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4 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: THE BUSINESS CYCLE Use the space below to take notes during class. Business Cycle: Expansion: Contraction: Peak: Trough: Indicator Goal Real GDP Growth Rate Unemployment Rate Inflation Rate Files 4:01 PM Fri May 13 79% Unit+4+workbook Q . . . Home Insert Draw Layout Review View Calibri Bold (Body 36 B I U aAv = v Unit 4-Economic Indicators Name: HR: GROSS DOMESTIC PRODUCT (GDP) Use the space below to take notes during class. Gross Domestic Product (GDP): Consumption: Investment: Government Expenditures: Net Exports: Standard of Living: GDP = What GDP tells us What GDP doesn't tell us 24 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: CALCULATING Nominal GDP Use the posters around the room to complete the tables, then use the tables to calculate your answers. Year Gallons of Milk Total value produced (- (uanti (-uantit X -rice) 1970 Year Gallons of Gas Value of Gas Total value produced (- uanti ) ( rice) (nuantit X - rice) 2019 20 Loaves of Bread Value of Bread Total value produced (quantity X price) 20 Total nominal value of everything produced in 1970 (a.k.a. nominal GDP): Total nominal value of everything produced in 1990 (a.k.a. nominal GDP): Total nominal value of everything produced in 2019 (a.k.a. nominal GDP): Complete the "GDP" assignment in Canvas. 4 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: CALCULATING Real GDP Gallons of Milk Value of Milk Total real value (quantity) (price) produced ( uant. x base r orice) 1970 Base Year 1990 Year Gallons of Gas Value of Gas Total value produced ( uanti ) (. rice) (nuantit X - rice) Number of Cars Value of Cars Total real value (quantity) (price) produced ( uant. X base r - rice) Base Year 1990 2019 Total real value of everything produced in 1970 (a.k.a. real GDP): Total real value of everything produced in 1990 (a.k.a. real GDP): Total real value of everything produced in 2019 (a.k.a. real GDP): Nominal value: Real value: Real GDP: 4 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: UNEMPLOYMENT Use the space below to take notes during class. Unemployed: Labor Force: Unemployment rate: Frictional Unemployment: Structural Unemployment: Cyclical Unemployment: Natural Rate of Unemployment: Actual Unemployment Rate: Discouraged Worker: Underemployed: Labor Force Participation Rate: Unemployment Rate = 4 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: INFLATION Use the space below to take notes during class. Inflation: Basket of Goods: C .9 p (5 q. E q. 0 U! G) U C O) 3 D- O) U! C O U Complete the "Indicators" assignment in Canvas. 4 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: AGGREGATE DEMAND AND SUPPLY Use the space below to take notes during class. Aggregated Demand (AD): Short Run Aggregate Supply (SRAS): Long Run Aggregate Supply (LRAS): Potential GDP/Potential Output: Recessionary Gap: Inflationary Gap: Long Run Equilibrium: Factors that shift AD Factors that shift SRAS Factors that shift LRAS 4 Files 4:01 PM Fri May '13 Insert Draw Layout Review View Unit 4Economic Indicators Name: HR: Long Run Equilibrium Recessionary Gap Inflationary Gap Complete the "Aggregate Supply and Aggregate Demand" assignment in Canvas. 8 nuuu'bb lull lieu as InlprrupuIIbmulgruuunhiprlrlulpleb-uunrulrllua-terpuguar I-Irlrruuuuuurl Unit d-Ecanomic Indicators Em. ' f'n - rmmm" _, m .. __, J ._..-- 5D'L itEI'lir 3\"" ' Gum-mi lemgl or our- \" Lynn/wh- .: - is... _ IMOQMN riimmmmmmmn.mumi \"WWI lhllmmmdaapms Figure 19.4 Components aIGDP on the Demand Side l'aJ Consumption is about twlhr'rds ofGDP, and it has been an a slight upward trend aver time. acuiness investment hovers amnd 15% a] 601'. but it uctuates more than consumption. Government spending on goods and services is slightly under 209' of GDP and has declined modestly over time. (hi Exports are added to total demand for goods and services. while imports are subu'at'tedlrom total demand. if exports exceed imparts. as in most of the 19605 and 1910s in the v.3 economy, a trade surplus exists rfimparcs exceed exports. as in recent years. dren n W deficit 81655 (Source: http:/r'bea.oavfublendex_nrpa.cfrnl torulnptlun expenditure by households is the largest component of GDP. accounting for about two- thirds of the GDP in any year. This tells us that oonsumers' spending decisions are a major driver of the economy. However. consumer spending is a gentle elephant: when viewed over time. it does not iump around too much. and has increased modestly from about 60% of GDP in the 19605 and 1910s. Investmem enpenditure refers to purchases of physical plant and equipment. primarily by businesses. If Starbucks builds a new store. or Amazon buys robots. they count these expenditures under business investment. Investment demand is far smaller than consumption demand, typically accounting for only about 15-18% ofGDP. but it isvery important for the economy because this is where jobs are created. However. it uctuates more noticeably than consumption. business investment is volatile. New technology or a new product can spur business investment, but then condence can drop and business investment can pull back sharply. If you have noticed any of the infrastructure projects {new bridges. highways, airports] launched during the 2009 recession. you have seen how important government spending can be for the economy. Wmment upendinn in the United States is close to 20% of GDP. and includes spending by all three levels of government: federal, state. and local. The only part of government spending counted in demand is government purchases of goods or services produced in the economy. Ekamples include the government buying a new ghter jet for the Air Force [federal government spending}. building a nevi highiwy [state government spending). or a new school (local government spending}. A significant portion ofgovernment budgets consists of transfer payments. like unemployment benets, veteran's benets. and Social Security payments to retirees. The government excludes these payments from GDP because it does not receive a new good or service in return or exchange. Instead they are transfers of income from \"waters to others. Access for free at httpa:l'lopanstax.org'bookai'principlea-eoonomics-Zelpagesl1-introduction unit 4-Economlc Indicators when thinking about the demand for domestically produced goods in a global economy, it is important to count spending on exportsdomestically produced goods that a country sells abroad. Similarly, we must also subtract spending on importsgoods that a country produces in other countries that residents of this country purchase. The GDP net export component is equal to the dollar value of exports pl} minus the dollar value of imports {ML (it - Ml. We call the gap between exports and imports the trade balance. If a country's expons are larger than its Imports. then a country has a crade surplus. In the United States, exports typically exceeded imports in the 19605 and 19705, as Figure 19.1 to] shows. Since the early 1980s, imports have typically exceeded exports, and so the United States has experienced a trade deficit in most years The trade deficit grew quite large In the late 1950: and in the mid-20005. Figure 19.4 lb] also shows that imports and exports have both risen substantially in recent decades, even after the declines during the Great Recession between 2008 and 2WD. its we noted before, if exports and Imports are equal, foreign trade has no effect on total GDP. However, even if exports and imports are balanced overall, foreign trade might still have powerful elfects on particular industries and workers by causing nations to shift workers and physical capital investment toward one industry rather than another. Based on these four components of demand, we can measure GDP as: GDP = Consumption + Investment 4- Government 4- Trade balance GDP=C+I+G+(x-M) Understanding how to measure GDP is important for analysing connections in the macro economy and for thinking about macroeconomic policy tools. GDP as a Measure of Well-8dr. The level of GDP per capita clearly captures sortie olwhat we mean by the phrase "standard of living.' Most of the migration in tWing from countries with uur - lUI IJUIIIPLIUII 1' IIIVCELIIICIIL T \\JUVCI IIIIICIIL T IIGUC Ull ILC GDP=C+I+G+(X-M} Understanding how to measure GDP Is important for analysing connections in the macro economy and for thinking about macroeconomic policy tools. GDP as a Measure of Well-Beta The level of GDP per capita clearly captures some olwhat we mean by the phrase "standard of living.' Most of the migration in the world, for example, involves people who are moving irorn countries with relatively low GDP per capita to countries with relatively high GDP per capita. \"Standard of Iiving\" is a broader term than GDP. While GDP focuses on production that is bought and sold in markets, standard of living Includes all elements that ailect people's well-being, whether they are bought and sold in the market or not. To illuminate the difference between GDP and standard of living it is useful to spell out some things that GDP does not cover that are clearly relevant to standard of living. limitations of GDP as a Measure of the Standard of Living while GDP indudes spending on recreation and travel, it does not cover leisure time. Clearly. however, there Is a substantial difference between an economy that is large because people work long hours, and an economy that isiust as large because people are more productive with their time so they do not have toworli as many hours. The GDP per capita ofthe U.5. economy is larger than the GDP per capita of Germany but does that prove that the standard of living in the United States is higher? Not necessarily, since it is also true that the average US. worker works several hundred hours more per year more than Access lor lree at httpsn'lopenstax.orgfbooltsl'principleseconomics-Zerpagasi1-inlroduc:lion Unit dEconomic Indicators the average German wmker. Calculating GDP does not account for the German worker's extra vacation weeks. While GDP includes what a country spends on environmental protection, healthcare, and education, it does not include actual levels of environmental cleanliness, health, and learning. GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier. GDP includes spending on medical care, but does not address whether life mtpectancy or infant mortality have risen or fallen, Similarly, it counts spending on education, but does not address directly how much of the population can read, write, or do basic mathematics. GDP includes production that is emd'tanged in the market, but it does not cover production that is not exchanged in the market. For example, hiring someone to mow your lawn or clean your house is part of GDP, but doing these tasks yourself is not part of GDP. One remarkable change in the U.S. economy in recent decades is the growth in women's participation in the labor force. As of 1970, only about 4296 oi women participated in the paid labor force. By the second decade of the 20005, nearly 60% of women participated in the paid labor force according to the Bureau of Labor Statistics. As women are now in the labor force, many of the senrices they used to produce in the mmalket economy like food preparation and child care have shifted to some extent into the market economy, which makes the GDP appear larger even if people actually are not consuming more services. GDP has nothing to say about the level of inequality in society. GDP per capita is only an average. When GDP per capita rises by596. it could mean that GDP for everyone in the society has risen by 5%, or that GDP of some groups has risen by more while that of others has risen by lessor even declined. GDP also has nothing in particular to say about the amount ofvariety available. If a family buys 100 loaves of bread in a year, GDP does not care whether they are all whibe bread, or whether the family can choose from wheat, rye, pu mpemickel, and many othersit just looks at the total amount the family spends on bread. Likewise, GDP has nothing much to say about what technology and products are available. The standard of living in, for example, 1350 or 1300 was not affected only by how much money people hadit was also affected bywhat they could buy. No matter how much money you had in 1950, you could not buy an iPhone or a personal computer. In certain cases, it is not clear that a rise in GDP is even a good thing. If a city is wrecked by a hurricane, and then experiences a surge of rebuilding oonstmction activity, it would be peculiar to claim that the hurricane was therefore economically benecial. if people are led by a rising fear of crime, to pay for installing bars and burglar alarms on all their windows, it is hard to believe that this increase in GDP has made them better otf. Similarly, some people would argue that sales of certain goods. like pornography or extremely violent movies, do not represent a gain to mcietfs standard of living. Does a Rise in GDP Overstate or Understate the Rise In the Standard of Livirg? The fact that GDP per upita does not fully capture the broader idea of standard of living has led to a concern that the increases in GDP overtime are illusory. It is theoretically possible that while GDP is rising, the standard of living could be falling if human health, environmental cleanliness, and other factors that are not included in GDP are worsening. Fortunately, this fear appears to be overstated. Access for free at https:openstax.orgfbookslprinciples-eoonomics-Zerpages!1-inlroduclion Unit 4Econornlr: Indicators In some ways, the rise In GDP understates the actual rise In the standard of living. For exam ple. the trunk-5| wnrlrurnlr far: I I t war-Irm- has fallen (our the lace ranlnm lnnm aha-mt no harm nor urinal! In line Unit d-Economic Indicators In some ways, the rise in GDP understates the actual rise in the standard of living. For eiram pie, the typical workweek for a U5. worker has fallen over the last century from about 60 hours per week to less than 40 hours per week. Lile expectancy and health have risen dramatically, and so has the average level oi education. Since 1970. the air and water in the United States have generally been getting cleaner. companies have developed new technologies for entertainment. travel, information, and health. A much wider variety of basic products like food and clothing is available today than several decades ago. Because GDP does not capture leisure, health, a deaner environment. the possibilities that new technology creates, or an increase in variety, the actual rise in the standard of living lor Americans in reoent decades has exceeded the rise in GDP. On the other side, crime rates, trafc congestion levels, and income inequality are higher in the United States now than they were in the 1960s. Moreover, a substantial number of services that women primarily provided in the non-market eoonorny are now part of the market economy that GDP counts. By ignoring these factors. GDP would tend to overstate the true rise in the standard ol living, Access lor lreo at https:oponsta:.orgfbookslprinciples-economicsearpages!1vintroduction Unit +Economic Indicators Real GDP Real GDP vs. Nominal GDP When examining economic statistics, there is a crucial distinction worth emphasizing. The distinction is between nominal and real measurements, which refer to whether or not ination has distorted a given statistic tacking at economic slatistir: without considering ination is like looking throuyt a pair of binoculars and trying to guess how cm something is: unles you know how strong the lenses are, you cannot guess the distance very accurately. Similarly, ifyou do not know the ination rate, it is difcult to figure out it a rise in GDP is due mainly to a rise in the overall level of prices or to a rise in quantities of goods produced. The nominal vahle of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time. The real voile refers to the same statistic after it has been adjusted for ination. Generally, it is the real value that is more important. Converthg Nomhlal GDP m Real GDP If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it might appear that national output had risen by a factor of more than twenty-seven over this time (that is, GDP of $14,958 billion in 2010 divided by GDP of $543 billion in 1960 = 27.51. This conclusion would be highly misleading Recall that we dene nominal GDP as the quantity of every nal good or service produced multiplied by the price at which it was sold, summed up for all goods and services. This allows two variables {price and quantity} to change over time and the Nominal GDP becomes a less useful measure of output. In order to see how much production has actually increased, we need to extract the elfec'ts of higher prices on nominal GDPA We do this by holding prices constantt A simplied way of doing this {for demonstrating the idea, not for actual real-world data) is to take the quantity of a good produced and multiply it by a fixed pricethe price it was during a base year. This allows us to hold the price consm nt and only allow for changes in quantity to affect our real G'. This is not the method used by real economists, but it allows us to demonstrate the principle using basic math. GDPisltough,butUseftl A high level of GDP should not be the onlyr goal of macroeconomic policy, or government policy more broadly. Even though GDP does not measure the broader standard of living with any precision, it does higher prices on nominal GDP. We do this by holding prices constant. A simplied way of doing this {for demonstrating the idea, not for actual real-world data] is to take the quantity of a good produced and multiply it by a fixed pricethe price it was durirlg a base year. This allows us to hold the price comm hi and only allow for changes in quantity to affect our real W. This is not the method used by real economists, but it allows us to demonstrate the principle using basic math. coeeRoummutuseru A high level of GDP should not be the only goal of macroeconomic policy, or government policy more broadly. Even though GDP does not measure the broader standard of living with any precision, it does measure production well and it does indicate when a country is materially better or worse off in terms of jobs and incomes In most countries, a signicamly higher GDP per capita occurs hand in hand with other improvements in everyday life along many dimensions, like education, health, and environmental protection. No single number can capture all the elements of a term as broad as \"standard of living.\" Nonetheless, GDP per capita is a reasonable, rough-and-ready measure of the standard of living. Access tor lroe at httpsopenslax.orgfbookslprincipleseconomics-Zelpages!1-inlroduclion Unit dEconomic Indicators Unemployment Newspaper or television reports typically describe unemployment as a percentage or a rate. A recent report might have said, for example, from August 2009 to November ZCDQ. the U.S. unemployment rate rose from 9.7% to 10.096, but by June 2010, it had fallen to 95%. At a glance, the changes between the percentages may seem small. However, remember that the U5. economy has about 160 million adults (as of the beginning of 201?] who either have jobs or are looking for them. A rise or fall otjust 0.196 in the unemployment rate of 160 million potential workers translates into 160,00.) people, which is roughly the total population of a city like Syracuse New York. Brownsville, Texas, or Pasadena, California. large rises in the unemployment rate mean large numbers ofjob losses. In November 2009. at the peak of the recession, about 15 million people were out ofwork. Even with the unemployment rate now at 4.896 as of January 201?, about 7.6 million people who would like to have jobs are out of work. Who's In or Outofthe Labor Force? Should we count everyone without a job as unemployed? Of course not. For example, we should not count children as unemployed. Surely, we should not count the retired as unemployed. Many full-time college students have only a parttime job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave. The point is that we do not just divide the adult population into employed and unemployed. A third group exists: people who do not have a job, and for some reasonretirement. looking after children. taking a voluntary break before a new jobare not interested in having a job, either. It also indudes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force. The LLS. unemployment rate, which is based on a monthly survey carried out hythe US. Bureau ofttIe Census. asks a series of questions to divide the adult population into employed, unemployed, or not in the labor force. To be classied as unemployed. a person must be without a job, currently available to work, and actively looking for work in the platinum four weeks Thus, a person who does not have a job but who is nut wnently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force. Employed: currently working for pay Unemployed: Out of work and actively looking for a job Out of the labor force: Out of paid work and not actively looking for a job Labor force: the number of employed plus the unemployed Calcllating the Unemployment Rate Figure 21.2 shows the threeway division ofthe 16andover population. In January 201?, about 62.9% of the adult population was 'in the labor force\"; that is, people are either employed or without a job but 9 Access tor Iree at https:l'lopanstax.orglbooks.'principles-economics-Zeipagee.'1-in|roduclion unit l-Econornic Indicators looking for work. We can divide those In the labor lame into the employed and the unemployed. Table 21.1 shows those values. The unemployment rate Is not the percentage of the total adult population without jobs. but rather the greeting: 01 adults who are in the labor tone but who do not have jobs: Fmployed Cu! 01 labor me unit A-Economic Indicators looking for work. We can divide those In the labor force into the employed and the unemployed. Table 21.1 shows those values. The unemployment rate is not the percentage of the total adult population without jobs. but rather the percentage of adults who are In the labor force but who do not have jobs: Out 01 labor force Fmployerl (94.300 lhousand) [152.081 thousand] lmmpbyod (H135 ll-uuwrdl Figure 21.2 Employed, Unemployed, and Out of the Labor Force Distribution ofndult Population (age 16 and older}, January 2017 The total adult, working-age population in January 2017 was 254.1 million. out of this total population, 152.: were classied as employed. and 7.6 million were classified as unemployed. The remaining 54.4 were classified as out of the labor force. As you will learn, however. this seemingly simple chart does not tell the whole story. 159.716 million 162.596] 54.355 million (31.1%) Table21.1 U.5. Employment and Unemployment, January 2017 l50urce: https:data.bls.govi In this eicample, we can calculate the unemployment rate as 7.635 million unemployed people divided by 159.716 million people in the labor force. which works out to a 4.8% rate of unemployment. categories of Unemployment Not all unemployment has the same cause. and therefore not all unemployment should be treated the same. In a market economy, some companies are always going broke for a variety of reasons: old technology; poor management: good management that happened to make bad decisions: shifts In tastes of consumers so that less of the firm's product is desired; a large customer who went broke; or tough dornestlc or foreign competitors Conversely. other companies will be doing very well for iust the opposite reasons and looking to hire more employees. In a perfect world, all of those who lost jobs would immediately find new ones. However, in the real world, even if the number of job seekers is equal to the number of job vacarirJes, it takes time to find out about new lobs, to interview and figure out if 10 Access Ior Ireo at https:riopenstax.orgrbooksiprinciples-economics-Zeipagesi1-inlroduclion Unit dEconomic Indicators the new iob is a good match, or perhaps to sell a house and buy another in proximity to a new job. Economists call the unemployment that occurs in the meantime, as workers move between iobs, frictional unemployment. Frictional unemployment is not inherently a bad thing. It takes time on part of both the employer and the individual to match those lookirtg for employlnent with the correct job openings. For individuals and companies to be successful and productive, you want people to nd the job for which they are best suited, notjust the first job offered. The artist's-ally utempbyed are individuals who have no jobs because they lack skills valued by the labor market. either because demand has shifted away from the skills they do have, or because they never learned any skills. Minimum wage creates structural unemployment by creating a surplus of labor because more people are seeking jobs at current wages than are available. Another example of the former would be the unemployment among aerospace engineers after the LLS. space program downsized in the 1970s. An example ofthe latter would be high school dropouts. Some people worry that technology leuses structural unemployment. In the past, new technologies have put lower skilled employees out of work. but at the same time they create demand for higher skilled workers to use the new technologies. Education seems to be the key in minimizing the amount of structural unemployment. Individuals who have degrees can be retrained if they become stnictulally unemployed. For people with no skills and little education, that option is more limited' The natural rate of unemployment is is the unemployment rate that would result from the combination of economic, social, and political factors that exist at a timeassuming the economy was neither booming nor in recession. 'lhie natIaI late of unemployment is the sum offrictional and structural unemployment. These forces include the usual pattern of companies expanding and contacting their workforces in a dynamic economy, social and economic forces that affect the labor market. or public policies that affect either the eagerness of people to work or the willingness of businesses to hire. One primary determinant ofthe demand for labor from firms is how they perceive the state of the macro economy. It rms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor. and the labor demand curve shilts to the right. Conversely, if rms perceive that the economy mm" wish to hire a lower nunsauan-Jm. no r"... "a..- \"mm. run-i a." Int... Anna-"l Hm... ...:II 4.\". in 0'." In cram.mr one" it... recession. The nuclei late of unemployment is the sum ofirictional and structural unemployment. These forces include the usual pattern of companies expanding and contracting their workforces in a dynamic economy, social and economic forces that affect the labor market. or public policies that alfect either the eagerness of people to work or the willingness of businesses to hire. One primary determinant ofthe demand for labor lrom firms is how they perceive the state of the macro economy. if rms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor, and the labor demand curve shifts to the right. Conversely, if lirrns perceive that the economy is slowing down or entering a recession, then they willwish to hire a lower quantity of labor at any given wage. and the labor demand curve will shift [0 the left. Economists call the variation in unemployment that the economy muses moving from expansion to recession or from recession to expansion {i.e. the business cycle} cycliul Il'lemphyma'rt. The actual unemployment rate is the sum of frictional, stnictural. and cyclical. Hidden Unemployment Even with the "out of the labor force\" category, there are still some people who are mislabeled in the categorization olemployed, unemployed, or out ofthe labor force. There are some people who have only part time or temporaryjobs. and they are looking for full time and permanent employment that are counted as employed, although they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed. This includes those who are trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in nance who is working asa sales clerk underemployed. They are. however, also counted in the employed group. All at these individuals fall under the umbrella of the term \"hidden unemployment.' Discouraged writers. 11 Access for tree at https:openstax.orgfbooksn'principles-eoonomicseeipagea!1-inlroduclion Unit l-Economic Indicators those who have stowed looking for employment and. hence, are no longer counted in the unemployed also fall into this group Liror Force Participation Rate Another important statistic is the labor tome participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking tor a job. Using the data in Table 21.1, those included in this calculation would be the 159316 million individuals in the labor lorce. We calculate the rate bytaking the number of people in the labor force. that is. the number employed and the number unemployed. divided by the total adult population and multiplying by 100 to get the percentage. For the data from January 2017, the labor force participation rate is 62.9%. Historically. the civilian labor lorce participation rate in the United States climbed beginning in the 19605 as women increasingly entered the workforce, and it peaked at just over 6796 in late 1595 to early 2000. Since then, the labor force participation rate has steadily declined. slowly to about 5596 in 2008. early in the Great Recession, and then more rapidly during and after that recession, reaching its present level, where it has remained stable, near the end ol 2013. tritium of Measuring Unemployment There are always complications in measuring the number of unemployed. For example. what about people who do not have jobs and would be available to work. but are discouraged by the lack 01 available jobs in their area and stopped looking? Such people, and their families, may be suliering the pains of unemployment. However. the survey counts them as out oi the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but. tnrly, they are not that eager to work and are not looking very hard at all. They are counted as unemployed. although they might more accurately be classied as out 01 the labor lorce. Still other people may have a iob. perhaps doing something like yard work. child care, or cleaning houses, but are not reporting the income earned to the tall authorities. They may report being unemployed. when they actually are working Although the unemployment rate gets most of the public and media attention, economic researchers at the Bureau of labor Statistics publish a wide array of sunieys and reports that try to measure these kinds of issues and to develop a more nuanced and complete View of the labor market. It is not exactly a hot news llash that economic statistics are imperfect. Even imperfect measures like the unemployment rate. however. can still be quite inlormative. when interpreted knowledgeably and sensibly. Access tor tree at https:Hoponstax.orglbooksi'principles-economics-Zeipagesi1oinlroduclion Unit LEconom'v: Indicators Inflation Access Ior Ireo at htlps:tloponsta:.org'bookslprinciples-ooonomics-2elpages.'1-inlrocluclion Unit 4-Econon1ic Indicators Ination Ination is a general and ongoing rise in the level of prices in an entire economy. Ination does not refer to a change in relative prices. A relative price change occurs when you see that the price of tuition has risen. but the price of laptops has fallen. Ination, on the other hand. means that there is pressure for prices to rise in most markets in the economy. In addition. price increases in the supply-and-demand model were one-time events. representing a shift from a previous equilibrium to a new one. Ination implies an ongoing rise in prices If ination happened for one year and then stopped, then it would not be inflation any more. Ination is generally a concern during business cycle expansions. Dinner table converntions where you might have heard about ination usually entail reminiscing about when "everything seemed to cost so much less. You used to be able to buy three gallons ofgasoline for a dollar and then go see an afternoon movie for another dollar.' Table 2.] compares some prices of common goods in 1910 and 201?. Of course, the average prices in this table may not reect the prices where you live. The cost of living in New York City is much higher than in Houston. Texas. for example. In add ition, certain products have evolved over recent decades. A new car in 2017. loaded with antipollution equipment, safety gear. computerized engine controls, and many other technological advances. is a more advanced machine {and more fuel efficient: than your typical 19705 car. However. put details like these to one side for the moment. and look at the overall pattern. The primary reason behind the price rises in Table 12.1 and all the price increases for the other products in the economy is not specic to the market for housing or cars or gasoline or movie tickets Instead. it is part ofa general lie in the level of all prices At the beginning of 201?. 51 had about the same purchasing power in overall lenns of goods and services as It! cents did in 1972, because of the amount of inflation that has occurred over that time period. w Table22.1 Price comparisons. 1970 and 2017 (sources: See chapter References at end of book: Access for free at httpsopenstax_orgfbooltsl'principleseconomics-29mm\"!1-inlrodut:lion Unit dEconomic Indicators Moreover. the power of ination does not affectjust goods and services. but wages and income levels. too. The second-tolast row of Table 22.1 shows that the average hourly wage for a manufacturing worker increased nearly sixfold from 1970 to 2017. The average worker in 2017 is better educated and rrtore productive than the average worker in ismhut not six limes more productive. Per npita GDP increased substantially from 1370 to 2017. but is the average person in the U.S. economy realty rrtore than eleven times better off in just 4? years? Not likely. it rrtodern economy has millions of goods and services whose prices are continually quivering in the breezes of supply and demand. How can all of these shifts in price attribute to a single ination rate? As with rrtany problems in economic measurement. the cortceptual answer is reasonably straightforward: Economists combine prices of a varietyofgoods and services into a single price level. The ination rate is simply the percentage change in the price level. Applying the concept. however. involves some practi-I difficulties. ThePrioecfalaslne'tnfootk To calculate the price level. economists begin with the concept of a basket ofgoodi and services, consisting of the different items individuals. businesses. or organizations typi-lly buy. The next step is to look at how Ihe prices of those items change over time. In thinking about how to combine individual pric into an overall price level. many people nd that their rst impulse is to calculate the average of the prices. Such a calculation. however. could easily be mieading he-use some products matter more than others. Changes in the prices of goods for which people spend a larger share oftheir incomes will matter more than changes in the prices ofgoods for which people spend a smaller share oftheir incomes. For example. an increase of 1096 in the rental rate on housing matters more to most people than whether the price of carrots lis' by 1096. To constntct an overall measure ofthe price level, economists compute a we'ghted average of the prices of Ihe items in the basket. where the weights are based on the actual quantities ofgoods and services people buy. than changes In the prices or goods tor which people spend a smaller share or their Incomes. for example, an increase of 10% in the rental rate on housing matters more to most people than whether the price of carrots rises by 10%. To oonstnrct an overall measure of the price level, economists compute a weighted average of the prices of Ihe items in the basket. where the weights are based on the actual quantities of goods and services people buy: Economists note that over most periods, the ination level in prices is roughly similar to the ination level in wages, and so they reason that, on average, over time, people's economic status is not greatly changed by ination. If all prices, wages, and interest rates adjusted automatically and immediately with ination, then no one's purchasing power, profits. or real loan payments would change. However, if other economic variables do not move atactly in sync with ination, or if they adjust for ination only after a time lag, then ination can cause three [Vp of problems: unintended redistributions of purchasing power, blurred price signals, and difculties in longterm planning. Unintended Redistribution: of Purchasing Power Ination can cause redistributions of purchasing power that hurt some and help others. People who are hurt by inflation include those who are holding oonsiderable cash, whether it is in a safe deposit box or in a cardboard box under the bed. when ination happens, the buying power of Ish diminishes. However, cash is only an example of a more general problem: anyone who has nancial assets invested in a way that the nominal return does not lteep up with ination will tend to suffer from ination. For example, if a person has money in a banlt account that pays 4% interest, but ination rises to 5%, then the real rate of return for the money invested in that banltaocount is negative 1%. 14 Access for tree at https:openstax.orglbookslprinciples-eoonomics-Zelpages!1-inlroducllon IJnit Il-Economit: Indicators armed Price Signals Prices are the messengers in a marltet economy. conveying Information about conditions of demand and supply. Inflation blurs those prioe messages. Inflation means that we perceive price signals more vaguely, like a radio program received with considerable static If the static becomes severe. it is hard to tell what is happening. Problems ol Long-Tenn Planning Inflation can make long-term planning diicult. In discussing unintended redistributions. we considered the case of someone trying to plan for retirement with a pension that is irted in nominal terms and a high rate of ination. Similar problems arise for all people trying to save for retirement, because they must consider what their money will really buy several decades in the future when we cannot ltnow the rate of future Inflation. Is there a connection between German hyperination and Hitler's rise to power? Germany suffered an intense hyperinflation of its currency, the Marlt. in the years after World War I. when the Weimar Republic in Germany resorted to printing money to pay its bills and the onset ofthe Great Depression created the social turmoil that Adolf Hitler was able to take advantage of In his rise to power. Shlller described the connection this way in a National Bureau of Economic Research 1996 Working Paper: A fact that is probably little known to young people today, even in Germany, is that the filial collapse of the Mark in 192 3. the time when the Mark's inflation reached astronomical levels {inflation of 35.974996 in November 1923 alone. lor an annual rate that month of 4.69 x 102596). came in the same month as did Hitlefs Beer Hall Putsch, his Nazi Party's armed attempt to overthrow the German government, This falled putsch resulted in Hitler's Imprisonment. at which time he wrote his bool: Mein Kampl, setting forth an inspirational plan for Germany's fut ure. suggesting plans for world domination. . . . . . Most people in Germany today probably do not clearly remember these events.- this laclt of attention to it may be because its memory is blurred by the more dramatic events that succeeded it (the Nazi seizure of power and World War II]. However, to someone living through these historical events in sequence . . . [the putsch] may have been remembered as vivid evidence of the potential effects of ination. Access Ior Iran at https:oponsta:.orgfbooksiprinciples-ooonomics-zoipagas!1-iniroduciion Unit 4Economic Indicators Aggregate Demand and Aggregate Supply \"""F'Vam' \"WNW 1-- I...:IJ _ ..__a'_.| _________ __._ __4_n __._ ___4 _ __4_n..__. _I.___._..4._. o_.__:___ ._.._u __._L. __ Access tor tree at https:iioponstax.orgrbooksiprinciples-coonomics-Zeipagesi1-inlroduclion Unit LEconomic Indiruitors Aggregate Demand and Aggregate Supply A Supply and Demand Model forthe Whole Economy To build a useful macroeconomic model, we need a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level. We call this the aggregate demandfaggregate supply model, This module will mtplain aggregate supply, aggregate demand, and the equilibrium between them. The Awegatie Demand Curve Aggregate Emand (AD) refers to the amount of total spending on domestic goods and services in an economy. It includes all four components of demand: consumption, investment, government spending, and net eitportslexporb minus imports]. This demand is determined by a number of factors, but one of them is the price levelrecall though, that the price level is an index number that measures the average price of the things we buy. The aggregate demand [AD] curve shows the total spending on domestic goods and services at each price level. Figure 24.4 presents an aggregate demand {AD} curve. The horizontal axis shows real GDP and the vertical axis shows the price level, The AD curve slopes down, which means that increases in the price level of outputs lead to a lower quantity of total spending. The reasons behind this shape are related to how changes in the price level affect the different components of aggregate demand. The following components comprise aggregate demand: consumption spending (Cl, investment spending {I}, government spending {6], and spendingon exports [X] minus imports (M): C + I + G + {X M}. mun llr-leDP' Figure 24.4 The Aggregate Demand Curve Aggregate demand {AD} slopes down, showing that, as the price level rises, the amount of total spending on domatic goods and services declines. When consumers feel more condent about the future of the economy, they tend to consume more which shifts the AD to the right. If business condence is high, then rms tend to spend more on investment also sh ifting AD to the right. Conversely, if consumer or business condence drops, then consumption and investment spending decline. Government spending is one component of AD. Thus, higher government spending will cause AD to ii to the right. while lower government spending will nuse AD to shilt to the left. For mp|e, in the United States, government spending declined by 3.2% of GDP during the 19905, from 21% of GDP in 1991, and to 17.8% of GDP in 1998. However, from 2MB to 2009, the peak of the Great Recession, Access for tree at https:opsnstart.orgfboaka.'principles-economics-Zelpages!1-inlroduclion Unit al-Economic Indicators government spending increased from 19% of GDP to 21.4% of GDP. It changes of a few percentage points of GDP seem small to you, remember that since GDP was about $144 trillion in 2009, a seemingly small change of 2% of GDP is equal to close to $300 billion. Tait policy can affect consumption and investment spending. too. tax cuts for individuals will tend to increase consumption demand. whiletax increases will tend to diminish it. Tax policy can also pump up investment demand by offering lower tax rates for corporations or tax reductions that benet specic kinds of investment. Shifting Consumption or Investment will shift the AD curve as a whole. The menu Supply um and Potential GDP Firms make decisions about what quantity to supply based on the prots they expect to earn. They determine prots, in turn. by the price of the outputs they sell and by the prices ol the inputs, like labor or raw materials, that they need to buy. Aggregate supva (AS) refers to the total quantity of output {i.e. real GDP} rms will produce and sell. The auregate supply (AS) curve shows the total quantity ol output tie real GDP) that rms will produce and sell at each price level. hwm us- i auteur-ms V\" I "5 mime-15m _. i \\ I lor- e A _,' I as- _/ S . __,- 2 ss- 7 ,__a""' I 754..'a slain rpm uuau 9pm mm Il'wmctlml'l} Figure 2-1.3 The Aggregate War as the price level for outputs rises. with the price 0 inputs remaining , Irms ave an incentive to produce more to earn 90me E . i pnlovlla ii ' *3 7 \"5 realism- , a no % tar. 5 l as - p 3. . J. g .. . _ _. s. -- l , 75 (Jim rpm luau aim \"Hill Red EDP modem\" Sol-I} Figure 2-1.3 The Aggregate Supply curve Aggregate supply {AS} slopes up. because as the price level lor outputs rises. with the price of inputs remaining xed. firms have an incentive to produce more to earn higher prots. The pour-Rial GDP line shows the maximum that the economyI can produce with full employment of workers and physical capital. In the long run, the most important factor shifting the AS curve is productivity growth. Productivity means how much output can be produced with a given quantity of labor. One measure of this is output per worker or GDP per capita. Over time, productivity grows so that the same quantity of labor can produce more output' Historically, the real growth in GDP per capita in an advanced economy like the United States has averaged about 2% to 33s per year. but productivity growth has been faster during certain extended periods like the 19605 and the late 19905 through the early 20005. or slower during periods like the 19705. A higher level of productivity shifts the AS curve to the right. because with improved productivity. firms can produce a greater quantity of output at every price level. Higher prices for inputs that are widely used across the entire economy can have a macroeconomic impact on aggregate supply. Examples of such widely used inputs include labor and energy products. Increases in the price of such inputs will cause the SIMS curve to shift to the left. which means that at each given price level for outputs, a higher price for input: will discourage production because it will reduce the possibilith for earning prots. 17 Access for free at https:llopenstax.orglbooksrpnnciples-eooncmics-Zelpagesl1-introduclion Unit A-Economic Indicators The aggregate supply curve can also shift due to shocks on input goods or labor. For example, an unexpected eariy freeze could destroy a large number 0! agricultural crops, a shock that would shift the its curve to the left since Ihere would be fewer agricultural products available at any given price. DennShonllunASandLonglburIAS Economists typically draw the aggregate supply curve to cross the potential GDP line. This shape may seem punling: How can an economy produce at an output level which is higher than its 'poIentiaI' or 'full employment" GDP? The economic intuition here is that if prices for outputs were high enough, producers would make fanatical efforts to produce: all workers would be on double-overtime. all machines would run 24 hours a day, seven daysaweek. Such hyper-intense production would go beyond using potential labor and physical capital resources fully. to using them in a way that is not sustainable in the long term. Thus, it is possible for production to sprint above potential GDP, but only in the short run. We differentiated between short run changes in aggregate supply which the AS curve shows and long run changes in aggregate supply which the vertical line aI potential GDP denes. In the short run, if demand is too low (or too high], it is possible for producers to supply less GDP (or more GDP] than potential. In the long run, however, producers are limited to producing at potential GDP as determined by the scarcity of the factors of production. For this reason, we may also refer to what we have been calling the AS curve as the short l'Ill We supply [5M5] crave. We may also refer to the vertical line at potential GDP as the long run magpie supply [mica-ire. Equilibrium and Gaps in the ADJAS Model The intersection of the short run aggregate supply and aggregate demand curves shows the short run equilibrium level of real GDP and the equilibrium price level in the economy. We can compare that short run equilibrium to poIenrial output [the Dust to understand current economic conditions. When the short run equilibrium real GDP is less than potential output (as shown by the vertical LRAS] then the economy is experiencing a reoesslonuygappanel [a] below. Recessionary gaps are associated with high unemployment. When the short run equilibrium real GDP is greater than potential output (as shown by the LRAS] then the economy is experiencing an inationary gappanel (b) below. Inationary gaps are associated with low unemployment buI high ination. When the short run equilibrium real GDP is at potential [2 shown by the vertical LRAS} then the economy is at long run equlhrhrmpanel (cl below and prices. unemployment. and output are stable. mm MM mm M m\" I.\" Access for free at https'opanstax,orgfbookslprincipleseconomics-Zaipagas!1-introduction