1. GDP – GNP – NNP – NI – PI – DI

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 produced
Real GDP measures current output at constant prices
Real GDP eliminates the influence of price changes from nominal GDP.

3. Did GDP Really Increase?

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 Indexes
The 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 bias
buyers change the mix of goods they buy in response to price changes.
Chain-type indexes of real GDP correct for this bias.

6. Composition of CPI: The Shopping Basket

7. GDPPI (GDP Price Deflator), CPI, and PPI

8. Business Cycles
Business 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%
1931
15.9%
1932
23.6%
1933
24.9% 
1939
17.2%

10. U.S. Real GDP (Recessions Shaded)

11. Annual Growth: Percent Changes in Real GDP

12. The Business Cycle: Some Terminology

13. number in the Labor Force
Unemployment
The unemployment rate is the percentage of the labor force that is not working.
Rate of Unemployment =
number unemployed
number in the Labor Force
The labor force is:
All U.S. residents
Over the age of 16
Who are not institutionalized
Who 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 Unemployment
Employment “off the books in underground economy.

16. Flavors of Unemployment
Seasonal Unemployment
Results from recurring changes in hiring needs of certain industries on a seasonal basis.
Frictional Unemployment: searching for jobs
Results from short-term movement of workers between jobs and job search by those entering the labor force.
Improved labor market information can reduce frictional unemployment
Structural Unemployment
Reflects imperfect match between employee skills and requirements of available jobs.
Results from technological change and other changes in the structure of the economy.
Cyclical Unemployment
Results 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 economy
But 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 inflation
Energy costs and inflation
Hyperinflation:
extremely high rate of inflation.
Printing money as last resort

22. Rates of Inflation for Selected Countries, 1990-2001

23. Interest Rates
Nominal Interest Rate (i): the observed interest rate in the market.
Real Interest Rate (r): nominal rate adjusted for inflation ().
r = i - 

24. The Real Interest Rate on U. S
The Real Interest Rate on U.S. Treasury Bills (Short-Term Securities of US Gov’t)