2 Real and Nominal GDP “Real“ GDP adjusts for inflation. Nominal GDP ($GDP) measures national output based on current prices of goods and services.Real GDP measures of the quantity of final goods and services producedReal GDP measures current output at constant pricesReal GDP eliminates the influence of price changes from nominal GDP.
4 Consumer Price Index (CPI) measures the cost over time of a typical bundle of goods and services purchased by households.Producer Price Index (PPI)measures average prices received by producers over time for raw materials, intermediate, and final goods.GDP Price Deflator (GDP Price Index, GDPPI)measures average prices over time of all goods and services included in GDP.includes prices of things government buys, capital goods businesses buy, things foreigners buy from us, etc.
5 Price IndexesThe value of a price index in any year indicates how prices have changed relative to a base year.The index is 100 the percent change in prices from the base year.CPI suffers from substitution biasbuyers change the mix of goods they buy in response to price changes.Chain-type indexes of real GDP correct for this bias.
8 Business CyclesBusiness Cycle: the pattern of real GDP rising and falling: expansions and contractions.Recession (Contraction): two or more successive quarters of falling real GDP.Depression: a severe, prolonged economic contraction.Prior to the 1930s, economic downturns were called “crises.” The term depression was introduced so people wouldn’t be scared.The Great Depression gave “depression” a bad name. We now speak of “recessions.”
9 The Great Depression Year U.S. Unemployment Rate 1929 3.2% 1930 8.7% 193115.9%193223.6%193324.9%193917.2%
13 number in the Labor Force UnemploymentThe unemployment rate is the percentage of the labor force that is not working.Rate of Unemployment=number unemployednumber in the Labor ForceThe labor force is:All U.S. residentsOver the age of 16Who are not institutionalizedWho are looking for work
14 Understating Unemployment Discouraged Workers: workers who have looked for work in the past year, but have stopped because they believe no one will offer them a job.Underemployment: employment of workers in jobs that do not fully utilize their productive skills.Overstating UnemploymentEmployment “off the books in underground economy.
16 Flavors of Unemployment Seasonal UnemploymentResults from recurring changes in hiring needs of certain industries on a seasonal basis.Frictional Unemployment: searching for jobsResults from short-term movement of workers between jobs and job search by those entering the labor force.Improved labor market information can reduce frictional unemploymentStructural UnemploymentReflects imperfect match between employee skills and requirements of available jobs.Results from technological change and other changes in the structure of the economy.Cyclical UnemploymentResults from business cycle fluctuations.Business activity down cyclical unempl’mt up.
17 Unemployment and Its Costs “Natural” Rate of Unemployment A normal rate, considering both frictional and structural factors.NAIRU (Nonaccelerating Inflation Rate of Unemployment) -- ~5% for US economyBut be aware: The “natural” rate can change!Potential Real GDP The level of output when non-labor resources are fully utilized and unemployment is at its natural rate.GDP gap = potential real GDP – actual GDP
20 Flavors of Price Inflation Demand-pull inflation:caused by increases in aggregate demand outpacing increases in aggregate supply.Cost-push inflation:increased production costs cause firms to raise prices.Wage-push inflationEnergy costs and inflationHyperinflation:extremely high rate of inflation.Printing money as last resort