Macroeconomics
BY Dan Lapidus
Macroeconomic Issues
• There are 3 major components to measuring macroeconomic
output
• Unemployment- the percentage of the labor force who would like to
work but cannot find a job
• Inflation- when the price of consumables goes up uniformly
• GDP- Gross Domestic Product, the value of all final goods and
services produced, in an economy, over a fixed period of time
Unemployment
• The definition of unemployment is on the previous slide, if you did
not get it copy it from someone else
• The labor force is comprised of all individuals who are employed or
unemployed
• Figure 35 in your packet charts the unemployment rate since the
turn of the 20th century
• You will notice firstly that the unemployment rate is never zero. This
reflects the changing fortunes of industry and the continual entry of
new job seekers into the labor force.
• You will also observe that the unemployment rate was 5% in 1900
and in 2008 had only increased slightly; this indicates that whilst
there were huge jumps in the 30s and 70s and in the mid-80s there
is nothing to indicate a long term increase.
Inflation
• There was a definition of inflation on the first slide, copy if you haven’t
already.
• Inflation reduces the purchasing power of regular consumers
• Figure 36 in your packet shows the inflation rate since 1901
• One thing to notice is that all changes in inflation are short-term the inflation
rate in 2006 was roughly the same as in 1901
• There are a few noticeable stalactites and stalagmites on this graph
• These changes are a result of hyper inflation
• Hyperinflation is a result of an increase in nominal GDP (GDP calculated in
current year prices instead of using a base year…will talk about more later)
without a corresponding increase in output.
• Deflation which occurred in the early-20s and early-30s is quite rare in the
developed world and that is when the real buying power of money
increases.
GROSS DOMESTIC PRODUCT
(über important the taking of notes is
recommended)
• Definition was on the first slide copy if you haven’t done so
• GDP is the most important way or measuring macroeconomic
success
• GDP was first developed by Simon Kuznets in 1934, he would
receive a Nobel Prize for his troubles in 1971.
• GDP is measured by a formula indicated in your packet on page 68
• The formula reads as follows C+I+G+NX=GDP
• Where C is consumption, I is investment, G is government
spending and NX is net exports
•
GDP Cont.
• The top of the right-hand column on page 67 discusses that one
of the ways to measure GDP is Expenditures=Production
• The basic theory is that all goods which are produced are
purchased then you can think of GDP as the total expenditures
within a country.
• Economists divide purchasers into 4 categories: households, firms,
government, and the foreign sector
• Correspondingly there are 4 categories of spending usually linked
to one of the categories: consumption expenditures, this can be
nondurable goods (food, clothing etc.), durables (house, car etc.)
and services (intangible goods, education, legal services, etc.)
GDP Cont.
• Spending by firms on final goods comprises investment
• Investment is further subdivided into business fixed investment
(factories, offices, machinery etc.), residential fixed investment
(new homes and apartment buildings etc.), and inventories
(company goods that haven’t been sold)
• In economics investment is used only to describe the purchase of
new capital goods
• Government purchases of goods and services include, paying Mrs.
Mal’s salary, paying of other workers (firefighters, cops and the like)
and buying equipment for government agencies (such as buying
fighter planes for the military)
GDP cont. (yes, I know it gets old)
• Net Exports is the difference between the value of domestically
produced goods sold to foreigners, and the value of foreign-
produced products purchased by domestic buyers (page 67 bottom
right corner).
The two types of GDP (Groan) :((((
• There are two types of GDP: real GDP and nominal GDP
• Real GDP, recall the definition of GDP, as a result of said definition
the resulting sum (GDP) depends on both the quantity of goods
purchased, and their prices
• If you look at the top panel of figure 38 on page 68 you will notice
that whilst GDP tripled, production only doubled
• Economists want to separate these two phenomena and they came
up with real GDP
• Real GDP involves taking a year and basing production in
subsequent years off of that year (we will call this the base year)
• Real GDP is useful in isolating change in production from change in
price
The Two Types of GDP (Groan) :((((( Cont.
• If you look at figure 38 and take the prices in 2000 as the base
year, then you calculate real GDP by taking 2005 production x
2000 prices of each good. Thus real GDP will increase by the same
rate as prices
• Nominal GDP is simply GDP calculated with current year prices
The Cost of Living
• In order to measure inflation the USBLS came up with the
Consumer Price Index (CPI)
• CPI calculation can be observed in Figure 39 on page 69
• The CPI is measured by calculating the cost of basic consumption
goods called a market bundle.
• The BLS conducts periodic surveys to determine the prices of
these goods and what they are.
• CPI is calculated by the following formula CPI in year t=100x(cost
of bundle in year t)/(cost of bundle in base year)
GDP Deflator
• The GDP deflator measures the value of all new, domestically
produced, final goods and services in an economy.
• GDP Deflator=100x(real GDP/Nominal GDP)
• Measures relationship between real and nominal GDP
A Quick Revisiting of Unemployment
• To calculate the unemployment rate the BLS surveys 60,000
households and classifies all persons 16 or older as one of the
following:
– Employed- If that person worked for pay either full- or part-time
during the previous week or is on vacation or sick leave from a
regular job.
– Unemployed- If that person did not work during the previous week
but made some effort to find paid employment during the past four
weeks.
– Out of the labor force- If that person did not work during the past
week and did not actively seek work during the previous four
weeks.
Types of Unemployment
• Frictional Unemployment is when people are in transition from job
to job
• Structural unemployment is when available jobs do not line up with
the skill set of workers or they don’t live near the vacancies
• Cyclical unemployment is similar to our current economic state and
is when there are high layoffs and workers find it hard to get
employed
Circular Flow (last slide)
• If you look at figure 42 on page 73 it shows how goods and capital
move throughout the economy
• The faster money and goods can go the more economic growth is
taking place