Lecture Issues in economics today - Chapter 7

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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.

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Nội dung Text: Lecture Issues in economics today - Chapter 7

Chapter 7 Every Macroeconomic Word You Have Ever Heard: Gross Domestic Product, Inflation, Unemployment, Recession and Depression McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Chapter Outline • Measuring the Economy • Real Gross Domestic Product and Why it is Not Synonymous with Social Welfare • Measuring and Describing Unemployment • Business Cycles McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Microeconomics vs. Macroeconomics • Microeconomics: that part of the discipline of economics that deals with individual markets and firms • Macroeconomics: that part of the discipline of economics that deals with the economy as a whole McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Gross Domestic Product • Gross 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. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Measuring Prices • Market Basket: what average people buy and in what quantities they buy it • Base 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. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Price Index • Price Index: a device that centers the price of the market basket around 100 • Consumer Price Index: the price index based on what average consumers buy PATMB CPI= PBYMB *100 Where P MB is the price of the market basket at “any time” and AT PBYMB is the price of the market basket in the base year McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Measuring Inflation • Inflation Rate: the percentage increase in the consumer price index CPIEYCPIBY Inflation rate = *100% CPIBY Where CPIEY is the Consumer Price Index at the end of the year and CPIBY is the Consumer Price Index at the beginning of the year. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
The CPI and Inflation in Selected Year Base Years (1982-1984) Year CPI Inflation Rate 1930 16.1 1950 25.0 1970 39.8 1990 133.8 1995 153.5 1996 158.6 3.3 1997 161.3 1.7 1998 163.9 1.6 1999 168.3 2.7 2000 174.0 3.4 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Cost of Living Adjustments • Cost of Living Adjustment or COLA: a device that compensates people for the fact that inflation makes the spending power of their income less McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Problems Measuring Inflation • Changes 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 substitutions The result is that economists estimate that CPI overstates the cost of living by approximately 1.1 percentage points annually. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Real Gross Domestic Product • Real Gross Domestic Product: an inflation adjusted measure of GDP • GDP Deflator: the price index used to adjust GDP for inflation, including all goods rather than a market basket GDP RGDP= *100 GDP Deflator McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Post WWII RGDP 1996 in billions 10000 9000 8000 7000 6000 5000 Real GDP 4000 3000 2000 1000 0 1957 1962 1967 1972 1977 1982 1992 1997 1947 1952 1987 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Problems With RGDP • GDP only counts market sales so it ignores home production. • GDP ignores the value of leisure • GDP ignores the composition of output • GDP should be a per capita measure • GDP ignores environmental measures • GDP ignores the “underground economy” McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Measuring Unemployment • Work Force: all those non-military personnel who are over 16 and are employed or are unemployed and actively seeking employment • Unemployment Rate: the percentage of people in the work force who do not have jobs and are actively seeking them McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Problems Measuring Unemployment • Underemployed : the state of working significantly below skill level or working fewer hours than desired • Discouraged worker effect: when bad news induces people to stop looking for work causing the unemployment rate to fall • Encouraged worker effect: when good news induces people to start looking for work causing the unemployment rate to rise (until they succeed in finding work) McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Annual Unemployment Rates 12 10 8 6 Unemployment Rate 4 2 0 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Types of Unemployment • Cyclically Unemployed: people lose their jobs because of a temporary downturn in the economy • Seasonally Unemployed: (a subset of the cyclically unemployed) people who lose their jobs predictably every year at the same time • Structurally Unemployed : people who lose their jobs because of a change in the economy that makes their particular skill obsolete • Frictionally Unemployed: people who are unemployed for a short time in the transition to an equal or better job McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
The Business Cycle • Business Cycle: regular pattern of ups and downs in the economy • Trough: the lowest point in the business cycle • Recovery: the part of the growth period of the business cycle from the trough to the previous peak • Expansion: the part of the growth period of the business cycle from the previous peak to the new peak • Peak: the highest point in the business cycle • Recession: the declining period of at least two consecutive quarters in the business cycle McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
The Business Cycle McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
The Business Cycle 1982 to 1990 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.