Agenda Anything new? Tests Returned Naked Economics Quiz Review GDP and the Business Cycle Problems with GDP Article Video Economic Challenges Student Companies HOMEWORK Review Powerpoint for next class (online) Read “Current Reading Assignment” (online)

Review…GDP / Business Cycle Are these examples of U.S. G.D.P.? 1.A Dell computer built in California and purchased by you? 2.An iPod produced in China and purchased in the U.S.? 3.A frappacino produced in Pasadena from coffee beans grown in Brazil? 4.Windows software designed in Washington, created in India and sold in Brazil?

Review…GDP / Business Cycle Why is Gross Domestic Product so important? If GDP then employment (unemployment )

Okun’s Law 2% GDP gap = 1% MORE Unemployment* GDP Gap = GDP Potential – GDP ActualGrowth * More than the natural rate of unemployment

The data….

GDP…a better look Real vs. Nominal GDP Nominal GDP is GDP measured in current prices. It does not account for price level increases from year to year. Real GDP is GDP expressed in constant, or unchanging, dollars. Real GDP adjusts for inflation Real GDP is the important one

GDP … the best look Real GDP per capita GDP per person in constant dollars Best measurement of the economic well being of a country

The Problems with GDP Nonmarket Activities GDP does not measure goods and services that people make or do themselves, such as caring for children, mowing lawns, or cooking dinner. Negative Externalities Unintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP. The Underground Economy There is much economic activity which, although income is generated, never reported to the government. Examples include black market transactions and "under the table" wages.

The Problems with GDP (cont.) Quality of Life Although GDP is often used as a quality of life measurement, there are factors not covered by it. These include leisure time, pleasant surroundings, and personal safety. Doesn’t capture improvements in quality A smartphone is better but cheaper. GDP is going down (cheaper) but life is better (higher quality). Same with cars getting better even if not cheaper

The Problems With GDP ARTICLE

The Problems With GDP

THREE MINUTE BREAK countdown/

Economic Challenges (new stuff) Unemployment Poverty Inflation Economic Inequality They are called “challenges” because they never go away. (Problems are solved, challenges stay with us)

Economic Challenges Unemployment Not enough jobs, people without jobs Measured as… Total number of people unemployed Total Labor Force* Why is that a challenge? People without jobs have no economic security or equity * Note that it is Labor Force, not total population

Four Types of Unemployment 1.Seasonal – Caused by the seasons of the year (ex. Life guard) 2.Structural – Mismatch of skill (ex. Auto worker in Detroit) 3.Cyclical – Caused by the business cycle (ex. Construction worker) 4.Frictional – Caused by time looking for a job (ex. You after high school)

Economic Challenges Poverty – People with an income below a level considered needed to sustain yourself Measured as…a dollar amount Why is that a challenge? No Economic Equity or Security

Economic Challenges Inflation – Increase in prices Measured as a change in prices or the consumer price index (CPI). Why is that a challenge? the value of your money declines money is no longer a store of value same amount of money buys less

Video The Consumer Price Index (CPI) explained

What’s in the CPI

Impact of Inflation ulator.htm/

Inflation (cont.) Three types of inflation 1.Demand pull 2.Cost push 3.Wage / Price spiral

Inflation (cont.) Demand Pull inflation is caused by increasing or excessive demand demand supply

Inflation (cont.) Cost Push inflation is caused by decreasing supply as resource prices increase demand supply

Inflation (cont.) Wage / Price Spiral are caused by increasing demand caused by increase wages (sort of like demand pull) demand supply

Wage / Price Spiral… An Example La Salle High School

Economic Inequality Gap between rich and poor, the haves and the have nots Three Common Measurements Gini index – Most Common 20:20 Ratio Palma ratio

Inequality Measurements Gini index The range of the Gini index is between 0 and 1 (0% and 100%), where 0 indicates perfect equality and 1 (100%) indicates maximum inequality. The Gini index is the most frequently used inequality index. But it’s a little confusing…

Gini Index Totally Equal Less Equal

Inequality Measurements 20:20 Ratio The 20:20 or 20/20 The ratio of the richest 20% of the population to the bottom 20%. Globally, ranges from 8 to 3

20 / 20 Ratio Global Comparison

Inequality Measurements (cont.) Palma ratio The ratio of the richest 10%’s share of income divided by the poorest 40%'s share. Developed by Chilean economist Gabriel Palma who found that middle class incomes almost always represent about half of national income Example: If the richest 10% have 30% of the income and the poorest 40% have 20%, the ratio is 30/20 or 1.5 Weakness – Assumes everyone in the middle 50% is equal

Gini Index

Homework Review Powerpoint for next class (online) Read “Current Reading Assignment” (online)

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