1. Unit 6 Economic Indicators & Goals

2. Economic Indicators
Different aspects of economic activity that, when evaluated together, indicate the health and direction of the economy
Some are considered leading indicators
Indicators change before the economy changes
Some are considered coincident indicators
Indicators change when the economy changes
Some are considered lagging indicators
Indicators change after the economy changes

3. Gross Domestic Product (GDP)
The monetary value of all the finished goods and services produced in the United States during a specified time period
Measured in dollars
Real GDP (real GDP per capita = real GDP/population)
the value of the GDP after taking out the effect of price changes
using this number takes out the effects of inflation and relates to real buying power
Nominal GDP
GDP is determined by evaluating the production of goods and services at current prices
5. _______________ is a measure of a nation's economic output and is defined as the monetary value of all final goods and services produced in a country over one year.
Deflation
GDP
Exchange rate
Monopsony
Suppose a small country produces only one type of good. The price per unit and number of units produced for 2009 and 2010 are provided in the table below.
Year
Price Per Unit # of Units Produced
2009 $20 5,000
2010 $22 5,750
9. The nominal GDP for 2010 is
$10,000.
$50,000.
$100,000.
$126,500
10. Real GDP for 2010 is
Hint: Remember to use 2009 prices as a constant.
$100,000
$110,000
$115,000
$120,000
13. What is the real GDP per capita of a country whose real GDP is $20 billion and has a population of 4 million people?
$500
$1,000
$5,000
$20,000

4. GDP is used to measure economic size & growth
the change in the level of economic activity from one year to another
Includes the following:
Consumer spending
Spending by individuals on goods and services
Referred to as private consumption
Business spending on capital
Businesses buying equipment, expanding facilities, etc.
Referred to as investment
Government spending
Purchases by the government of goods & services from the private sector
Payments to government employees

5. Expenditure approach:
GDP Equation
Only include final goods
Items purchased for final use
Example: automobiles, kitchen appliances, computers, etc.
Do not include Intermediate goods (purchased for resale or used to produce other goods)
Example: farmers wheat (will be ground into flour and sold) the flour can be intermediate
Expenditure approach:
GDP = Consumption + Investment + Government Spending + Net Exports
11. Which of the following is NOT true about intermediate goods?
They are goods that are purchased for resale or goods that will be used to produce other goods.
They are included in the calculation of GDP.
If you are not careful and counted them in the GDP, you would be counting the same goods more than once.
All of the above
12. According to the expenditure approach, GDP =
Investment + Intermediate Goods + Imports
Government spending - Investment - Consumption
Imports - Exports + Consumption
Consumption + Investment + Government Spending + Net Exports

6. Well-being measured by size of GDP
The larger the GDP, the better
Higher economic output
More jobs generally available
Wages generally good
Results in a higher standard of living for those in the country
The smaller the GDP, the worse
Lower economic output
Fewer jobs generally available
Wages generally poor
Results in a lower standard of living for those in the country

7. Rate of change important
Growth is good; shrinking is bad
How fast or slow it is growing or shrinking is important, too
Low growth (<2% annualized growth) is bad, since the economy isn’t growing rapidly enough to account for increases in the labor force and/or replace jobs lost in any previous downturn
Runaway growth (>4% annualized growth) is bad, because it is usually due to price inflation for some type of asset (housing, etc.)
Ideal growth is between 2% & 4% (2.5 – 3.5% is considered best) per year

8. GDP deflator
Economists use the GDP deflator, an adjustment that accounts for inflation in computing the national income.
The GDP deflator can be calculated as the ratio of a country's aggregate output at current market prices (nominal GDP) to its value at base year prices (real GDP):
(nominal GDP)
GDP deflator = ————————————— * 100
(real GDP)
An increase in real GDP over time indicates economic growth, which means the country is producing more goods and services than in the past. A decrease in real GDP over time indicates economic contraction.
33. What is the real GDP of a country whose nominal GDP is 100 billion and the GDP deflator is 110?
$90.9 billion
$95.2 billion
$100 billion
$110 billion

9. How GDP Is Reported & Evaluated
The Bureau of Economic Analysis (a division of the US Department of Commerce) reports changes in the GDP quarterly (every 3 months)
Numbers they report (that you see in the news) are percentage change in the GDP compared to the previous quarter
The numbers represent an annualized equivalent of what the growth rate was during that quarter
Example:
If the GDP grew by 1% during the quarter, it would be reported to have grown at a 4% annualized rate
Current trend of change is of primary importance
Is the rate of change now better than it was for previous quarters?

10. GDP Change Example #1
Quarter
Rate of Change (%)
Last Quarter
3.0
2 Quarters Ago
2.1
3 Quarters Ago
1.0
4 Quarters Ago
0.4
Rate of change for more recent quarters is larger than earlier quarters
The rate of expansion of the GDP is increasing
What it tells us: The economy is starting to “pick up”

11. GDP Change Example #2
Quarter
Rate of Change (%)
Last Quarter
0.4
2 Quarters Ago
1.0
3 Quarters Ago
2.1
4 Quarters Ago
3.0
Rate of change for more recent quarters is smaller than earlier quarters
The rate of expansion of the GDP is decreasing
What it tells us: The economy is starting to “slow down”

12. GDP Change Example #3
Quarter
Rate of Change (%)
Last Quarter
-1.5
2 Quarters Ago
0.4
3 Quarters Ago
1.0
4 Quarters Ago
2.1
Rate of change for more recent quarters is smaller than earlier quarters and now has gone negative
The GDP is decreasing (contracting)
What it tells us: The economy is “taking a nose-dive”

13. GDP Change Example #4
Quarter
Rate of Change (%)
Last Quarter
1.5
2 Quarters Ago
-0.4
3 Quarters Ago
-1.0
4 Quarters Ago
-1.5
Rate of change for more recent quarters is larger than earlier quarters and now has gone positive
The GDP is increasing (expanding)
What it tells us: The economy has “turned the corner”

14. In-Class Activity GDP Measuring the Country’s Output

15. Unemployment
The condition of those who are willing and able to work and are actively seeking work but who do not currently work
in order to be counted among the ranks of the unemployed, you must be:
willing and able to work
actively seeking work
25. Which of the following could be classified as "unemployed?"
A 15-year-old boy trying unable to find a part-time summer job
A 35-year-old woman who is a stay-at-home mom
A 55-year-old man that was fired from his job and hasn't been looking for another one for the last six months
A 22-year-old woman who graduated from college a year ago and has been looking for a job ever since

16. Unemployment Rate
The percentage of the civilian labor force that is considered unemployed
Labor Force – all citizens age 16 or older who are
Currently Employed or
Actively seeking work
If you are not seeking work, you are not considered part of the labor force and are not counted in the employment/unemployment numbers
To calculate:
7. In January 2011, the Commonwealth of Virginia had a labor force of approximately 4.2 million people. Approximately 273,000 of these people were unemployed. The unemployment rate in Virginia was
0.65%.
6.5%.
65%.
650%.
26. What is the unemployment rate of a country that has 10,000 people that are unemployed and 1 million people in the labor force?
0.01% 1%
10%
100%
Unemployment Rate =
Number Unemployed
Number in Civilian Labor Force

17. Problem with Calculating Unemployment This Way
Does not take into account workers marginally attached to the labor force
People who have looked for work in the past 12 months but have given up on looking for a job even though they want one
Discouraged workers, a subset of this category, are those who have given up due to job-market related reasons
Gives temporary and part-time jobs the same weight as full time jobs
Worker may want to work full-time, but he/she can’t get the hours (underemployed)

18. Unemployment Is a BAD Thing
A high unemployment rate is bad for the economy
People out of jobs = less money to spend
Less money to spend = less production needed (less stuff made or services provided)
Less production needed = fewer jobs needed
Fewer jobs needed = layoffs/downsizing (additional increases in unemployment)
More people collecting unemployment compensation is an additional drag on the economy
The government needs to tax or borrow that money to pay them, reducing economic activity that would have otherwise been done with that money

19. Unemployment Rate that is Increasing is Bad
More people losing jobs = less $$ to spend
Less spent = less bought
Less bought = less made
Less made = fewer employees needed
Fewer employees needed = increased unemployment
Negative cycle keeps repeating but will eventually stop
How bad things get will vary

20. UNLESS…
If the unemployment rate is going up because workers are re-entering the workforce, this is a good thing
Ex: 100,000,000 workers; 10,000,000 unemployed
10% unemployment
If 100,000 discouraged/marginally attached workers decide to re-enter the workforce
100,100,000 workers; 10,100,000 unemployed
10.1% unemployment
Unemployment increases, but not because workers lost jobs

21. Unemployment Rate that is Decreasing is Good
More people getting jobs = more $$ to spend
More $$ to spend = more stuff needs to be provided
More stuff needs to be provided = increases in production
Increases in production = more workers needed
More workers needed = reduction in unemployment
Positive cycle begins

22. UNLESS…
If the unemployment rate is going down because workers are leaving the workforce, this is a bad thing
Ex: 100,000,000 workers; 10,000,000 unemployed
10% unemployment
If 100,000 workers give up and leave the workforce
99,900,000 workers; 9,900,000 unemployed
9.9% unemployment
Unemployment drops, but not because unemployed workers got jobs

23. OR…
If the unemployment rate is going down because the jobs that are created are only part-time or temporary, this is a BAD thing
Those workers more than likely want permanent, full-time jobs
Workers are probably under-employed

24. Types of Unemployment Structural Unemployment Cyclical Unemployment
unemployment resulting from skills that do not match what employers require
being geographically separated from job opportunities
Cyclical Unemployment
unemployment resulting from too low a level of aggregate demand
a.k.a. demand deficiency unemployment
people want less => producers make less
6. What type of unemployment happens when a person loses his/her job because the work will be performed by a machine?
Frictional unemployment
Cyclical unemployment
Structural unemployment
Seasonal unemployment

25. Frictional Unemployment
unemployment when people are temporarily between jobs
Seasonal Unemployment
unemployment of people who are out of work because of factors that vary with the time of year
27. What type of unemployment happens when a person is offered a job but hasn't started working yet?
Frictional unemployment
Cyclical unemployment
Structural unemployment
Seasonal unemployment

26. Economic Goal: Full Employment
Employment of about 95% of the labor force
Allows for 5% for frictional and seasonal unemployment
Methods of reducing unemployment
Education and training
Helps reduce structural unemployment
Match skill requirements to job
Job may have unnecessarily high qualifications
Labor unions may restrict entry into jobs
1. The national economic goals for the U.S. government include
contraction.
full employment.
high inflation.
all of the following.

27. Increasing aggregate demand
Lower minimum wage
High minimum wage can add to structural unemployment because employers don’t want to pay that much for the job
Increasing aggregate demand
If demand goes up, employers will hire more people so they can increase production to meet demand

28. Can You Tell Which Country Is More Productive?
Total productivity = Output quantity/input quantity Workforce productivity (often called labor productivity) is the ratio of output to the input of labor. Workforce productivity = produced output/ labor input

29. Productivity is considered to be higher when either one of the following is true:
a) you produce more output with the same amount of input as before, or
b) you produce the same amount of output with less input than before.
15. What is the workforce productivity (labor productivity) of a country that has a GDP of $100 billion and a labor input of 5 million workers?
$4,000 per worker
$10,000 per worker
$20,000 per worker
$200,000 per worker
16. Which of the following is a way for a country to grow economically?
Using more production inputs per capita
Produce more output with the same amount of inputs as before
Produce the same output while using fewer inputs
All of the above

30. GDP per capital is not the only way to measure wealth
GDP per capital is not the only way to measure wealth. Human Development Index (HDI) measures:
gross national income per capita
average life expectancy
the education index (based on the mean, or average, of years of schooling for 25-year-old adults and the expected years of schooling for children)

31. Based on HDI which countries are the wealthiest? Poorest?
17. GDP per capita and the Human Development Index (HDI) measure the
economic development of countries.
amount of unemployment for countries.
amount of imports for countries.
average number of vacation hours available in countries.
18. According to the map below, where are most of the world's poorest countries, as measured by the Human Development Index, located?
North America and South America
Australia and Europe
Africa and Asia
Antarctica and Australia

32. Review Economic Indicators Gross Domestic Product (GDP) Unemployment
Leading
Coincident
Lagging
Gross Domestic Product (GDP)
Size
Rate of Growth
Too slow
Too fast
Just right
Unemployment
Who is considered unemployed
Who is considered part of labor force
Types of Unemployment
Structural
Cyclical
Seasonal
Frictional
Ideal Unemployment Rate

33. In-Class Activity The Mysteries of Unemployment

34. Inflation A sustained rise in the general level of prices
some prices may rise rapidly, some may rise slowly, some may actually fall
in inflation, more prices rise than fall
Inflation causes uncertainty in the marketplace for both consumers and businesses

35. Less Extreme Inflation May Actually Stimulate an Economy
Wages rise more slowly than the prices of products
Prices are high in relation to wages
Producers make high real profits
Production expands; more workers are hired
Workers increase spending
Quantity demanded increases
The economy prospers
Goal inflation rate in the US: 2%

36. High Inflation Hurts the Economy
Prices rise rapidly
Consumers’ real income decreases
Fewer goods are purchased
Quantity demanded decreases
Unemployment increases
34. Which of the following is a cost (negative impact) of inflation?
People's standard of living is harmed.
Investments decline.
Economic growth and productivity are reduced.
All of the above

37. Inflation May Lead to Speculation
Speculation - when someone buys a large amount of a good and hopes to resell it at a much higher price
Speculation will continue to drive prices up
May result in misallocation of resources
Money that could have been spent in other parts of the economy is instead tied up in the good that is experiencing price inflation

38. Who Benefits from Inflation?
Debtors (people who have borrowed money from someone else) - money paid back at a later date actually has a lower value than the money they borrowed
ex: Homeowners

39. Who Is Hurt By Inflation?
People on fixed income (income that is set and does not change from year to year) - their income loses purchasing power
Creditors (people who have loaned money to others) - money being paid back does not have the purchasing power it had when loaned out

40. Inflation Measured by Price Index
Price index - a number that compares prices in one year with some earlier base date
Consumer Price Index (CPI) - a number used to calculate changes in the average level of prices for a number of items typically bought by urban families
Most common CPI for the US is the Consumer Price Index for Urban Consumers (CPI-U), which covers approximately 88% of the US population
Does not include every good and service produced in the economy
Uses average price for 400 “common” items (market Basket)
Influence of each item is found through a weighting process

41. How do you calculate Price Index?
To calculate the value of this market basket, multiply the quantity of each item by its price. Then, add up the total spent on all the items in the basket.
Market Basket (year) = (Qty × Price) + (Qty × Price) + (Qty × Price)
Market Basket (2000) = (200 × $0.50) + (20 × $10.00) + (5 × $20.00)
So, for the year 2000, the value of the market basket was $
31. What is the price index for 2012 (rounded off to the nearest whole number), given the market basket below and that 2011 is the base year?
Item Quantity Price (2011) Price (2012)
Footballs $30 $40
Basketballs 10 $20 $30
Soccer balls $20 $25
100
106
126
220

42. The Makeup of the Consumer Price Index

43. What Does the CPI Measure?
A “base period” is established
Prices from 1982 – 1984 were used for current base period
These prices are plugged into the formula used to calculate the index
Calculation using base period prices results in an index number of 100
Every month/year, current prices are plugged into the same formula to calculate the current index number
Rate of change of the index number is the estimate of inflation for the period being calculated

44. How to Use the CPI to Compute the Rate of Inflation
Most Recent CPI – Earlier CPI
Earlier CPI = –
0.616
0.003 = 0.3%
8. The U.S. CPI was 207 in 2007 and 215 in In 2008, the U.S. inflation rate was
3.72%.
3.86%
37.2%
38.6%
32. Suppose the price index for 2011 was 105 and the price index for 2012 was 110, what was the inflation rate between 2011 and 2012?
1.65%
2.58%
4.76%
9.53%

45. Limitations of the CPI
Although called the cost of living index, it doesn’t actually measure any one person’s “cost of living”
the “basket of goods” used to compute the CPI may not match your “basket of goods”
CPI only includes those items that can be bought and sold in the market
does not include factors like taxes or government services
CPI does not account for changes in the quality of goods

46. Difference between CPI & PPI
Another measurement is the Producer Price Index (PPI)
Calculated based on the selling prices that the producers receive for a basket of goods.
The PPI is different from the CPI because producers not only sell consumption goods to consumers, they also sell intermediary goods and raw materials to other producers.
PPI could measure…
…the increased cost of cotton for clothing manufacturers.
…the increased cost of ingredients for food manufacturers.

…the increased cost of steel for machinery manufacturers.
What is the difference between CPI and PPI?
PPI is the measurement of average prices paid by an average urban American 30. household while CPI is the measurement of  selling prices that the producers receive for a basket of goods.
CPI is the measurement of average prices paid by an average urban American household while PPI is the measurement of  selling prices that the producers receive for a basket of goods.
The CPI takes into account that producers sell intermediary goods and raw materials to other producers while the PPI does not.
None of the above

47. Changes in the Inflation Rate
Inflation Rate Varies from Year to Year
not constant
Inflation Rate Varies Among Types of Goods
Prices of some items rise slightly
Prices of some items rise sharply
Prices of some items drop
Prices may vary by location (remember: prices used in the CPI are average prices across the country)

48. In-Class Assignment The Effects of Inflation

49. Business Cycle
Pattern of repeated expansion and contraction of a country’s GDP
Passes through four phases

50. Phases of the Business Cycle
EXPANSION
Rapid rise in GDP, profits, and employment
Normally characterized by low inflation
PEAK
Growth reaches its highest level, as do profit and employment
Normally characterized by modest to runaway inflation

51. CONTRACTION TROUGH Growth begins to decline
Unemployment starts to rise
Normally characterized by low inflation or deflation
TROUGH
Lowest point in the cycle, with increased unemployment
Normally characterized by no growth, recession, or depression

52. GDP (rate of change) PEAK EXPANSION CONTRACTION TROUGH Time
Highest levels of:
GDP
Profits
- Employment
Usually has
Moderate to
runaway inflation
EXPANSION
Rapid rise in:
GDP
Profits
- Employment
Usually has
Low inflation
CONTRACTION
GDP begins decline
- unemployment rises
Usually has
Low inflation or
deflation
TROUGH
Lowest levels of:
GDP
Profits
Employment
Referred to as
No Growth
Recession
Depression
2. A period of economic growth is a(n) ________________ and its highest point is a _________________.  A period of economic decline is a(n) ________________ and its lowest point is a __________________.
contraction, trough, expansion, peak
contraction, peak, expansion, trough
expansion, trough, contraction, peak
expansion, peak, contraction, trough
4. Which of the following is true of inflation?
It is a steady decrease in the general level of prices.
It only occurs when the economy is contracting.
When it occurs, money purchases less than it did before.
All of the above
Time

53. Recessions & Depressions
Recession – a period of declining economic activity usually measured as a decrease in GDP for at least two consecutive quarters (6 months)
Depression – a prolonged economic downturn characterized by plunging real GDP and extremely high unemployment
42. The National Bureau of Economic Research declares a ______________ after two or more quarters of declining economic activity (six months or longer). It becomes known as a ___________________ if it is particularly long and severe.
recession, depression
growth, boom
peak, trough
All of the above

54. In-Class Assignment Economic Ups & Downs

55. Review Inflation Business Cycle Who is helped Who is harmed
Speculation
Consumer Price Index
What makes it up
Problems with calculation
Ideal Inflation Rate
Business Cycle
Expansion
Peak
Contraction
Trough

56. Leading Economic Indicators
Different aspects of economic activity that are believed to indicate the direction the economy is heading
Supposed to predict economic activity for the next 6 months
Positive trends in these indicators are supposed to indicate the economy is improving
Negative trends in these indicators are supposed to indicate the economy is worsening

57. Main Leading Economic Indicators
Initial Jobless Claims
Measures the number of people filing first-time claims for unemployment insurance
More workers losing their jobs and having to collect unemployment insurance is a bad thing
Indicates production of goods & services is going down
Conference Board’s explanation of the relevance of each economic indicator:

58. Average Weekly Hours, Manufacturing
Measures the average number of hours worked by workers producing goods to be sold in the economy
Increases may indicate manufacturers are starting to produce more goods because they believe demand for those goods is increasing

59. Manufacturer’s New Orders – Consumer Goods & Materials
Measures changes in the level of orders made by retailers for goods to be purchased by consumers
Increases could indicate expected in increase in consumer demand by retailers

60. Manufacturers’ New Orders – Non-Defense Capital Goods
Measures changes in orders for capital goods (equipment used by businesses to produce the products they sell)
Level of spending and changes in level indicate whether or not businesses are replacing or adding equipment to increase production

61. Institute for Supply Management (ISM) Index of New Orders
Survey of purchasing executives of roughly 300 industrial companies
Considered single best snapshot of factory sector health

62. Building Permits – New Private Housing Units
Measures level of residential construction permits being issued
Housing construction is major part of US economy
Increases in construction will have major impacts on the economy

63. Stock Prices – Standard & Poor’s 500 (S&P 500)
Major stock index that is believed to represent the health of the stock market as a whole
Many believe that the stock market tends to go up before the economy starts improving, making it a good predictor of changes coming in the economy

64. Leading Credit Index
Developed by an organization called The Conference Board
Measures changes in the financial and credit markets
Changes to conditions in financial markets will impact businesses’ ability to gain access to credit in the near future, which will impact those businesses’ ability to expand

65. Interest Rate Spread – Treasury Less Federal Funds
Difference between interest rate on 10-year Treasury Bonds and the Federal Funds Rate (the interest rate banks charge each other for overnight loans to each other)
If investors are worried about economic downturns, they will usually sell off their short-term bonds and buy longer-term bonds to protect against short-term losses, driving the rate of return on the long-term bonds down
This spread, if negative, usually signals the beginning of a recession
This involves the market for capital, not bonds.
The supply of capital (coming from the investors) is large
The demand for capital (banks, gov’t, etc.) is not shifted
Since the supply of capital goes up, and demand stays the same, the price of that capital (interest rate) goes down
The spread is negative because the formula used to calculate the spread (10-Year Rate – Federal Funds Rate) has the Federal Funds rate higher than the 10-year rate
This is not talking about the bond market, because if you look at it that way, the demand for bonds goes up which should drive the price up based on the laws of supply and demand. Do not use the bond market to illustrate this concept.

66. Average Consumer Expectations for Business Conditions
Measured in the Consumer Confidence Index
Judges the mood of consumers toward the future of the economy
Confidence in the economy tends to lead toward increased spending in the economy

67. Coincident Economic Indicators
Gross Domestic Product (GDP)
Employees on Non-Agricultural Payrolls
Reflects net hiring and firing in all sectors but agricultural and the smallest businesses
Considered one of the biggest gauges in measuring the health of the economy
Index of Industrial Production
Covers physical output at all stages of production in all industries
Index historically has captured the majority of fluctuations in output

68. Manufacturing & Trade Sales
When combined with retail spending by consumers, this measures all spending within the economy
Personal Income Less Transfer Payments
Transfer Payment – payment that involves no economic activity
Social Security
Welfare
Unemployment
Measures personal income due to economic activity

69. Lagging Economic Indicators
Unemployment
Inflation
Commercial & Industrial Loans Outstanding
Measures loans being taken out by businesses
Since businesses normally need to borrow more during times of reduced profit, these loans normally go up after the businesses experience reduced profits

70. Ratio of Consumer Installment Credit to Personal Income
Consumers tend to hold off on getting personal loans until after a recession ends
Ratio will go up when consumers are more confident about the future, which will occur after the change
Average Prime Rate Charged by Banks
The key rate on which banks base all of their other loan rates
Changes in this rate tend to lag behind movement of general economic activities
Others

71. In-Class Assignment The Current Indexes of Economic Indicators

72. In-Class Activity Queue Blues at the Central Store