployment rate
ØHigh interest rates
ØLow economic growth or stagnation

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 Inflation
Inflation is an increase in the price level and is usually
measured on an annual basis. The inflation rate is the
positive percentage change in the price level on an annual
basis.

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 Inflation
When you know the inflation rate, you can find out
whether your income is
(1) keeping up with,
(2) not keeping up with, or
(3) more than keeping up with inflation.
How you are doing depends on whether your income
is rising by
the same percentage as,
(2) a smaller percentage than, or
(3) a greater percentage than the inflation rate,
respectively. Click to return
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 Inflation
ØWhen you make this computation and comparison, you
are determining your real income for different years.
ØReal income is a person’s nominal income (or current
dollar amount of income) adjusted for any change in
prices. Real income is computed as follows:

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Macroeconomic Measures - Prices
Ø Price Level - A weighted average of the
prices of all good and services.
Ø Price Index - A measure of the price level.
Ø Consumer Price Index (CPI) - A widely cited
index number for the price level; the
weighted average of prices of a specific set of
goods and services purchased by a typical
household.
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 Macroeconomic Measures - Prices

Base Year - The year chosen as a point of

reference or basis of comparison for prices
in other years; a benchmark year.

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Computing the Consumer Price
Index

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Consumer Price Index 1940-2010

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 Changes in Prices

In 2005 the CPI was 195.3; in 2006 the index was

201.6. What was the percentage change in prices
from 2005-2006?
Click below for answer.

3.23 %
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Macroeconomic Measures - Prices

Gasoline cost $1.15 per gallon in 1980. At

today’s prices are we better off?

Click below to check.

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 GDP Implicit Price Deflator vs.
Consumer Price Index
Ø GDP Implicit Price Deflator is based upon all
goods and services produced in an economy.
Ø CPI is based upon a representative group of
goods and services purchased by a typical
household

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 Unemployment
The total population of the United States
can be divided into two broad groups.
ØOne group consists of persons who are (1)
under 16 years of age, (2) in the armed
forces, or (3) institutionalized (in a prison,
mental institution, or home for the aged).
Ø The second group, which consists of all
others in the total population, is called the
civilian non-institutional population. Click to return
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Who Are the Unemployed?

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 Who Are the Employed?
According to the Bureau of Labor Statistics
(BLS), employed persons consist of:
• All persons who did any work for pay or
profit during the survey reference week.
• All persons who did at least 15 hours of
unpaid work in a family-operated enterprise.
• All persons who were temporarily absent
from their regular jobs because of illness,
vacation, bad weather, industrial dispute, or
various personal reasons. Click to return
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 Who Are the Unemployed?
According to the BLS, unemployed persons
consist of:
• All persons who did not have jobs, who
made specific active efforts to find a job
during the prior four weeks, and who were
available for work.
• All persons who were not working and who
were waiting to be called back to a job from
which they had been temporarily laid off. Click to return
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 Unemployment

Unemployment Rate-The percentage of

the civilian force that is unemployed:

Number of unemployed persons

U = -------------------------------------------- X 100
Civilian labor force

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 Unemployment
Employment Rate -The percentage of the
civilian noninstitutional population that is
employed:
Number of employed persons
(E) = ----------------------------------------------- X 100
Civilian non-institutional population

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 Labor Force Participation Rate

Labor force participation rate - The

percentage of the civilian non-institutional
population that is in the civilian labor force:

Civilian labor force

LFPR = --------------------------------------------- x 100
Civilian non-institutional population

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 Who are the Unemployment
Ø Job loser. This is a person who was employed in the
civilian labor force and was either fired or laid off.
Ø Job leaver. This is a person employed in the civilian
labor force who quits his or her job.
Ø Reentrant. This is a person who was previously
employed, hasn’t worked for some time, and is
currently reentering the labor force.
Ø New entrant. This is a person who has never held a
full-time job for two weeks or longer and is now in the
civilian labor force looking for a job. Click to return
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 Discouraged Workers
Ø They are former workers who are not actively looking
for work and are not waiting to be called back to a job
or to report for a job.
Ø Discouraged workers are not counted as unemployed
workers

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Unemployment Rates

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 Frictional Unemployment

Unemployment due to
the natural “frictions”
of the economy, which
is caused by changing
market conditions and
is represented by
qualified individuals
with transferable skills
who change jobs. Click to return
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 Structural Unemployment
Unemployment due to
structural changes in
the economy that
eliminate some jobs
and create other jobs
for which the
unemployed are
unqualified.

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 Natural Unemployment
Unemployment caused by frictional and
structural factors in the economy.

Natural unemployment rate = Frictional

unemployment rate + Structural
unemployment rate.

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 Full Employment

The condition that exists when the

unemployment rate is equal to the
natural unemployment rate.

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 Cyclical Unemployment
Rate
The difference between the unemployment
rate and the natural unemployment rate.

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 In This Lecture…..

ØGross Domestic Product

ØExpenditures
ØComputing GDP
ØMeasurements Other Than
GDP
ØReal GDP
ØEconomic Growth and •To select a topic, click on its link

Business Cycles
above
 Gross Domestic Product
(GDP)

The total market

value of all final
goods and services
produced annually
within a country’s
borders.

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 Ways to Compute GDP -
Expenditure Approach
ØAdd the amount of money spent by
buyers of final goods and services*
ØAvoid double counting.
ØDo not count intermediate goods**

* Goods in the hands of their final users.

** Goods that are inputs for the production of final
goods.
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 *Ways to Compute GDP
Income and Value –added
Approaches
ØIncome Approach – add the sum of all
incomes earned (wages, interest, rents, and
profits) in producing goods and services
ØValue-added Approach – add the value
added at each stage of production of all
goods and services

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 What’s Not Included in GDP
Ø Certain non-market goods and
services such as chores performed at
home by family members.
Ø Underground activities, both legal
and illegal such as legal unrecorded
activities paid for in cash or illegal
gambling
Ø Sales of used goods

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 What’s Not Included in GDP
ØFinancial transactions such as
trading of stocks and bonds
ØGovernment transfer
payments , a payment to a
person that is not for goods
and services currently
supplied such as social
security
ØLeisure time Click to return
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 GDP and Bads
Ø GDP counts the
goods and services,
but it does not net out
the air and water
pollution.
Ø Thus, some
economists argue that
GDP overstates our
overall economic
welfare.
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 GDP Per Capita

Click above to view data from the CIA Fact

Book on per capita GDP for countries
around the world
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 GDP - Expenditure Approach
4 Sectors

Household Sector - Consumption

Business Sector - Investment
Government Sector – Government Purchases
Foreign Sector – Net Exports

GDP = C + I + G + (X – M)
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 Consumption

The sum of household spending on:

ØDurable goods
ØNondurable goods
ØServices

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 Durable Goods
Durable goods are goods that are expected
to last for more than three years, such as
refrigerators, ovens, or cars.

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 Nondurable Goods
Nondurable goods are goods that are not
expected to last for more than three years,
such as food.

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 Services
Services are intangible items such as lawn
care, car repair, and entertainment.

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 Investment
The sum of all purchases of:
ØFixed Investment -Newly produced
capital goods - Business purchases of
capital goods, such as machinery and
factories
ØInventory Investment -Changes in
business inventories (stock of unsold
goods). Click to return
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ØPurchases of new residential housing

 Government Purchases
Includes:
Federal, state, and local government purchases of
goods and services and gross investment in
highways, bridges, and so on.
Excludes:
Government transfer payments to persons that
are not made in return for goods and services
currently supplied.

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 Net Exports
Exports (X) - Total foreign spending on
domestic (U.S.) goods
Less
Imports (M) - Total domestic (U.S.) spending
on foreign goods

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 Expenditure Approach

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 GDP – Income Approach
1. Purchases (expenditures) made in product markets flow
to business firms.
2. Business firms then use these monies to buy resources
in resource markets.
3. These monies flow to the owners (suppliers) of land,
labor, capital, and entrepreneurship.
4. The sum of these resource payments is total income,
which flows to households. In this simple economy
total purchases (expenditures) equal total income.
5. Because total purchases (expenditures) equal GDP and
total purchases equal total income, it follows that GDP
equals total income.

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 Click to return
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 National Income
ØTotal income earned by PH citizens and
businesses, no matter where they reside or
are located.
ØNational income is the sum of the
payments to resources (land, labor,
capital, and entrepreneurship).

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 Computing National Income

National income =
Compensation of employees
+ Proprietors’ income
+ Corporate profits
+ Rental income
+Net interest
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 COMPENSATION OF
EMPLOYEES
Compensation of employees consists of
wages and salaries paid to employees plus
employers’ contributions to Social
Security and employee benefit plans plus
the monetary value of fringe benefits, tips,
and paid vacations.

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 PROPRIETORS’ INCOME
Proprietors’ income includes all forms of
income earned by self-employed
individuals and the owners of
unincorporated businesses, including
unincorporated farmers.

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 CORPORATE PROFITS
Corporate profits include all the income
earned by the stockholders of
corporations.

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RENTAL INCOME (OF PERSONS)

ØRental income is the income received by

individuals for the use of their non-
monetary assets (land, houses, offices).
Ø It also includes returns to individuals
who hold copyrights and patents.
Ø Finally, it includes an imputed value to
owner-occupied houses.

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 NET INTEREST
Net interest is the interest income received
by PH households and government minus
the interest they paid out.

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 From NI to GDP
GDP =
National income
- Income earned from the rest of the world
+ Income earned by the rest of the world
+ Indirect business taxes
+ Capital consumption allowance
+ Statistical discrepancy
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GDP = Income Approach

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 Net Domestic Product
NDP measures the total value of new goods
available in the economy in a given year after
worn-out capital goods have been replaced.

Net domestic product (NDP) =

GDP – Capital consumption allowance*
*The estimated amount of capital goods used up in production
through natural wear, obsolescence, and accidental destruction.

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 Personal and Disposable Income
Personal income =
National income
– Undistributed corporate profits
– Social insurance taxes
– Corporate profits taxes
+ Transfer payments

Disposable income =
Personal income
– Personal taxes
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 Real GDP
The value of the entire output produced
annually within a country’s borders,
adjusted for price changes (inflation).
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Real GDP = Σ(Base-year prices X Current-year quantities)

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a publicly accessible website, in whole or in part.
 Economic Growth
Economic Growth is measured by increases
in Real GDP.

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 Business Cycle
1. Peak. At the peak of the business cycle, Real GDP is at a temporary
high. In the exhibit, Real GDP is at a temporary high at Q1.
2. Contraction. The contraction phase represents a decline in Real
GDP. According to the standard definition of recession, two consecutive
quarter declines in Real GDP constitute a recession.
3. Trough. The low point in Real GDP, just before it begins to turn up,
is called the trough of the business cycle.

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 Business Cycle
4. Recovery. The recovery is the period when Real GDP is rising. It begins at the
trough and ends at the initial peak. The recovery in the exhibit extends from the
trough until Real GDP is again at Q1.
5. Expansion. The expansion phase refers to increases in Real GDP beyond the
recovery. In the exhibit, it refers to increases in Real GDP above Q.
An entire business cycle is measured from peak to peak. The typical business
cycle is approximately four to five years, although a few have been shorter
and some have been longer.

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 NBER and Recessions
ØThe standard definition of a recession is two
consecutive quarter declines in Real GDP, but this is
not the only definition of a recession.
ØThe National Bureau of Economic Research has
this to say about a recession.
ØA recession is a period between a peak and a trough . . .
During a recession, a significant decline in economic
activity spreads across the economy and can last from a
few months to more than a year.

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