Economic Variables

7/29/2019 Economic Variables

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Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.1-1

Six Key Economic Variables

Real Gross Domestic Product (GDP)

is corrected for changes in the price level(real)

includes the replacement of worn-outand obsolete equipment and structuresas well as new investment (gross)

counts economic activity that happens inthe United States (domestic)

represents the production of final goodsand services (product)


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Real Gross Domestic Product

often divided by the number of workersin the economy

measures how well the economyproduces goods and services that peoplefind useful

does not indicate the relative distributionof the nations economic product

is an imperfect measure of economicwell-being


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Figure 1.4 - Officially Measured Real GDPper Worker in the United States


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The Unemployment Rate

to be unemployed, a person must wantto work and be actively looking for a job(but have not yet found one)

the labor force consists of those whoare employed and those who are

unemployed the unemployment rate is equal to the

number of unemployed people divided bythe labor force


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Figure 1.5 - The U.S. Unemployment Rate


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The Unemployment Rate

frictionalunemployment occurs becauseworkers and firms spend time searchingfor the best match

cyclicalunemployment occurs duringrecessions and depressions

the unemployment rate is the bestindicator of how well the economy isdoing relative to its productive potential


7/22Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.1-7


The Inflation Rate

is a measure of how fast the overall pricelevel is rising

hyperinflation occurs when the pricelevel is rising by more than 20% per

month



Figure 1.6 - Inflation in the United States




The Interest Rate

is important because it governs theredistribution of purchasing power acrosstime

the many different interest rates in theeconomy vary by duration and degree of

risk often move up and down together




The Interest Rate

nominalinterest rate is the interest ratein terms of money

does not take into account the effects ofinflation

realinterest rate is the interest rate in

terms of goods and services does take into account the effects of inflation



Figure 1.7 - U.S. Real Interest Rates,1960-1999




The Stock Market

is heard about most often (every day)

is an index of expectations for the future

a high value means that investors expecteconomic growth to be rapid, profits to behigh, and unemployment to be low



Figure 1.8 - Real Stock Index Prices




The Exchange Rate

governs the terms on which internationaltrade and investment take place

nominalexchange rate is the rate atwhich monies of different countries canbe exchanged for one another

realexchange rate is the rate at whichthe goods and services produced indifferent countries can be exchanged forone another




The Exchange Rate

if domestic currency appreciates

its value in terms of other currenciesincreases

foreign-produced goods are relatively cheapfor domestic buyers

imports are likely to be high

domestic-made goods are relativelyexpensive for foreigners

exports are likely to be low




The Exchange Rate

if domestic currency depreciates

its value in terms of other currencies declines

domestic-produced goods are relatively cheapfor foreign buyers

exports are likely to be high

foreign-made goods are relatively expensivefor domestic buyers

imports are likely to be low



Figure 1.9 - The U.S. Real Exchange Rate:The Dollar against a Composite Index

of Foreign Currencies



The Current

Macroeconomic Situation The United States - 2001

economic growth has slowed to a very

weak pace forecast for 2001 is that real GDP will grow by

no more than 1.8%

interest rates lowered through Fed policy

due to lags, effects of lower interest rates willnot be felt until end of 2001 (at the earliest)

inflation continues to be low



The Current

Macroeconomic Situation The United States - recent past

from early 1990s to 2000, there was an

economic boomunemployment fell during the 1990s

lowest unemployment rate in two decades(4%)

real wages increased only slightly

helped to keep inflation low



The Current

Macroeconomic Situation Europe

economic growth in countries belonging

to the European Monetary Union slowing low inflation

less than 2% per year

relatively high unemployment

near 10%



The Current

Macroeconomic Situation Japan

slow growth rate

real GDP grew only 1.8% in 2000 real GDP is expected to grow only by 1.4% in

2001

deflation is occurring

the overall price level fell by 0.7% in 2000


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C i ht 2002 b Th M G Hill C i I All i ht d1 22

Chapter Summary

The key indicators in macroeconomicsare

real GDP

the unemployment rate

the inflation rate

the interest rate

the level of the stock market

the exchange rate

Economic Variables

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