1. Measuring the Health of the Economy – Some Complications Between December 2014 and January 2015 the unemployment rate rose from 5.6 percent to 5.7 percent. Question: How can we explain this positive reaction when the unemployment rate rose? Economists React to the January Jobs Report: ‘Astonishingly Strong’ Wall Street Journal – February 6, 2015 “The report earned a 10 out of 10 in our eyes and suggests that labor markets remain extremely strong as fears of an early-year slowdown prove unfounded…..” –Gennadiy Goldberg, TD Securities “Employment growth is astonishingly strong; ….Ignore the increase in the unemployment rate; month-to-month, it is just noise. What matters is payroll growth, and the numbers are huge…. With every indicator we follow screaming that payrolls will be very strong for the foreseeable future...” –Ian Shepherdson, Pantheon Macroeconomics “January was another strong month across a breadth of industries confirming that our economic recovery is becoming robust. Job growth is strong and the labor force participation rate ticked up slightly, indicating that people who have given up looking for work are beginning to start looking again...” –Bill Spriggs, AFL-CIO

2. Dec 2014Jan 2015Change Noninstutitional Population 249,000249,700+700 Labor Force156,130157,180+1,050 Not in Labor Force92,90092,550  350 Employed147,440148,200+760 Unemployed8,6908,980+290 Unemployment Rate5.6%5.7% Labor Force Participation Rate 62.7%62.9% Let’s look at the data more closely. Noninstitutional Population Employed Unemployed Not in Labor Force Entrants Up 700 Down 350 Up 760 Up 290 Labor Force Up 1,050 “Employment growth is astonishingly strong; ….Ignore the increase in the unemployment rate; month-to-month, it is just noise. What matters is payroll growth, and the numbers are huge…. With every indicator we follow screaming that payrolls will be very strong for the foreseeable future...” –Ian Shepherdson, Pantheon Macroeconomics “January was another strong month across a breadth of industries confirming that our economic recovery is becoming robust. Job growth is strong and the labor force participation rate ticked up slightly, indicating that people who have given up looking for work are beginning to start looking again...” –Bill Spriggs, AFL-CIO Unemployment Rate Labor Force Unemployed = Labor Force rise 156,130 1,050 = =.67% Unemployed rise 8,690 290 == 3.34% Up 3.34% Up.67%  Questions: What are the percent changes in the unemployed and labor force? Figures are in 1,000’s of persons

3. Question: How should unemployment and the goods and services produced in the economy be related? Unemployment Up  Employment Down  Production Down Unemployment Down  Employment Up  Production Up Macroeconomics: A different approach Nominal GDP for 2014=Sum of the market values of all final goods and services produced in the United States during 2014 Gross Domestic Product: How many goods and services does the economy produce? Final Goods versus Intermediate Goods

4. Department of Commerce Data for 2014 (All figures are in billions of dollars) U. S. Household Purchases of Final Goods and Services (Consumption)11,930 U. S. Firm Purchases of Final Goods and Services (Investment)2,850 U. S. Government Purchases of Final Goods and Services3,180 Federal 1,220 National defense760 Nondefense460 State and local 1,960 U. S. Exports of Final Goods and Services2,340 U. S. Imports of Final Goods and Services2,880 U.S. HouseholdU.S. FirmU.S. Government =Purchases of+ + Final G&S (C)Final G&S (I)Final G&S (G) =17,960 U. S. Net +Exports of Final G&S (NX) = +  540 =17,420 Nominal GDP for 2014=Sum of the market values of all final goods and services produced in the United States during 2014 11,9302,8503,180 U. S. Net Exports of Final Goods and Services  540 Nominal GDP for 2014

5. U. S. Government Purchases of Final Goods and Services3,180 Federal 1,220 National defense760 Nondefense460 State and local 1,960 3,6002,775= 825   Federal Purchase ofTransfer of Final G&S Payments 1,2202,380 Two Roles of the Government in the Macro Economy Purchase of final goods and services: Government purchases for final goods and services Affects the disposable income of households Decreases household income disposable in by collecting taxes Increases household income by distributing transfer payments Total Federal Federal Deficit=Government  Outlays Receipts The Federal Deficit in 2014 : Income households have available to spend Net taxes = Taxes  Transfers More about the deficit later in the semester. Question: How does the government affect disposable income?

6. GDP and Unemployment GDP Falls  Employment Down  Production Down  Unemployment Up GDP Rises  Employment Up  Production Up  Unemployment Down Year Nominal GDP (billions of dollars) Unemployment Rate (%) 19335720.9 19346716.2 19357414.4 19368510.0 1937939.2 19388712.5 19399411.3 19401039.5 19411296.0 19421663.1 19432031.8 19442251.2

7. GDP and Unemployment GDP Falls  Employment Down  Production Down  Unemployment Up GDP Rises  Employment Up  Production Up  Unemployment Down A Puzzle: YearNominal GDPUnem Rate (%) 200714,4804.6 200814,7205.8 Nominal GDP for 2007=Sum of the market values of all final goods and services produced in the United States during 2007 Nominal GDP for 2008=Sum of the market values of all final goods and services produced in the United States during 2008 NB: Both changes in prices (P’s) and quantities (Q’s) cause nominal GDP to change. Question: What changes do we want to capture to explain changes in unemployment?Q’s only.

8. YearNominal GDPReal GDPUnem Rate 200714,48014,8754.6 200814,72014,8355.8 Nominal GDP for 2014=Sum of the market values of all final goods and services produced in the United States during 2014 Real GDP for 2014=Sum of the market values of all final goods and services produced in the United States during 2014 evaluated at base year (2009) prices Real GDP Falls  Employment Down  Production Down  Unemployment Up Nominal GDP versus Real GDP Returning to our puzzle: The Q’s, production, had to fall.

10. Nominal GDP for 2014=Sum of the market values of all final goods and services produced in the United States during 2014 Real GDP for 2014=Sum of the market values of all final goods and services produced in the United States during 2014 evaluated at base year (2009) prices Price Indexes GDP Price Deflator Hypothetical Questions: What if prices were unchanged since 2009? GDP Price Deflator 100 What if prices had doubled since 2009?200 What if prices had tripled since 2009?300 Since the base year (2009) prices have risen by 8 percent on average.