Chapters 5 and 6

Chapters 5 and 6 - What is the total GDP of the USA? $13.06...

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Unformatted text preview: What is the total GDP of the USA? $13.06 trillion 2. $51.27 billion 3. 643.85 billion 4. $1.79 trillion 1. What is the per capita GDP of the USA? $43,800 2. $102,400 3. $12,500 4. $74,300 1. How high is the unemployment rate in the USA? 3.2% 2. 7.4% 3. 4.8% 4. 2.7% 1. What is higher: Exports or Imports to / from the USA? Imports 2. Exports 1. Who is the biggest export partner of the USA? 1. 2. 3. 4. 5. China Mexico Canada UK Japan Who is the biggest import partner of the USA? 1. 2. 3. 4. 5. China Mexico Canada Germany Japan Macroeconomic Measurement Chapters 5 and 6 Desirable Economic Goals Price stability (low inflation) Low Unemployment High and sustained economic growth To achieve price stability... ..we have to be able to measure prices Economist`s toolbox: Consumer Price Index (CPI) Question: What is a price index? Answer: It is a weighted average of the prices of a representative "market basket" of goods and services in a given year. Price index Comparing market baskets from year to year 2001 Cost = $97.54 2002 Cost = $115.98 Calculating the CPI CPI = (Current cost of market basket / Base year cost of market basket) * 100 Cost of market basket. $78.93 $85.43 $86.94 $89.10 $93.33 $95.78 $94.12 $97.54 $115.98 Base year is 2001 $78.93/97.54*100= 81.8 $85.43/97.54*100= 87.6 $86.94/97.54*100= 89.1 $89.10/97.54*100= 91.3 $93.33/97.54*100= 95.7 $95.78/97.54*100= 98.2 $94.12/97.54*100= 96.5 $97.54/97.54*100= 100.0 $115.98/97.54*100=118.9 Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 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 20052006? 3.23 % Calculating Inflation Inflation: Increase in price level Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 Cost of market basket. Base year is 2001 $78.93 $78.93/97.54*100= 81.8 $85.43 $85.43/97.54*100= 87.6 $86.94 $86.94/97.54*100= 89.1 $89.10 $89.10/97.54*100= 91.3 $93.33 $93.33/97.54*100= 95.7 $95.78 $95.78/97.54*100= 98.2 $94.12 $94.12/97.54*100= 96.5 $97.54 $97.54/97.54*100= 100.0 $115.98 $115.98/97.54*100=118.9 Inflation rate n/a (87.6-81.8)/81.8*100%= 7.1% (89.1-87.6)/87.6*100%= 1.7% (91.3-89.1)/89.1*100%= 2.5% 4.8% 2.6% -1.7% 3.6% 18.9% Using the CPI to calculate ,,real" prices and wages Real means adjusted for inflation- (by converting dollars to the same base year) Real Price = (Nominal Price/CPI) x 100 - A price expressed in the base year dollars. Real Salary= (Nominal Wage/CPI) x 100 A salary expressed in the base year dollars. If all Joe cared about was money (purchasing power), when was he doing better? $40,000 in 1996, or $47,000 in 2002? CPI with base year 2001: CPI in 1996 is 89.1, and CPI in 2002 is 118.9 Real salary in 1996 = ($40,000/89.1)*100= $44,893 (in 2001 dollars.) Real salary in 2002=($47,000/118.9)*100= $39,529 (in 2001 dollars.) Suppose your grandfather told you things were so much cheaper when he was growing up... a loaf of bread was only 35 cents in 1924. In 2002 it is $1.50. When was bread cheaper? We need the CPI for both years, in 1924 the CPI was 13 and in 2002 the CPI is 118.9. Real price of bread in 1924 = ($0.35/13)*100 = $2.69. (2001 dollars) Real price of bread in 2002= ($1.50/118.9)*100=$1.26. (2001 dollars) Exercise In year 1, your annual income is $45,000 and the CPI is 143.6; in year 2, your annual income is $51,232 and the CPI is 150.7. Has your real income risen, fallen, or remained constant? 3 more exercises The CPI was 140.3 in 1992 and 177.1 in 2001. What was the percentage change in prices during the time period 19922001? 2. Nominal income is $50,000 and the CPI is 143. What does real income equal? 3. Smith and Jones have the same nominal income, but they live in different countries. Does it follow that they have the same real income? 1. Who Are the Unemployed? Labor Force Participation Rate Labor force participation rate - The percentage of the civilian noninstitutional population that is in the civilian labor force: Civilian labor force LFPR = --------------------------------------------- x 100 Civilian noninstitutional population LFPR men and women Year Men Women 1900 1960 2000 80% 84% 74% 20% 26% 60% Unemployment Unemployment Rate-The percentage of the civilian force that is unemployed: Number of unemployed persons U = -------------------------------------------- X 100 Civilian labor force percent 10 12 0 2 4 6 8 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 Unemployment rate US Frictional Unemployment Unemployment due to the natural "frictions" of the economy caused by changing market conditions qualified individuals with transferable skills who change jobs. Structural Unemployment Unemployment due to structural changes in the economy that eliminate some jobs and create other jobs for which the unemployed are unqualified. Natural Unemployment Unemployment caused by frictional and structural factors in the economy. Natural unemployment rate = Frictional unemployment rate + Structural unemployment rate = + Cyclical Unemployment = Total Unemployment rate Natural Unemployment rate = - Full Employment The condition that exists when the unemployment rate is equal to the natural unemployment rate. Chapter 6 Economic Production and Growth GDP: Gross Domestic Product Total market value of all final goods and services produced annually within a country's borders. For the US that is $13 trillion or 13,000,000,000,000 GDP is a flow variable labor services Households GDP Firms Goods and services What's Not Included in GDP Certain non- market goods and services such as chores performed at home by family members. What's Not Included in GDP Underground activities, both legal and illegal What's Not Included in GDP Sales of used goods Financial transactions such as trading of stocks and bonds What's Not Included in GDP Government transfer payments such as social security Leisure time GDP and Bads Also bads that are produced by the economy are calculated into GDP. Thus, some economists argue that GDP overstates our overall economic welfare. Example: When someone gets shot and has to go to the hospital, GDP increases Ways to Compute GDP Expenditure Approach Add the amount of money spent by buyers of final goods and services* Do not count intermediate goods** * Goods in the hands of their final users. ** Goods that are inputs for the production of final goods. Ways to Compute GDP Income and Value added Approaches Income Approach add the sum of all incomes earned (wages, interest, rents, and profits) in producing goods and services Value-added Approach add the value added at each stage of production of all goods and services Expenditure Approach: 4 Sectors GDP C = C + I + G + (EX - IM) = Consumption (household sector) I = Investment (purchases of capital (machines, etc.) + changes in inventories G = government spending (federal, state, and local) EX-IM = net exports Net export in US Example: U.S. imported $10 billion worth of shoes, and exported $5 billion. What does EX-IM equal? $5 billion - $10 billion = - $5 billion. (trade deficit). Exercise If C = $1,000, I = $300, G = 250, EX = 100 and IM = 300, what is GDP equal to? GDP 2006 Computing GDP Income Approach The payments to the 4 factors of production add up to GDP Wages + Rent + Interest + Profits = C + I + G + (EX IM) Because income earned by these four factors is spent somewhere in the economy Why? Real GDP Real GDP = (Nominal GDP / Price level) *100 Analogous to "real prices" and "real salaries" Real GDP is reported in a base year, just like the CPI. The price level (P) is based on the prices of all goods and services, rather than the prices just affecting consumers, as in the CPI. Economic Growth Economic Growth is measured by increases in Real GDP. If GDP in year 1 is $487 billion and it is $490 billion in year 2, what is the economic growth? Questions Suppose Nominal GDP is $6 trillion in year 1 and $6.2 trillion in year 2. What has caused the rise in GDP? Suppose Real GDP is $5.2 trillion in year 1 and $5.3 trillion in year 2. What has caused the rise in Real GDP? Business Cycle Recurrent swings (up and down) in real GDP. ...
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This note was uploaded on 04/09/2008 for the course ECO 201 taught by Professor Zenker during the Spring '08 term at Elon.

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