Chapter 7: Every Macroeconomic Word You Have Ever Heard: Gross Domestic Product, Inflation, Unemployment, Recession and Depression

Chapter 7Every Macroeconomic Word You Have Ever Heard: Gross Domestic Product, Inflation, Unemployment, Recession and DepressionChapter OutlineMeasuring the EconomyReal Gross Domestic Product and Why it is Not Synonymous with Social WelfareMeasuring and Describing UnemploymentBusiness CyclesMicroeconomics vs. MacroeconomicsMicroeconomics: that part of the discipline of economics that deals with individual markets and firmsMacroeconomics: that part of the discipline of economics that deals with the economy as a wholeGross Domestic ProductGross Domestic Product: the dollar value of all of the goods and services produced for final sale in the United States in a year“Final Sale” avoids double counting of intermediate production“Sale” implies exclusively market activities“produced..in the United States” implies that Hondas produced in the US count but Fords produced in Mexico do not.Measuring PricesMarket Basket: what average people buy and in what quantities they buy itBase Year: year in which the market basket is established and year to which all other prices are compared Price of the Market Basket in the Base Year: (PBYMB) national average of the total cost of the market basket for the first month in the first year.Price IndexPrice Index: a device that centers the price of the market basket around 100Consumer Price Index: the price index based on what average consumers buyCPI= *100PBYMBPATMBWhere PATMB is the price of the market basket at “any time” andPBYMB is the price of the market basket in the base yearMeasuring InflationInflation Rate: the percentage increase in the consumer price indexInflation rate = *100%CPIEY-CPIBYCPIBYWhere CPIEY is the Consumer Price Index at the end of the year andCPIBY is the Consumer Price Index at the beginning of the year.The CPI and Inflation in Selected YearBase Years (1982-1984)YearCPIInflation Rate193016.1195025.0197039.81990133.81995153.51996158.63.31997161.31.71998163.91.61999168.32.72000174.03.4Cost of Living AdjustmentsCost of Living Adjustment or COLA: a device that compensates people for the fact that inflation makes the spending power of their income lessProblems Measuring InflationChanges in the Market Basket are too infrequent.The treatment of improvements in the quality of goods is inadequate.People change the places they buy frequently.No accounting for substitutionsThe result is that economists estimate that CPI overstates the cost of living by approximately 1.1 percentage points annually.Real Gross Domestic ProductReal Gross Domestic Product: an inflation adjusted measure of GDPGDP Deflator: the price index used to adjust GDP for inflation, including all goods rather than a market basketRGDP= *100GDPGDP DeflatorPost WWII RGDP1996 in billionsProblems With RGDPGDP only counts market sales so it ignores home production.GDP ignores the value of leisureGDP ignores the composition of outputGDP should be a per capita measureGDP ignores environmental measuresGDP ignores the “underground economy”Measuring UnemploymentWork Force: all those non-military personnel who are over 16 and are employed or are unemployed and actively seeking employmentUnemployment Rate: the percentage of people in the work force who do not have jobs and are actively seeking themProblems Measuring UnemploymentUnderemployed : the state of working significantly below skill level or working fewer hours than desiredDiscouraged worker effect: when bad news induces people to stop looking for work causing the unemployment rate to fallEncouraged worker effect: when good news induces people to start looking for work causing the unemployment rate to rise (until they succeed in finding work)Annual Unemployment RatesTypes of UnemploymentCyclically Unemployed: people lose their jobs because of a temporary downturn in the economySeasonally Unemployed: (a subset of the cyclically unemployed) people who lose their jobs predictably every year at the same timeStructurally Unemployed : people who lose their jobs because of a change in the economy that makes their particular skill obsoleteFrictionally Unemployed: people who are unemployed for a short time in the transition to an equal or better jobThe Business CycleBusiness Cycle: regular pattern of ups and downs in the economyTrough: the lowest point in the business cycleRecovery: the part of the growth period of the business cycle from the trough to the previous peakExpansion: the part of the growth period of the business cycle from the previous peak to the new peakPeak: the highest point in the business cycleRecession: the declining period of at least two consecutive quarters in the business cycleThe Business CycleThe Business Cycle 1982 to 1990DepressionDepression: There is no generally accepted standard but most are characterized by a severe recession that results in a financial panic and bank closures, unemployment rates exceeding 20%, prolonged retrenchment in RGDP on the magnitude of ten percent or more, and significant deflation.