ECONOMIC INDICATORS

The Business Cycle

What are economic indicators?

• Article: identify indicators

GROSS DOMESTIC PRODUCTThe Expenditure Approach:

Measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports.

What is included? What is not included?

GROSS DOMESTIC PRODUCT• The Income Approach–Measures GDP by adding the incomes that

firms pay households for the factors of production they hire.–The U.S. National Income and Product

Account divide incomes into two big categories:•Wages• Interest, rent, and profits

Comparing Income Approach and Expenditure Approach

Taxes, subsidies, and depreciation affect the value of items when they are counted.

Each of these issues must be considered when adjusting the income measurement. After making adjustments the income approach almost gives the same estimate of GDP as the expenditure approach.

REAL GDP VS. NOMINAL GDP

Table 3. Gross Domestic Product and Related Measures: Level and Change From Preceding Period

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

GROSS NATIONAL PRODUCTThe market value of all the final goods and

services produced anywhere in the world in a given time period by the factors of production supplied by residents of the country.

U.S. GNP = U.S. GDP + Net factor income from abroad

CAUSES OF INFLATION

•DEMAND-PULL•COST-PUSH•WAGE-PRICE SPIRAL• EXCESSIVE MONETARY

GROWTH

EFFECTS OF INFLATION•PURCHASING POWER DOWN• SPENDING HABITS • SPECULATION INCREASE•DISTRIBUTION OF INCOME

CONSUMER PRICE INDEX

Consumer Price Index (CPI) –A measure of the average of

the prices paid by urban consumers for a fixed market basket of consumer goods and services.

The Market Basket

Simplified CPI Calculation.

22.1 THE CONSUMER PRICE INDEX

CPI =Cost of CPI basket at current period prices

Cost of CPI basket at base period pricesx 100

For 2000, the CPI is: = 100$50

$50x 100

For 2003, the CPI is: = 140$70

$50x 100

22.1 THE CONSUMER PRICE INDEX

• Measuring Inflation– Inflation rate– The percentage change in the price level from one

year to the next.

Inflation rate = = 16.7 percent140 120

120x 100

CPI in current year CPI in previous year

CPI in previous year

x 100Inflation rate =

THE CONSUMER PRICE INDEX

In part (b), the inflation rate was high during the early 1980s, but low during the 1990s.

THE CPI AND THE COST OF LIVING

– New Goods Bias• New goods do a better job than the old goods that they

replace, but cost more.• The arrival of new goods puts an upward bias into the

CPI and its measure of the inflation rate.– Quality Change Bias• Better cars and televisions cost more than the versions

they replace.• A price rise that is a payment for improved quality is

not inflation but might get measured as inflation.

THE CPI AND THE COST OF LIVING

– Commodity Substitution Bias• If the price of beef rises faster than the price of chicken,

people buy more chicken and less beef.• The CPI basket doesn’t change to allow for the effects

of substitution between goods.– Outlet Substitution Bias• If prices rise more rapidly, people use discount stores

more frequently.• The CPI basket doesn’t change to allow for the effects

of outlet substitution.

NOMINAL AND REAL VALUES

• Dollars and Cents at Different Dates– To compare dollar amounts at different dates, we

need to know the CPI at those dates.– Convert the price of a 2-cent stamp in 1905 into its

2005 equivalent:

Price of stamp in 2005 dollars =

= 2 cents x

195.6

9.4= 42 cents

Price of stamp in 1905 dollars xCPI in 2005

CPI in 1905

• http://www.bls.gov/cpi/tables.htm

Inflation Calculator

• http://www.bls.gov/data/inflation_calculator.htm

International CPI Data

• http://global-rates.com/economic-indicators/inflation/consumer-prices/cpi/cpi.aspx

UNEMPLOYMENT

The survey counts as unemployed all persons who, during the week before the survey:

– 1. Had no employment– 2. Were available for work, and either:– 1. Had made efforts to find employment during the

previous four weeks, or– 2. Were waiting to be recalled to a job from which

they had been laid off.

SOURCES AND TYPES OF UNEMPLOYMENT

• Types of Unemployment– Frictional unemployment – The unemployment that arises from normal labor

turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs.

– Structural unemployment– The unemployment that arises when changes in

technology or international competition change the skills needed to perform jobs or change the locations of jobs.

SOURCES AND TYPES OF UNEMPLOYMENT

– Seasonal unemployment – The unemployment that arises because of

seasonal weather patterns.– Cyclical unemployment– The fluctuating unemployment over the business

cycle that increases during a recession and decreases during an expansion.

• http://www.bls.gov/web/laus/lauhsthl.htmCurrent rates and historic high/low rates by state

National Unemployment rates

• http://data.bls.gov/timeseries/LNS14000000

LABOR MARKET INDICATORS

• Two Main Labor Market Indicators• The unemployment rate• The labor force participation rate

– Unemployment rate– The percentage of people in the labor force who

are unemployed.

Unemployment rate =

Number ofpeople unemployed

x 100Labor force

LABOR MARKET INDICATORS

– Labor force participation rate– The percentage of the working-age population

who are members of the labor force.

Labor force participation rate = Working-age population

x 100Labor force

LABOR MARKET INDICATORS

• Discouraged Workers– Discouraged worker– A person who does not have a job, is available to

work, but has not made efforts to find a job within the previous four weeks.

LABOR MARKET INDICATORS

– Full-time workers -People who usually work 35 hours or more a week.–Part-time workers - People who usually

work less than 35 hours a week.– Involuntary part-time workers/

Underemployed workers - People who work 1 to 34 hours per week but are looking for full-time work.

The Human Development Index

The figure shows the relationship between real GDP per person and the Human Development Index (HDI).

Each dot represents a country.

The small Africa country of Sierra Leone has the lowest HDI and the second lowest real GDP per person.

The Human Development IndexThe United States has the third highest real GDP per person but has the eighth highest HDI.

Why is the United States not ranked higher on the HDI?

Because the people who live in seven countries live longer, have better access to health care and education than do Americans.

The Great Depression