# Measurements of Economic Performance Full Employment Price Stability

• Slides: 46

Measurements of Economic Performance • Full Employment • Price Stability • Economic Growth

How Do We Measure Them? Full Employment is measured by the Unemployment Rate Price Stability (Inflation) is measured by CPI Economic Growth is measured by GDP

Unemployment

What does this mean?

Unemployment BLS Sep 2010 data • Unemployment Rate: the # of unemployed individuals/total # of persons in the civilian labor force • A 0. 1% rise in unemployment=approx 139, 000 people.

Civilian and Non-institutionalized Adult Population • Everyone 16 years old or older and who is not in the military, not in jail or prison, not living permanently in nursing homes, and not in other “institutions. ”

Labor Force (LF) • The total # of adult noninstitutionalized civilians who are either working and on a payroll (E) OR are actively seeking work (U). • You are not considered unemployed if you are not actively seeking work

Are the following employed or unemployed? • • • Your retired grandfather? A mother who stays home with kids? Someone just sentenced to 10 years? A full time college student? Any of you?

Labor Force Participation Rate • Labor force/adult population X 100. • i. e. , adult population is 222. 8 million – Labor force is 146. 8 million – What is the labor force participation rate? – 65. 9%

How do we calculate this rate? • BLS calls 55, 000 households and asks the person the following… – Are you working? – Have you looked for work in the past four weeks?

• You work for the BLS. Interview your classmates and figure out the unemployment rate of the class and labor force participation rate

• Determine the impact on each of the following if two million formerly unemployed workers decide to return to school full-time and stop looking for work… – A. the labor force participation rate – B. The size of the labor force – C. The unemployment rate

• The labor force in the US has 146. 8 million people in it. Of those, 138. 6 million are employed. What is the unemployment rate?

Types of Unemployment • 1) Frictional: unemployment that is caused by workers who are b/w jobs for one reason or another

Types of Unemployment • 2) Structural: occurs when a fundamental change in the operations of the economy reduces the demand for workers

Types of Unemployment • 3) Cyclical: directly related to swings in the business cycle, i. e. , layoffs in response to a recession…this is why the unemployment graph looks the way it does. • Changes/cycles every 3 -5 years

Types of Unemployment • 4) Seasonal: resulting from changes in weather or changes in the demand for certain products. • annual

Types of Unemployment • 5) Technological: caused when workers with less skills, talent, or education are replaced by machines and other equipment that do their jobs • automation

Why don’t we just print all of the money that we need?

Inflation! --rise in the general level of prices

What is Price Stability? • A steadiness of the price level from one period to the next; zero or low annual Inflation; also called “price-level stability. ” • How do we measure it? – CPI—Consumer Price Index

Other Issues with Inflation Deflation is when the general level of prices is falling. This is the opposite of inflation. Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system. Germany in 1923, prices rose 2, 500% in one month. Zimbabwe

Hyperinflation 500% or greater Usually the last stage before a monetary collapse Zimbabwe 2008

Deflation • Very rare • Only two significant deflations have occurred: – post WWI recession (1920 s) – Great Depression (1930 s)

Types of Inflation • Demand-Pull Inflation- Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level. “Too much spending chasing too few goods. ” • Cost-Push Inflation- Increases in the price level (inflation) resulting from an increase in resource costs and hence in per-unit production costs. – The major source of this type of inflation has been from supply shocks

Inflation and Purchasing Power The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a \$1 pack of gum will cost \$1. 02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.

Measuring Inflation CPI: Consumer Price Index—economists look at the current price of a selection of goods Inflation is a calculation of the annual rates of change of the price level Inflation rate = in price level/beginning price level X 100 CPI Calculator

Causes of Inflation 1) Increased demand creates shortages and increased price levels (demand-pull) 2) federal deficit (demand pull+gov) 3) rising costs of inputs (i. e. , labor) drive up prices (cost-push) 4) excessive money growth (the government prints excess money) 5) some argue that inflation is natural part of increased wages

So what… • The US dollar buys less • Difficult for people on fixed incomes (i. e. , retired people) • Lenders tend to be hurt by long periods of inflation

What is Economic Growth? • A nation's overall standard of living, that is, not just the individuals who have improved their human capital, but all their fellow citizens as well.

Economic Growth vs. Economic Development • Economic growth can be measured in terms of some concrete measures, such as real GDP per capita. • However, even corrected for price level changes (real) and differences in population (per capita), growth rates do not tell everything about the well-being of the citizens of a country. Economic growth is a quantitative measure. • Economic Development encompasses qualitative measures. Such things as distribution of income, employment rates, educational attainment and health of citizens tell more about a country's level of development than does an average income figure.

I need 10 volunteers • What is your guess of the percentage of private wealth owned by the top 10%?

What is GDP? GDP = Gross Domestic Product • The basic measure of a nation’s economic output and income. • It is the total market value, measured in dollars, of all final goods and services produced in the economy in one year.

What is The United State’s Economic Growth Rate? Economic Growth occurs when there is a sustained increase in real GDP. Our current economic growth rate is

What is Per Capita GDP? • It measures the amount of GDP that is available for each person. 2011 Per Capita GDP in the US is approximately \$48, 100. 00 (CIA World Factbook)

NOMINAL GDP VERSUS REAL GDP • Calculating Real GDP – The value of the final goods and services produced in a given year when valued at constant prices…aka, adjusted for inflation. – Nominal GDP – The value of the final goods and services produced in a given year valued at the prices that prevailed in that same year.

What is the Best Economic Indicator? • Real GDP Per Capita may be a better indicator of economic growth than the percentage change in real GDP alone because it takes into consideration the population growth of the country.

How is GDP Calculated? Consumption (C): Spending by households on goods and services. Includes spending on things such as cars, food, and visits to the dentist. Makes up 2/3 rds of GDP spending. Investment (I): Spending by businesses on machinery, factories, equipment, tools, and construction of new buildings. Government (G): Spending by all levels of government on goods and services. Includes spending on the military, schools, and highways. Net Exports NX: Spending by people abroad on U. S. goods and services (exports, or X) minus spending by people in the U. S. on foreign goods and services (imports, or M). GDP = C + I + G + NX

What’s missing…?

Shortcomings in GDP as a Measure of Total Production. What GDP Doesn’t Include… • Household Production- Goods and services people produce for themselves. • The Underground Economy- Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

Shortcomings of GDP as a Measure of Well. Being • The Value of Leisure Is Not Included in GDP- I value retiring more than working but when I retire GDP decreases. • GDP is Not Adjusted for Pollution or Other Negative Effects of Production- Although countries with a higher GDP typically take better care of the environment.

Shortcomings of GDP as a Measure of Well. Being • GDP Is Not Adjusted for Changes in Crime and Other Social Problems- Crime may reduce well-being but may increase GDP if it leads to greater spending on police, security, etc. Divorce, drug addiction and other factors may affect well-being.

Shortcomings of GDP as a Measure of Well. Being • GDP Measures the Size of the Pie but Not How the Pie is Divided Up- Unequal distribution. GDP may not provide good information about the goods and services consumed by a typical person.

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