Economic Performance

1. Economic Performance • Objectives: • Determine how economists calculate gross • domestic product (GDP) and the limitations of GDP • 2. Examine the four phases of the business cycle and factors that influence the business cycle • 3. Identify 3 leading indicators used to determine the current phase of the business cycle • 4. Explain why economic growth is important and the requirements for economic growth • 5. Describe the relationship between economic growth and productivity

2. Economic Performance Governor Brown, while posing with you, I’d like to know: What is a NIPA? Nathan, it’s a National Income and Product Account—used to track production, income and consumption in a nation’s economy? They provide information about a nation’s economic activities.

3. Economic Performance Simoncini, as lieutenant governor, I’d like to add that the most widely used NIPA is Gross Domestic Product. So, what is that?

4. Economic Performance Lieutenant Governor Newsome, GDP is the total dollar value of all final goods and services produced within a country during one calendar year.

5. Economic Performance And the three components of GDP are: Final Output—econo- mists include only the value of final goods and services when calculating GDP; Current year—only count goods made in that year—not secondhand goods; Output Produced Within National Borders, like Toyotas produced in the USA. Hershey bars produced in Mexico don’t count.

6. Economic Performance The output-expenditure model C + I + G + (X-M) = GDP C: Personal consumption expenditures—consumer purchases of durable goods (lifetime more than 1 year), nondurable goods (short useful lifetime, i.e. food or cosmetics) and services

7. Economic Performance The output-expenditure model C + I + G + (X-M) = GDP I: Gross investment—the total value of all capital goods produced in a given nation during one year as well as changes in the dollar value of business inventories Fixed investment (residential and nonres-idential structures, capital goods (machinery and office equipment)) Inventory investment: increase or decrease in total dollar amount of the stock of raw materials, intermediate goods and final goods of domestic businesses during a given period

8. Economic Performance The output-expenditure model C + I + G + (X-M) = GDP G: Government purchases of goods and services—total dollar value that federal, state and local governments spend on goods and services

9. Economic Performance The output-expenditure model C + I + G + (X-M) = GDP X-M: net exports (total exports minus total imports)—GDP includes the value of goods and services produced domestically but sold in other countries (exports) and does not include goods and services produced in other countries but purchased locally (imports)

10. Economic Performance Nominal GDP and Real GDP Nominal—current GDP is expressed in the current prices of the period being measured Real—GDP adjusted for price changes 10,000 9,500 9,000 8,500 8,000 7,500 Billions of dollars 1996 1997 1998 1999 2000

11. Economic Performance Master, what’s a price index and how is it created? Woman, a price index is a set of statistics that allows economists to compare prices over time.

12. Economic Performance But Master, how is it created? Well, tocreate a price index, economists first select a base year against which to measure changes in prices. Second, they assign the base year an index number of 100. Third, they calculate index numbers for other years to indicate the amount prices are higher or lower relative to the base year.

13. Economic Performance OK, now I’m really confused. So, what are the limitations of GDP? I, Richard Nixon, will answer that, Savannah! Initial figures are often inaccurate. GDP does not include nonmarket activities (activities like you washing your parents’ car for free) or the underground economy (illegal and non-reported legal activities—under the table.) GDP does not accurately measure a nation’s well-being.

14. Economic Performance So President Nixon, Colonel Sanders here. How does GDP differ from GNP? Colonel, GNP is the final output produced with factors of production owned by the residents of a given country. GDP is the final output produced within a nation’s borders.

15. Economic Performance The four stages or phases of the business cycle • Expansion and growth or recovery • Peak—the economy is at its strongest and most • prosperous • Contraction—business slowdown aka recession • Recession is a decline in real GDP for 2 or • more consecutive quarters • Trough—when demand, production and • employment reach their lowest levels (1933)

16. Economic Performance OK, then, Mr. President. What are three signs that the business cycle is entering a period of expansion? Ms. Bacon, high levels of business investment, low interest rates, and increased consumer spending.

17. Economic Performance You see, investment creates a demand for goods, which encourages further increases in production; businesses use new capital to moderate production methods and promote efficiency; third, increased business investment (particularly in R&D) tends to stimulate technological change and generally results in higher output at lower production costs.

18. Economic Performance Leading indicators …anticipate the direction in which the economy is headed (changes in building permits issued, orders for new capital and consumer goods, price of raw materials, stock prices)

19. Economic Performance Coincident indicators …change as the economy moves from one phase of the business cycle to another and tell economists that an upturn or a downturn in the economy has arrived (personal income, sales volume, industrial production levels)

20. Economic Performance Lagging indicators …change months after an upturn or a downturn in the economy has begun and help economists predict the duration of economic upturns or downturns (use of consumer installment credit, number and size of business incomes)

21. Economic Performance My question is, what does the term “Real GDP per capita” mean? OOOOH!! I know that!It’s an increase in the real dollar value of all final goods and services that are produced per person for a specified period of time

22. Economic Performance Relationship between economic growth and a nation’s standard of living A nation’s standard of living increases when its real GDP per capita grows. Said another way, the standard of living improves when production per person increases faster than the total population.

23. Economic Performance “For a nation to increase its long-term output and income, it must either increase its inputs . . . or increase the productivity of these inputs.” What are examples of inputs that should be increased? OK: Natural resources, human resources, capital resources and entrepreneurs.

24. Economic Performance What is labor productivity? A measure of how much each worker produces in a given period of time, usually one hour.

25. Economic Performance What factors have significant affects on productivity growth? • Level of available technology • Quantity of capital goods available per worker—capital deepening means an increase in the amount of capital goods available per worker; occurs when the amount of a nation’s capital goods increases faster than the size of that nation’s workforce • Education and skill level of the labor force

26. Economic Challenges • Objectives: • Define the unemployment rate • Identify the 4 major types of unemployment • Discuss the main economic costs of unemployment • Explain how economists evaluate price changes over time • Describe what causes inflation • Identify the main two price indexes that economists use to measure inflation • Analyze how inflation affects the economy • Explain how economists determine the number of poor people in the U. S. and how they measure the distribution of income • Identify U. S. government policies to reduce the income gap and decrease poverty

27. Economic Challenges Rats! I just lost my job and now I’m unemployed. I wonder how high rates of unemployment hurt the nation’s economy. Well, Trevor, the nation loses the goods and services that the unemployed would produce if they were working and businesses lose sales because the unemployed cannot buy as many products.

28. Economic Challenges The government must decide how and to what extent to support the unemployed and their dependents.

29. Economic Challenges Definition of employed people During the week surveyed, people who: Worked for pay or profit one or more hours Worked without pay in a family business 15 or more hours Have jobs but did not work as a result of illness, weather, vacations or labor disputes

30. Economic Challenges Okun’s Law (Arthur Okun) For every one percent rise in the unemployment rate, real gross domestic product (GDP) drops 3 percent. The reverse is also true.

31. Economic Challenges Three shortcomings of unemployment rate Does not indicate the differences in intensity with which people look for jobs

32. Economic Challenges Three shortcomings of unemployment rate The conditions for being included among the unemployed exclude Marginally attached workers (people who once held productive jobs but have given up looking for work) Discouraged workers

33. Economic Challenges Three shortcomings of unemployment rate Does not indicate the number of underemployed workers—workers who have jobs beneath their skill level or who want full-time work but are only able to find part-time jobs

34. Economic Challenges Four types of unemployment Frictional—workers moving from one job to another

35. Economic Challenges Four types of unemployment Structural—changes in technology or the way the economy is structured

36. Economic Challenges Four types of unemployment Seasonal

37. Economic Challenges Four types of unemployment Cyclical—unemployment resulting from recessions and economic downturns This type of unemployment harms the economy more than any other type of unemployment

38. Economic Challenges Price Level Price level influences aggregate supply—the total amount of goods and services produced throughout the economy—and aggregate demand—the total amount of spending by individuals and businesses throughout the economy

39. Economic Challenges Inflation Inflation is an increase in the average price level of all products in an economy. Usually, inflation occurs when aggregate demand increases faster than aggregate supply. As prices increase, the amount that a dollar buys decreases. Thus inflation reduces the real purchasing power of the dollar.

40. Economic Challenges Federal Reserve Board is responsible for monetary policy Determines how much money is available to businesses and individuals from financial institutions; can increase or decrease the money supply More money: lower interest rates & more consumer spending—aggregate demand increases as more goods purchased Spending outpaces available supply of goods and demand-pull inflation results

41. Economic Challenges Cost-Push Inflation …when producers raise prices to cover higher resource costs (crop failures, natural disasters, political problems abroad) The relationship between wages and prices can also lead to cost-push inflation. Higher wages will cause prices to increase (wage-price spiral)

42. Economic Challenges Consumer Price Index CPI is a measure of the average change over time in the price of a fixed group of products The Bureau of Labor Statistics (BLS) selects a base year against which to measure price changes—still 1982-1984

43. Economic Challenges Consumer Price Index Second, the BLS selects a representative sample of commonly purchased consumer items, called the market basket—items that the typical urban consumer might buy. Each item in the market basket is weighted based on its importance in consumers’ budgets. The BLS then samples the prices of those goods and services in selected areas across the nation.

44. Economic Challenges

45. Economic Challenges Consumer Price Index Economists set the index price for the base year at 100. To calculate the CPI for another year, the BLS determines the price of the market basket for that year, divides the amount by the cost of the market basket in the base year, and multiplies the result by 100 If the market basket cost $4,000 in 1982-1984 and $7,000 in a later year, the CPI for the later year would be 175: ($7,000 / $4000) x 100 = 175. The average price level in the later year is 75% higher than it was in 1982-1984—purchasing power has declined and consumers must spend 175% of the cost in 1982-1984

46. Economic Challenges How does the U.S. government calculate the inflation rate using the CPI?

47. Economic Challenges Inflation rate = [(CPI year B – CPI year A) divided by CPI Year A] times 100

48. Economic Challenges Say, in that regard, what are things in which inflation causes changes?

49. Economic Challenges Changes caused by inflation Purchasing power of the dollar—particularly hurts people on fixed incomes

50. Economic Challenges Changes caused by inflation Decreased value of real wages—when pay increases fail to keep pace with rising prices (teachers in Oakdale: a pay cut plus increase in medical insurance)