Macroeconomic Concepts

Macroeconomics looks at the big picture, the performance of our economy as a whole. It measures various symptoms of how healthy the national economy is. Key Economic Indicators 1. Gross Domestic Product 2. Consumer Price Index 3. Unemployment rate

Gross Domestic Product GDP = C + I + G + Xn C= consumer spending I= investment G= government spending Xn= exports - imports GDP is the total market value of all goods and services produced in a nation over a specific period of time (year). Expenditure approach: GDP is equal to the total of all consumer spending, business investment, government spending, and net exports.

Continue GDP Why do we subtract our imports from our exports? The money other countries spend on our exports adds value to our economy, while the money we spend on goods imported from other countries takes money out of our economy. If the nation’s GDP increases, you can tell that the economy is growing, unless the increase was due to inflation, or an increase in prices. To get an accurate measurement of how much the economy is growing, you need to find the real GDP by using a price index to adjust for inflation. The GDP figure before adjusting for inflation is called the nominal GDP. A nation’s rate of economic growth is the percentage change in its real GDP from one year to the next.

Inflation Inflation: increase in the price of goods and services. (We get less for our money) Inflation rate: the percentage rate of change in price level over time. Deflation: decrease in the price of goods and services. (We get more for our money)

Consumer Price Index CPI is one measure of inflation. Economists add up the total price of a “market basket” of typical items bought by an average family in a month. They compare this total price to the total price of the same items a year before. They then divide the current total cost by the previous total cost and multiply the result by 100 to get a percentage. CPI= cost of today’s market basket x 100 cost of market basket in previous CPI = 1000 x 100 = Stagflation: prices increase but the economy does not grow. Cost-of-living adjustment: increases wages to keep up with inflation Today’s Market Basket 960 Previous Year

Unemployment One of the key indicators of an economy’s health Low unemployment usually indicates a healthy and growing economy Labor force: either you have a job or are looking for one. We do not count everyone who doesn’t have a job. We don’t count: -Children -Retired people -Students -Parents who choose to stay home -People who give up looking for a job

Calculating the unemployment Rate Unemployment rate = number of people looking for work number of people in labor force 8.1% = 12,500, ,365,000

Four Different Types of Unemployment 1.Structural unemployment: Occurs when the skills of the labor force do not match those that employers need. (Ex: Factory workers are unemployed because the factories they used to work in have closed.) To reduce structural unemployment, workers must either relocate to where their skills are needed or learn new skills.

Continue 2. Frictional unemployment: Occurs when people decide not to take a job because they are looking for a better job that suits their talents, needs, and desires. (Ex: An unemployed office worker might be able to find a job in the grocery store, but would rather wait until he or she can find a job with better pay.)

Continue 3.Seasonal unemployment: affects mainly people whose jobs depend on the weather. (EX: Snow plow drivers can find worker only in the winter and construction workers are unemployed in the winter.)

Continue 4.Cyclical unemployment: occurs because of a downturn in the economy. (EX: During good times, companies hire workers and production goes up. If consumer demand goes down, companies cut production resulting in the loss of many jobs.)