Mater Academy Charter Middle / High School



ECO 2013/ Principles of Macroeconomics

Spring 2016

Module 3: Measures of Economic Performance

The course provides instruction in measurements of economic performance

The course provides instruction in inflation, unemployment, and stabilization policies

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Support text: McConnell and Brue, Economics 18th Ed, Chapters 23, 24 and 26

Module 3 / Basic Economic Concepts

1. The nature of macroeconomics.

2. The national accounts

a. Gross Domestic Product: Definition, calculating GDP, components of GDP ( expenditure approach)

b. Real GDP vs nominal GDP; market baskets and price indexes

c. Other national accounts: net national product (NNP), national income (NI), personal income (PI), and disposable income (DI).

3. Deviations from the Trend: Business Cycles. Phases and causation.

4. Unemployment.

a. Definition and Measurement.

b. The natural rate of unemployment

c. Types: seasonal, frictional, structural, cyclical. Which affect the unemployment rate?

d. Full Employment: What is it? What are the implications if achieved?

5. Inflation and deflation

a. Meaning of inflation

b. Measurement of inflation

c. Facts and types of inflation

Module Objectives

• Differentiate between Macroeconomics and Microeconomics

• Understand how Gross domestic Product (GDP) is defined and measured.

• Understand difference between real GDP and nominal GDP

• Understand why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy.

• Understand how unemployment and inflation are measured

• Recognize the types of unemployment and inflation and their various economic impacts.

Textbooks

• McConnell, Campbell; Brue, Stanley; and Flynn, Sean. “Economics, Principles, Problems, and Policies”. 18th Edition, New York, McGraw-Hill Irwin, 2009. ISBN -13:978-0-07-337569

• Krugman, P. and Wells, R.” Economics, 2nd edition, BFW 2009, ISBN 978-0-7167-7158-6

Online Resources

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Lesson #1 “Measuring Domestic Output and National Income”

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Class Work and Homework Instructions

Lesson Objectives/ at the end of the lesson, students will be able to:

• Understand how Gross domestic Product (GDP) is defined and measured.

• Understand difference between real GDP and nominal GDP

• Identify the components of GDP on the demand side and on the supply side

Main topics

1. The nature of macroeconomics: Macroeconomic Goals, framework, and tools.

2. Measuring the Size of the Economy: Gross Domestic Product

• The expenditure approach / by components on the demand side

• The income approach / by components on the supply side

3. Real GDP vs nominal GDP; market baskets and price indexes

4. Other national accounts: net national product (NNP), national income (NI), personal income (PI), and disposable income (DI).

To Do

1. Take notes and participate in any class discussion. Be an active participant of the class.

2. By using the Required Textbook (McConnell, Campbell; Brue, Stanley; and Flynn, Sean; “Economics, Principles, Problems, and Policies”. 18th Edition, New York, 2009), students will read the chapters 24 “Measuring Domestic Output and national Income” (pages 479-497). Take notes and complete the following vocabulary and key terms.

Vocabulary and Key Terms

• Macroeconomics vs Microeconomics

• Macroeconomics questions

• Gross domestic product (GDP)

• Expenditure approach

• Income approach

• Personal consumption expenditures (C)

• Gross private domestic investment (I)

• Government purchases (G)

• Net exports (Xn)

• Nominal GDP

• Real GDP

• Price Index

3. Work on “Study Questions/ Checking your Understanding” (see attachment for details). Show all your work on a separate piece of paper and justify your answers. Use a graph for illustrating your answers (if apply). Label any axis/ curve/graph.

4. Make a summary and be sure you understand the basic chapter ideas. List topics/concepts you didn’t understand. Ask your teacher at the beginning of the next class and/or attend a tutoring session.

5. As a reference student will use the following online resource:

, look for “Macroeconomics Textbook” and review chapter 6 “The Macroeconomic Perspective”, pages 131-158.

“Measuring Domestic Output and National Income”

Study Questions

1. Why do economists include only final goods in measuring GDP for a particular year? Why don't they include the value of the stocks and bonds bought and sold? Why don't they include the value of the used furniture bought and sold?

2. What are the main components of measuring GDP with what is demanded?

3. What are the main components of measuring GDP with what is produced? Would you usually expect GDP as measured by what is demanded to be greater than GDP measured by what is supplied, or the reverse?

4. Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP?

5. Which of the following are included in GDP, and which are not?

a. The cost of hospital stays

b. The rise in life expectancy over time

c. Child care provided by a licensed day care center

d. Child care provided by a grandmother

e. The sale of a used car

f. The sale of a new car

g. The greater variety of cheese available in supermarkets

h. The iron that goes into the steel that goes into a refrigerator bought by a consumer.

6. Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The results you obtain with the different methods should be the same.

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a. Using the above data, determine GDP by both the expenditures and the income approaches.

7. Last year, a small nation with abundant forests cut down $200 worth of trees. $100 worth of trees were then turned into $150 worth of lumber. $100 worth of that lumber was used to produce $250 worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in the production of trees, lumber, and bookshelves, what is this nation's GDP? In other words, what is the value of the final goods produced including trees, lumber and bookshelves?

8. Why must double counting be avoided when measuring GDP?

9. Ethiopia has a GDP of $8 billion (measured in U.S.dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.

10. In 1980, Denmark had a GDP of $70 billion (measured in U.S. dollars) and a population of 5.1 million. In 2000, Denmark had a GDP of $160 billion (measured in U.S. dollars) and a population of 5.3 million. By what percentage did Denmark’s GDP per capita rise between 1980 and 2000?

11. What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms?

8. How do you convert a series of nominal economic data over time to real terms?

12. Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2000 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine the GDP price index for 1984, using 2000 as the base year. By what percentage did the price level, as measured by this index, rise between 1984 and 2000?

13. The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data.

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14. What are the two main difficulties that arise in comparing the GDP of different countries?

15. List some of the reasons why GDP should not be considered an effective measure of the standard of living in a country.

16. What does GDP not tell us about the economy?

17. Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?

Main ideas

• Macroeconomics is the study of the behavior of the economy as a whole, which can be different from the sum of its parts. Macroeconomics differs from microeconomics in the type of questions it tries to answer.

Definition of GDP

• The total market values of all final goods and services produced within a country in one year.

• Market value: We must compute the value of production, not just the production. Example: Suppose you need to track the monthly production of a small coffee shop. The table represents the output in two recent months.

|January |February |

|# Cappuccinos |# Café Lattes |# Scones |# Cappuccinos |# Café Lattes |# Scones |

|25 |25 |50 |30 |30 |40 |

Calculate the amount of goods produced by the coffee shop each month.

• At first glance the two months produced the same amount (100) of goods, but the mix of goods is different:

Adding the value of production / incorporating the value of these items

|January |Quantity |Prices ($) |Value of Production ($) |

|Cappuccinos |25 |3.00 |75 |

|Café Lattes |25 |2.50 |62.50 |

|Scones |50 |1.50 |75 |

|Total |100 | |212.50 |

|February |Quantity |Prices ($) |Value of Production ($) |

|Cappuccinos |30 |3.00 |90 |

|Café Lattes |30 |2.50 |75 |

|Scones |40 |1.50 |60 |

|Total |100 | |225 |

• Calculate the value of production each month and make a conclusion

Making preliminary conclusions

• While both months had 100 units of production, February was a more impressive month because the total value of the production was higher.

• This difference would have been noticed and anticipated by the owners of the coffee shop.

Definition of Final Goods vs. Intermediate Goods

• Final goods are those are ready for consumption. A bottle of ketchup at the grocery story is counted.

• Intermediate goods are those that require further (extra, additional) processing before they are counted as a final good.

Example: A raw material like a tomato may be bought and sold several times before it appears as a final good. If we were to count the dollars at every stage of this process, we would be double counting, and this is to be avoided.

|Transaction |Cost ($) |

|1 Lb. of tomatoes from Grower to Processor |0.50 |

|Bottle of ketchup from processor to Publix |1.50 |

|Publix sells ketchup to consumer |3.00 |

|Total $ spent |5.00 |

At each stage, value is added to the final product. The total price of ketchup includes all of these values, so we only count the final transaction price of $3.00. $5.00 overstates the value of the good in its final use.

• GDP includes only final products and services. It avoids double or multiple counting, by eliminating any intermediate goods. GDP only adds the final transaction as the value of the final good produced.

• GDP is calculated as the production done within the bounds of a given nation. It doesn’t matter where it is consumed, or where the company is headquartered.

Example: General Motors, an American company, has a factory producing trucks in South Africa. The value of these trucks in counted in South Africa’s GDP.

• GDP sums the dollar value of what has been produced in the economy over the year, not what was actually sold.

Example: A Honda Civic produced in Kentucky in 2009, but not sold until January 2010 is counted in 2009 production and 2009 GDP.

How the GDP is measuring

How the GDP is measuring /as spending on domestically produced final goods and services / Expenditure Approach

GDP is divided into categories of buyers in the market: household consumers, businesses, government, and buyers from outside of the country.

Categories of the GDP / Expenditure Approach

• Personal consumption expenditures ( C ) includes durable goods, non-durable goods and services.

Examples:

▪ A pound of tomatoes------- non-durable

▪ A new washing machine --------durable

▪ A pedicure ----service

• Domestic Investment (I) includes:

▪ All final purchases of machinery and equipments, and tools by business.

▪ All constructions (including residential) / Building a new apartment complex or a “Sedano’s Superstore”

▪ Chances in business inventory

• If total output exceeds currents sales, unsold inventories build up / Remember GDP is about production in a year, not consumption

• If business are able to sell more than they currently produce, this entry will be negative number.

• Government Purchases / Government Expenditures (G) include consumption goods and capital goods.

▪ All levels of government are included (federal, state, local)

▪ All direct purchases of resources are included, (labor included)

Example: A local City Hall buy a heavy duty van from General Motors.

• Net Exports (X-IM)

▪ All expending of goods produced in the U.S. (purchased here or abroad) (exports)

▪ Imports : goods purchased in the U.S. but produced elsewhere

▪ Net Exports = X-IM / Positive or negative depending on which is the large amount.

Summary:

GDP = C + I + G + Xn

How the GDP is measuring as factor income earned from firms in the economy

• The sum of the following components represent National Income: all income earned by American supplied resources, whether here or abroad. This category demonstrates how the expenditures on final products are allocated to resource suppliers.

Categories of the GDP / Income Approach

• Compensation of employees: wages, salaries, unconventional benefits, salaries and supplements, and payment made on behalf of workers like social security and other health and pension plans.

• Rents: payments for supplying property resources

• Interest: Payments from private business to suppliers of money capital.

• Proprietors’ income: Income of single proprietorships, etc.

• Corporate profits: After corporate income taxes are paid to government, dividends are distributed to the shareholders (investors, owners), and the remainder is left as undistributed corporate profits.

Summarizing

NI = Wages + Rents + Interest + Profits

What’s out of the GDP?

• Second hands sales: Previously existing assets and property sold or transferred must be excluded.

• Purely financial transactions such as

• Public transfer payments (social security or cash welfare benefits)

• Private transfer payments (student grants, alimony, etc.)

• Sale of stocks and bonds (represent transfer of existing assets)

Module 3: Measures of Economic Performance

Work on an economics article review.

General Information

To obtain course credits and earn an average grade of C or higher, each student is required to submit two written economics article reviews during corresponding to the current course.

Objectives:

• Develop comprehension ability to reach overview of material and the ability to evaluate strengths and weaknesses of a work.

• Develop writing abilities, such as follow instructions, summarize materials, take notes, and provide appropriate support to opinions and own statements.

The article review is a written evaluation in form of an essay, of a particular work after careful reading, note-taking and analysis of what the author is trying to say. Your review’s length may vary according to the article’s size. Generally four to six typed paragraphs per article will suffice. The review consists of four components that are placed in continuous narrative:

1. Description of the work: A one or two paragraph description of the work’s physical structure and any information about the author you may have discovered. For example magazine title, number of pages, publisher, copyright, date, edition, whether it is part of a series.

2. Statements of author’s goals: The author will say that he or she is trying to accomplish somewhere at the outset either in the article’s preface or in its introduction. In your own words, or paraphrasing his or her own, state the person’s objectives for having writing the article (one or two paragraphs)

3. Your judgement about the article: Did the author achieve the goals set forth? Or were some achieved but not all? Were the conclusions valid, or can you show when he or she hedged the point? If the answer is “yes” show why and use examples from the text to bolster your praise. If the answer is “no,” do the same thing to back your claim. Remember, you cannot praise or condemn without proof.

4. Personal opinion of the whole work: Did you like the article? Why or why not? Use examples to support your statements

The articles review may be related to one of the following topics:

• The Great Depression (1929-1933) and its social and cultural impact on America.

• Many poor countries have high of rates of population growth: Effects on the long-run growth rates of overall output and on the achievement of increasing a higher standard of living.

• Business cycle at the United States: current economic status in the United States.

• Business cycle and economic growth in selected countries.

For review, select a current article (within one year of publication). The article must be the equivalent of at least one page in length. Analyze the article in deep. Follow instruction and use the rubric as a guide for a good grade.

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Due by March 15, 2016

Lesson #2 / “Deviations from the Trend: Business Cycles”

“Unemployment and Inflation”

Class Work and Homework Instructions

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Lesson Objectives/ at the end of the lesson, students will be able to:

• Explain the business cycle and its primary phases

• Understand how unemployment and inflation are measured

• Recognize the types of unemployment and inflation and their various economic impacts.

To Do

1. Take notes and participate in any class discussion. Be an active participant of the class.

2. By using the Required Textbook (McConnell, Campbell; Brue, Stanley; and Flynn, Sean; “Economics, Principles, Problems, and Policies”. 18th Edition, New York, 2009), students will read the chapters 26 “Business cycle, unemployment, and inflation” (pages 520-539).Take notes and complete the following vocabulary and key terms.

Vocabulary and Key Terms

•

• Business cycle : Expansion, Peak, Contraction, Recession, Trough

• Trough

• Cyclical Unemployment

• Deflation

• Discouraged Workers

• Expansion

• Frictional unemployment

• Structural Unemployment

• Full-Employment Rate of Unemployment

• Hyperinflation

• Labor Force

• Natural Rate of Unemployment (NRU)

• Nominal Income

• Real Income

• Real Interest Rate

• Price Index

• Market basket

• GDP price deflator

• Expected/Anticipated inflation

• Nominal rate of interest

• Depression

• Consumer Price Index (CPI)

• Inflation

• Unanticipated Inflation

• Unemployment Rate

3. The chapter reading will provide student an introductory look at macroeconomic instability.

4. Work on “Study Questions/ Checking your Understanding” (see attachment for details). Show all your work on a separate piece of paper and justify your answers. Use a graph for illustrating your answers (if apply). Label any axis/ curve/graph.

5. Make a summary and be sure you understand the basic chapter ideas. List topics/concepts you didn’t understand. Ask your teacher at the beginning of the next class and/or attend a tutoring session.

6. As a reference student will use the following online resource:

, look for “Macroeconomics Textbook” and review chapter 6 “The Macroeconomic Perspective”, pages 131-158.

Study Questions From page 538, Questions # 1, 3, 5, and 8.

1. Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million (of whom 139.1 million are employed). How many people are “not in the labor force?” What are the proportions of employed, unemployed and not in the labor force in the population? Hint: Proportions are percentages.

2. Using the above data, what is the unemployment rate? These data are U.S. statistics from 2010. How does it compare to the February 2015 unemployment rate computed earlier?

3. Over the long term, has the U.S. unemployment rate generally trended up, trended down, or remained at basically the same level?

4. Whose unemployment rates are commonly higher in the U.S. economy?

a. Whites or nonwhites?

b. The young or the middle-aged?

c. College graduates or high school graduates?

5. Beginning in the 1970s and continuing for three decades, women entered the U.S. labor force in a big way. If we assume that wages are sticky in a downward direction, but that around 1970 the demand for labor equaled the supply of labor at the current wage rate, what do you imagine happened to the wage rate, employment, and unemployment as a result of increased labor force participation?

6. Is the increase in labor force participation rates among women better thought of as causing an increase in cyclical unemployment or an increase in the natural rate of unemployment? Why?

7. Many college students graduate from college before they have found a job. When graduates begin to look for a job, they are counted as what category of unemployed?

Main Ideas

• The typical business cycle goes through four phases:

o Peak

o Recession

o Trough

o Expansion

• Unemployment is of three general types:

o Frictional

o Structural

o Cyclical

• The natural unemployment rate (frictional plus structural) is presently four to five percent in the US

• A positive GDP gap occurs when actual GDP exceeds potential GDP; a negative GDP gap occurs when actual GDP falls short of potential GDP

• Society loses real GDP when cyclical unemployment occurs; according to Okun’s law, for each one percentage point of unemployment above the natural rate, the US economy suffers a two percent decline in real GDP below its potential GDP

• Inflation is a rising general level prices and is measured as a percentage change in a price index such as the CPI

• Inflation harms those who receive relatively fixed nominal incomes and either leaves unaffected or helps those who receive flexible normal incomes

Unemployment and Its Calculation

• The Bureau of Labor Statistics (BLS) categorize citizens above the age of 16 who are not in prisons or Armed Forces, into three groups:

▪ Employed: people working at least 1 hour per week.

▪ Unemployed: people not working at least 1 hour per week BUT seeking work

▪ Not in labor force

• Labor Force = Employed + Unemployed

• Labor force participation rate = 100 x Labor Force/civilian population 16 and older

• Unemployment rate: the percent of the labor force that is not employed

UR % = 100 x # of unemployed/ labor force

Causes and Categories of Unemployment

• The job market is constantly fluctuating according to different parts of the business cycle.

• The business cycle represents alteration between economic downturns and upturns in the economy.

• Phases of a business cycle: recession, trough, recovery, and peak

• Unemployment rate is never equal to zero because even in the best of times there are some causes of unemployment that occurs always. The natural rate of unemployment exists always.

• Natural unemployment = frictional unemployment + structural unemployment.

• Actual unemployment = natural unemployment + cyclical unemployment.

• Frictional Unemployment: Looking for job or waiting to take jobs soon. Examples: A college graduate but doesn’t start a job for a month. A truck driver quits his job for one company looking for a better driving route from another company.

• Structural Unemployment: there are more people seeking jobs in a labor market than jobs available at the current wage rate. Example: When certain skills become obsolete or geographic distribution of jobs changes.

• Seasonally Unemployment: People find a job for only a portion of the year due to the seasonal nature of their jobs. Example some agriculture activities.

• Cyclical Unemployment: People are out of work because of the business cycle. They will be back to work when production picks up during the next expansion.

Inflation

• It is a sustained rise in most prices in the economy.

• Economists say that the level of prices doesn’t matter….but the rate of change of prices does……

• Inflation rate is the rate at which prices are rising.

Example: A student has $20 per week to spend on gasoline ($2 per gallon) or café lattes ($4 per cup). The table shows his purchasing possibilities

|The most gas he could buy |The most lattes he could buy |To buy one more latte, he must give up (trade-off) |

|10 gallons |5 cups |2 gallons of gasoline |

• One gallon of gas uses up 10% of his income

• One cup of latte uses up 20% of his income

• What would happen if his income doubled and so did the price of gasoline and the price of a latte? ABSOLUTELY NOTHING/ Nothing REAL has changed.

• BUT what if the price of gas and lattes double, while his income stays the same????

• One gallon of gas uses up 20 % of his income and a cup of latte 40% of his income/ this price inflation decreases his purchasing power/ in a very REAL sense, he is worse off.

• Rapid inflation imposes costs on society in the form of shoe-leather costs, menu costs, and unit-of-account costs.

• Shoe-leather costs: People spend a lot of time looking for less expensive substitutes. All this extra time and effort comes at a cost to the consumer. The term Shoe-leather cost is an allusion to the wear and tear caused by the extra running around that take place when people are trying to avoid holding money.

• Menu costs: These are the costs incurred by sellers just to update the posted prices new menus and signs)

• CPI (consumer price index) is a measure of the price of a specified collection of goods and services, called “market basket” in a given year as compared to the price of an identical basket in a reference year.

Price Index = Price of market basket in a specific year / price of the same basket in base year

Real GDP = Nominal GDP/ Price Index (in hundredths)

Assignments and Assessments

1. For a classwork grade/ Key terms and questions for Lesson 1: Complete the vocabulary and answer questions from page 496, Questions #3, 11, and 13.

2. For a quiz grade/ Read the article “GDP: Does It Measure Up? “ From and complete questions at the end of article.

3. For a classwork grade/ Key terms and questions for Lesson 2:/ Complete the vocabulary and answer questions from page 538, Questions # 1, 3, 5, and 8.

4. For a Homework Grade / Read the article “Then and Now: Fed Policy Actions during the Great Depression and Great Recession”, November 2011 by using the following link

5. For a QUIZ Grade/Answer the following questions:

1. Define the term “unemployment”. Why do economists consider unemployment as a serious economic problem?

2. List and explain the different types of unemployment. Is the full employment possible? Explain.

3. Margaret loses her job at a shoe factory when the economy falls into a recession. Classify the Margaret’s unemployment into a general category.

4. Comment the following statement: “It is unlikely that the unemployment rate will ever fall to zero”. Is the statement correct? Why?

5. The most recent statistics confirms that there is a strong demand for welders in California but Bill, an unemployed welder, lives in New York. Is Bill considered a frictionally unemployed? Explain your answer.

6. You are working at a supermarket bagging groceries but you are unhappy about your wage so you quit and begin looking for a new job at a competing grocery store. What type of unemployment is this?

7. By using the information below for a small town, answer the following questions:

a. What is the size of the labor force?

b. What is the unemployment rate?

|Total Population | 2000 |

|Total Employed Adults | 950 |

|Total Unemployed Adults | 50 |

8. Define inflation. Does the inflation encourage households to save money? Justify your answer.

9. Inflation exerts significant cost on the economy. Specifically, explain the following inflation effects:

a. Causes a misallocation of resources.

b. Discourage savings

c. Redistributes wealth from lenders to barrowers.

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