Macro Economic Terms
Ch. 7,8, + 9 - GDP, Unemployment, Inflation and Growth
Impact of Unemployment
For individuals extended periods of unemployment can
lead to lower incomes, poverty, as well a variety of social
problems such as alcoholism, divorce, etc.
At a macroeconomic level unemployment means that the
there is an underutilization of resources and a decreased
output (goods and services) for the entire society.
Lowest rate of unemployment was at end of WW II at
Highest rate of unemployment was in Great Depression
at almost 25%
Definition of Unemployment
Unemployment is defined as those people in
the civilian labor force who are looking for
work, but cannot find a job.
Therefore, the definition of the civilian labor
force becomes very important. Let’s look at
who is counted in and out of this concept.
Who is in and who is out of the
civilian labor force?
People in military (not
People working in counted in civilian labor
private sector jobs force)
People working in People taking care of the
home if unpaid (e.g. house
public sector jobs wife)
Unemployed people, High school students
seeking work under 18, working part
People “working under the
The Unemployment Rate
Unemployment rate is determined by the number
of people in the civilian workforce actively
seeking work, but unable to find jobs.
Unemployment rate = unemployed/civilian
workforce x 100
For example 9,000,000/100,000,000 = .09
.09 x100 = 9% unemployment rate
You calculate the unemployment
rate with the following statistics:
Labor force is 2000 workers
Unemployed is 120 workers
What is unemployment rate?
120/2000 = .06 and .06 x100= 6 or 6%
Your turn: make up an unemployment
problem and have your neighbor solve it.
The Underemployed and
The underemployed are those people who have
jobs, but who work part time or below their skill
Discouraged workers are those people who have
given up looking for jobs. Their numbers not
included in the labor force or unemployment
The over employed are people working two jobs
or over 40 hours per week.
Calculate the Unemployment
50/250 = .2 x 100 = 20%
Types of Unemployment
Frictional unemployment is temporary unemployment of
workers moving from one job to another.
Seasonal unemployment is linked to seasonal work (e.g.
Structural unemployment is due to the decline of
industries, so that workers no longer have necessary job
skills. (Steel workers laid off due to decline of Steel
industry don’t have computer skills for new jobs)
Cyclical unemployment has to due with job loss due to an
Economists do not assume 0%
unemployment as full employment
They argue that there will always be a
certain level of frictional unemployment as
people move between jobs in a free market
The government currently describes “full
employment” as between 4 and 6 percent.
Why did the price of the candy
rise in the second round?
What was the price of candy in the first round?
What was the price of candy in the second round?
Why did the price of candy rise in the second
Was the DaveDollar worth more or less in the
What can you deduce from this activity is the
impact of price rises on consumers?
Prices and Inflation
Inflation is a general rise in prices.
A short term rise in a specific commodity like oil
may lead to inflation.
However, economists also look at many other
products. In some cases the drop in some product
prices may mean that there is not a net increase in
prices to the consumer.
Deflation is the general drop in prices.
Impact of price changes
The main problem with inflation is that it
decreases the purchasing power of consumers.
A price rise means that the dollars that people hold
are worth less.
Falling prices may benefit consumers, however
deflation can hurt owners and producers. For
example, a drop in housing prices decreases the
equity in a person’s home.
How is the price index and
inflation is calculated
The government has a number of indexes, but the
most common is the Consumer Price Index or CPI
The CPI measures the changes in basic consumer
prices over time using an imaginary “market
The simple equation for calculating the CPI (Price
index) is: cost of market basket today/cost of
market basket in base year x 100 For example:
120/100 x 100 = 120%
The rate of inflation is the new price index minus
100. For example 120-100= 20 % inflation rate
The cost of a market basket in the current year is 100
The cost of a market basket in a base year was 75
Calculate the price index and the rate of inflation
100/75 x 100 = 133
133-100= 33% rate of inflation
What if the current market basket was 150 and the base
year was 75
150/75 x 100 = 200 price index
200 -100= 100% rate of inflation.
Now make an inflation problem for your partner.
Puzzling unemployment statistics
Wednesday’s Chronicle said that employment in
the service sector expanded in September for the
ninth straight month
This morning the TV news said that there was a
fall in unemployment claims from 470,000 to
450,000 this month.
Tomorrow the new unemployment percentage will
be released. Do you think that these numbers
indicate that the unemployment rate will fall, or is
it possible that the new rate could increase or stay
the same? Explain.
The Producer Price Index measures the
general price changes of producer goods
The GDP deflator is most often used to
compare the GDP of different years. The
measure takes out price level changes in
measuring the total number of goods and
services in the economy.
Question: Can you explain how the prices of
gasoline and food could be going up but the
economy is still having deflation?
Answer:The general price level could be falling,
despite the fact that some prices are going up. The
CPI measures the general level of prices in a
Question:Do you know what the term is for when
prices are going up, but at a slower rate than
Anticipated and unanticipated
Anticipated inflation is the rate of inflation that
consumers, the government and businesses believe
Unanticipated inflation causes more problems if
prices rise or decline more than people anticipate.
Unanticipated inflation helps debtors who borrow
money,but hurts banks and money lenders.
Nominal and real interest rates
The nominal interest rate is the price of borrowing
money in today’s dollars. For example, your bank
account may pay a nominal rate of 5%.
The real interest rate = nominal rate minus the
anticipated rate of inflation. For example if the
nominal rate is 5% and the anticipated rate of
inflation is 3%, then the real interest rate is 2%.
Cost Push and Demand Pull
When resources and factors of production
rise in prices this is called cost push
When increased demand pushes up price
levels, this is called demand pull inflation.
Gross Domestic Product (GDP)
GDP equals the total amount of goods and
services produced in an economy over one year.
If GDP goes up then an economy is growing, if
GDP goes down then it is shrinking.
GDP is calculated as total consumption +
investment + government spending + (exports -
imports) or C+I+G+NX=GDP
This is the single most important statistic used by
economists to measure economic growth
Consumption component of GDP
Consumption consists of consumer
spending on goods and services including:
Durable items such as cars, furniture and
Non-durable goods such as food and clothes
Investment component of GDP
Investment consists of non-residential fixed
The creation of tools and equipment
The building of new homes or apartments
Inventory changes (stocks of products held
Government component of GDP
Government spending consists of federal,
state, and local government spending on
goods and services
However, the government component of
GDP does not include transfer payments
such as social security or unemployment
The Net Export component of
Net Exports is equal to total US exports minus
total US imports
Exports are goods and services purchased by
people in foreign nations
Imports are foreign goods purchased by US
In years where the value of exports is higher than
the value of imports, the GDP number is higher.
In years, such as the last few years, where the
value of export is lower than the value of imports,
the GDP number is lower.
Per capita GDP
Per capita GDP means the amount of GDP per
The simple formula per capita GDP is
If population falls and GDP remains constant then
per capita GDP rises.
Conversely, if population rises and GDP remains
constant, then per capita GDP falls.
If GDP rises faster than population increases, then
per capita GDP increases. This leads to a higher
standard of living.
What’s not counted in GDP
Buying and selling securities (stocks and bonds)
Government transfer payments, like social security
Private transfer payments between individuals
(e.g.. Purchasing a used car from a neighbor)
Housework and childcare (if it done outside the
Issues related to GDP
Critics of the GDP argue that a single measure cannot
adequately measure the welfare and well being of a
Growth may bring negative externalities like pollution,
which adversely effects the quality of life of a people.
Economic growth may not be fairly distributed to poorer
sectors of society.
Economic growth does not always bring happiness.
Societies with a different mix of market and non-market
activities are not easily compared with GDP as measure.
Real vs.. Nominal GDP
The nominal GDP is the current GDP in today’s
When economists want to compare GDP for two
different years, they need a way take out the price
level changes from year to year. This gives them a
real GDP measurement.
The tool they use to create constant dollars is the
GDP deflator. A base year is chosen for prices and
years before or after that year are calculated
Calculation of Real GDP
The calculation of real GDP = nominal
GDP/GDP deflator x 100
For example if GDP = 200 and GDP
deflator is 133 then
Real GDP = (200/133) x 100
150 real GDP = 1.5 x 100
Calculation of Deflator
You can derive the deflator if you have the
nominal and real GDP’s for a year
GDP deflator = nominalGDP/RealGDP x
E.g. GDP deflator = (110/100) x 100
Deflator is 110 = 1.1 x 100
Expenditure and Income
Approaches to GDP calculation
C+I+G+NX calculates the value of goods and
services in the product market for a year.
Economists also calculate the total of income
accrued to the factors of production. In the Gross
Domestic Income (GDI) economists add up
wages, profits, and rents.
There is an identity between the two methods,
meaning that if calculated properly GDP should
The business cycle
Expansions and Contractions
During periods of expansion GDP grows,
unemployment falls, and prices tend to rise
During periods of contraction GDP falls,
unemployment rises, and prices often fall.
Two quarters of GDP decline is termed a
recession. A severe recession is called a
What is economic growth?
Economic growth is defined as increases in per
capita real GDP.
Growth can be shown by an increase in the
production possibilities curve for a nation.
Economic growth leads to the possibility of
increasing the standard of living for a nation’s
citizens, however increases in real per capita GDP
don’t tell us specifically about income
What causes economic growth?
Productivity increases in labor - real GDP growth
divided by the number of workers (e.g. more
output per worker)
Saving is important to growth. If you want more
future growth a nation must save today.
Growth and improvements in technology
Research and development and innovation
human capital - education of labor
Open economy (e.g. free market)
Population growth and immigration