Economic IndicatorsGDP, Unemployment and Inflation

Gross Domestic Product

•The market value of all final goods and services produced in a country in a given year.

•The market values of all final goods and services produced in a country within a given year.

•Market – what the good sells for

•Final – no resale or intermediate goods

•Produced in - no matter who owns company

•Given – annual figure

Divide into four categories•C – Consumption by households•I – Investment by businesses, incl R&D•G – Government spending•(X-M) – (Exports – Imports)

•GDP = C + I + G + (X-M)

• Change usually more interesting than actual number.

Mostly consumer-driven:

• http://blogs-images.forbes.com/mikepatton/files/2014/12/Table-US-GDP-Components-2011.jpg

Write C, I, G or (X-M) and or

•Due to a tax cut, consumers decide to buy more new cars.• C up and GDP up

•Worried about an increasing budget deficit, the government decides to buy fewer military planes• G down and GDP down

•Increasing prices in the US encourage Americans to buy more foreign goods.• M up and (X-M) down thus GDP down

Write C, I, G, or (X-M) and or •Due to a tax increase, consumers decrease

purchases on vacation travel• C down and GDP down

•Due to increased incomes, Europeans buy more US goods• X up making (X-M) up thus GDP up

•Businesses are optimistic about the future and increase the construction of new factories• I up and GDP up

Some economic activity is left out

•Informal Work▫(Shadow Economy)

•Subsistence Work

•Care Work

If we measure it, it must matter•GDP measures economic activity, not

well-being…. What is the effect of•Cutting down all of our forest’s and

selling the wood▫Increase C and X thus increasing GDP

•Doubling government spending because of war

Increase G thus increasing GDPEffect of BP Oil Spill, link

Measures of Economic Well-being•SPI ted talk

Measures of Economic Well Being•Green GDP – account for environmental

damage

•Video Example

•This would not beIncluded, lighting

Unemployment Rate

In Civilian Labor Force ifOver 16Not in militaryHave a jobActively looking for work

Not in labor force if,

-Retired, -Discouraged

Workers those who have given up –looking, or

-Full-time student

• Unemployed if▫ Over 16▫ Actively looking for work in last 4 weeks▫ Available to work▫ And, do not have a job

Not Unemployed if Given up looking U1-U6 definition

s

Unemployment rate tends to undercount unemployment because of

▫Underemployed▫Reduced Hours▫Discouraged Job Seekers

Source: MSN

Types of Unemployment•Cyclical Unemployment

▫Due to recessions•Seasonal Unemployment

▫Due to seasonal changes, teachers & lifeguards

•Structural Unemployment▫Due to skills becoming obsolete

•Frictional Unemployment▫Due to transition to better or equal job

What happens to the UR, if• In May, there is a surge of college graduates

looking for work• A number of workers give up looking for work• Most construction workers take off Nov-Feb

because of weather conditions• After a particularly touching Dr Phil episode

people unhappy with their bosses quit to find a better job

• With the invention of solar cars, gas stations all over the country go out of business

A dollar doesn’t buy what it used to•In Zimbabwe, video

▫Hyperinflation Prices changing by the hour

How it is measured•Percentage change in the CPI•Consumer Price Index

•Cost of a constant market basket of goods each time period.

Find the Cost of the market basket•Done every year

How it is done•Calculate CPI

Basket Cost 2012/Basket cost 1984 = CPI 2012 with base year of 1984

•Calculate Inflation with percent change in CPI▫CPI 2012 – CPI 1984------------------------------ * 100 CPI 1984

Problems with measureInaccuracy Over or Under

Estimate InflationMarket basket changes every ten years

Over

Quality Improvements OverWe change our point of purchase

Over

We look for substitutes Over

Using the inflation rate•COLA – Cost of Living Adjustment

•Over time dollar comparisons▫Real vs Nominal

Nominal – in current dollars Real - inflation adjusted dollars

Go from Nominal to Real Dollars•Nominal is the change on the price tag or

paycheck

•Real dollars accounts for inflation

Real vs Nominal Stamp Prices

Real vs Nominal Gallon Gas

Real vs Nominal Minimum Wage

Costs of (unexpected) inflation•Hurts Savers•Hurts Retirees and those on fixed income•Hurts Lenders

Causes of Inflation•Too much money in circulation relative to

amount of goods•Inflation, Bubbles and Tulips•Demand-pull•Cost-push•Wage-price spiral

Misery Index

•Unemployment rate plus inflation rate•http://www.miseryindex.us/

indexbyyear.aspx?type=IR

Additional Indicators•Consumer Spending (approx 70%)

•Manufacturing

•Stock Market

•International Markets current/capital

Consumer Spending•Consumer Confidence & Consumer

Sentiment•Retail Sales•Durable Goods orders

▫Goods that last more than 3 years•Housing:

▫New Home sales, Construction•Personal Income & Spending

Manufacturing•PPI

▫Predicts CPI changes•Factory Orders

▫Leading indicator•Wholesale trade

▫Value of business inventories▫I/S ratio lagging indicator

Stock Markets•S&P 500

▫75% of equities traded tracked by Standard & Poor

•Dow Jones Industrial Average▫Tracks 30 of the largest companies on the

stock market. Picked by the WSJ

•NASDAQ Composite Index▫Electronic stock market, US and non-US tech

companies

International•Trade Balance

•Current account•Capital account

Timing of indicatorsLeading Coincident Lagging• Manufacturing

Hours• New unemp claims• Consumers new

orders• ISM index new

orders• MFR new orders,

( excl defense and aircrafts)

• Bldg permits• S&P 500• Leading Credit

Index• 10yr Int rate

spread• Consumer

expectations

• GDP • Income• Employment• Sales-Inventory

ratios• Labor costs• Prime rate