Transcript No Slide Title

No results on the Midterm yet. I will post
them as soon as the grader gets them to me.
Also, it is worth restating, that I do not plan to
curve the exam or course. The grade scales
are listed in the syllabus with cut offs of
90%, 80%, 67% and 55%.
The Topics of Macroeconomics
Read Chapter 5 pages 104-121.
I Growth of Real GDP and Business Cycles
A) Terminology
1) Real gross domestic product (real GDP),
is the total value of all final goods and
services produced during a particular year
or period, adjusted to eliminate the effects
of changes in prices.
2) Nominal gross domestic product (nominal
GDP), is the total value of final goods and
services for a particular period valued in
terms of prices for that period.
3) The business cycle is the economy’s pattern
of expansion, then contraction, then
expansion again.
4) A period in which real GDP is rising is an
expansion.
5) A period in which real GDP is falling is a
recession. Typically, an economy is said to
be in a recession when real GDP drops for
two consecutive quarters.
6) The point at which an expansion ends and a
recession begins is called the peak of the
business cycle.
7) The point at which a recession ends and an
expansion begins is called the trough of the
business cycle.
II Price-Level Changes
A) Terminology
1) Inflation is an increase in the average level
of prices
2) Deflation is a decrease in the average level
of prices.
3) Hyperinflation which is generally defined
as an inflation rate in excess of 200
percent per year.
4) A price index is a number whose movement
reflects movement in the average level of
prices.
5) A base period is a time period against
which costs of the market basket in other
periods will be compared in computing a
price index.
6) The consumer price index (CPI), is a price
index whose movements reflects changes in
the prices of goods and services typically
purchased by consumers.
7) The implicit price deflator (also called GDP
deflator), is a price index for all goods and
services produced, is the ratio of nominal
GDP to real GDP.
8) A value expressed in units of constant
purchasing power is a real value.
9) A value expressed in dollars of the current
period is called a nominal value.
B) Why is inflation bad?
1) When there is inflation, people will not
hold as much money and will spend more
time trying to avoid holding money than is
good for the economy.
2) Inflation results in a reallocation of wealth
from lenders to borrowers. (I.e., if you are in
debt, you like inflation since the money you
repay the loan with has lower value.)
3) Similarly, deflation represents a reallocation
of wealth from borrowers to lenders. (I.e., if
you have are in debt, you hate deflation since
the money you repay the loan with has greater
value. To some extent this is why farmers
have such difficulties. They typically take out
large debts at the begin of the growing season
and if prices fall, they sometimes cannot raise
enough from crop sales to repay their debts.)
C) Computing the price index.
1) Price index=
current cost of basket/base-period cost basket.
2) Example (Movie price index)
Cost of basket in 1999=$48.00
Cost of basket in 2000=$50.88
MPI(2000)=$50.88/$48.00=1.06
3) Sometimes this is written as 106.
D) Computing the Implicit price deflator
1) Implicit price deflator=
nominal GDP/real GDP.
2) Example
nominal GDP in 1999=$9,146.2 billion
real GDP in 1999 = $8,778.6 billion
Implicit deflator= 9,146.2/8778.6= 1.0418
3) Sometimes this is written 104.18
E) Computing the rate of Inflation or
Deflation
1) Inflation =
change in index/initial value of index.
2) Example 1 (Movie inflation)
Index value in 1999 = 1.00
Index value in 2000 = 1.06
Inflation = (1.06-1.00)/1.00 =.06 = 6%
3) Example 2 (CPI)
CPI in December 1997=1.613
CPI in December 1998= 1.639
Inflation rate =
(1.6391.613)/1.613=0.016=1.6%
F) Computing a real value
1) Real value of X at time t =
Nominal value X at time t/Price index time t
2) Example:
Wage rate in 1997= $6
CPI in 1997 = 1.605
Real wage rate in 1997=$6/1.605 = $3.74
G) Problems with inflation measures.
1) Because they use fixed baskets of goods,
they tend to overstate the inflation rate.
2) Tend to leave out new goods and services.
3) Do not accurately account for quality
changes.
4) Do not account for where consumers shop.
III Unemployment
A) Terminology
1) The labor force is the total number of
people working or unemployed.
2) The unemployment rate is the percentage
of the labor force that is unemployed.
B) How they determine the unemployment
rate.
1) Once a month the Bureau of Labor
Statistics survey’s people. They ask a
sequence of questions.
a) Are you working. If yes then the person is
employed and part of the labor force.
b) If no, they then ask whether the person is
looking for work. If yes they are
considered unemployed and part of the
labor force.
c) If no, they are not part of the labor force.
2) Sample survey results from June 1999.
a) Of those called 133,432 said they were
employed and 74,200 said they were not.
b) Of those who were not, 5,975 said they
were actively seeking work.
c) The other 68,225 said they were not.
d) The unemployment rate is then found to be
5,975/(5,975+133,432)=0.043=4.3%
3) Problems with the survey.
a) Does not count discouraged workers.
b) Does not count underemployed workers.
C) Types of unemployment
1) The natural level of unemployment is the
employment level at which the quantity of
labor demanded equals the quantity
supplied.
2) The natural rate of unemployment is the rate of
unemployment consistent with the natural level
of employment.
3) Frictional unemployment occurs because it
takes time for employers and workers to find
each other.
4) Structural unemployment occurs because there
is a mismatch between worker qualifications
and the characteristics employers require.
5) Cyclical unemployment is unemployment in
excess of unemployment in excess of the natural
level of unemployment.