TOPIC 2

MEASUREMENT OF ECONOMIC PERFORMANCE

AP MACRO ONLINE TEXTBOOK

3

SECTION 3:

Measurement of Economic Performance

ONLINE BOOK

INFLATION ISLAND GAME

MODULE 10: Circular Flow and GDP

PAGES 105-113

ONLINE BOOK

CIRCULAR FLOW MODEL OF A MARKET ECONOMY

GROSS DOMESTIC PRODUCT

GDP = C + I + G + (X - IM)

C -- Consumer Spending

I -- Investment Spending

G -- Government Spending

X -- Exports

- IM -- Imports

GDP

What’s Included?

REVIEWING MODULE 10

1. Coca-Cola builds a new bottling plant in the United States.
• Yes - Investment Spending
2. Delta sells one of its existing airplanes to Korean Air
• NO - “Existing” means it’s used.
3. Ms. Moneybags buys an existing share of Disney stock
• NO - Transfer of ownership… not new production

• A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada.
• YES - Export-someone in the US made money
• An American buys a bottle of French perfume in Tulsa
• NO - Import-Foreigners made money
• A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.
• YES - Additions to inventories are considered “investment spending”

Will it be included in GDP for the United States? Practice with the following 6 scenarios. (Be able to explain why)

MODULE 11:

Interpreting Real Gross Domestic Product

ONLINE BOOK

JACOB CLIFFORD: What GDP Tells Us

AFTER WATCHING: What you should be able to do:

1. Define GDP.
2. Know the difference between NOMINAL and REAL GDP.
3. Why NOMINAL GDP goes up faster than REAL GDP.
4. The name of the tool that we use to move from NOMINAL to REAL GDP

MODULE 12:

Calculating Unemployment

ONLINE BOOK

ISSUES WITH THE CALCULATIONS

1. Discouraged Workers
• Stop looking for work
• They got discouraged
2. Marginally Attached
• Left the job market for other reasons
• Examples: For school, now disabled, etc.
3. Under-Employed
• Actually Currently Employed
• But…
• Would like more hours
• Overqualified

**THESE DON’T COUNT ON THE “UNEMPLOYMENT” RATES**

“MEASURES OF LABOR UNDERUTILIZATION”

(Bureau of Labor Statistics)

What if you add...

1. Unemployment
2. Discouraged Workers
3. Marginally Attached
4. Underemployed

“mjmfoodie” Video:

EPISODE 18: Unemployment

AFTER WATCHING: What you should be able to do:

1. What does it mean to be unemployed?
2. What is the formula to count the unemployment rate?
3. Who are some people who are not part of the workforce?
4. What are the two categories of workers who are counted in the labor force?

KEY TERMS

LABOR FORCE:

Working + Unemployed

WORKFORCE:

Everyone 16+ years old.

UNEMPLOYMENT:

Looking for Job; can’t find one

CALCULATING UNEMPLOYMENT

LABOR FORCE: Working + Unemployed

WORKFORCE: Everyone 16+ years old.

UNEMPLOYMENT: Looking for Job; can’t find one

​

CALCULATING LABOR FORCE

LABOR FORCE: Working + Unemployed

WORKFORCE: Everyone 16+ years old.

UNEMPLOYMENT: Looking for Job; can’t find one

​

MODULE 13:

The Causes and Categories of Unemployment

ONLINE BOOK

“OVERSTATING UNEMPLOYMENT”

Very Qualified but hasn’t accepted a job yet

JACOB CLIFFORD:

NRU (Natural Rates of Unemployment)

MODULE 14: Inflation: An Overview

PAGES 138-144

ONLINE BOOK

INFLATION v. UNEMPLOYMENT TRENDS

​

• INFLATION IS UP THEN… UNEMPLOYMENT IS…
• DOWN
• IF INFLATION IS LOW THEN… UNEMPLOYMENT IS…
• UP

WAGE, INCOME, INFLATION

• REAL WAGE = Wage Rate / Price Level
• REAL INCOME = Income / Price Level
• INFLATION RATE = Percentage increase in overall prices for year.

INFLATION v. DEFLATION:

​

1. Shoe-Level -- 2. Menu -- 3. Unit-of-Account
1. High rates of inflation impose significant economic costs.
1. SHOE-LEATHER COSTS
• the increased costs of transactions caused by inflation.
• People don’t want to hold money that is “inflating”
• Ex: More bank activity: Deposits, exchanges, ect.
2. MENU COSTS
• Menu cost is the real cost of changing a listed price.
• Ex: Restaurant prices fluctuate
3. UNIT-OF-ACCOUNT COSTS
• Unit-of-account costs arise from the way inflation makes money a less reliable unit of measurement.
• Ex:
1. Inflation = 10%
2. Salary Raise of from $100,000 to $110,000
1. A “Phantom Gain”
2. Raise is really ZERO

INTEREST RATES

NOMINAL v. REAL

1. NOMINAL INTEREST RATE
• Rate actually paid on a loan
• Rate the bank actually gives you
• NOT ADJUSTED FOR INFLATION
2. REAL INTEREST RATE
• REAL INTEREST =

NOMINAL Interest Rate (-) EXPECTED inflation rate

• FOR EXAMPLE…
• $10,000 Student Loan @ 8% Interest rate
• Expected INFLATION Rate = 2%
• REAL INFLATION IS…. ( ? )

INFLATION CALCULATOR

8% - 2% = 6%

MODULE 15:

The Measurement and Calculation of Inflation

ONLINE BOOK

WORKSHEET

MODULE 15

PRICE INDEXES

(MACRO) EPISODE 15:

INFLATION AND PRICE INDEXES

1. CONSUMER PRICE INDEX

(CPI)

MARKET BASKET:

• Main Items consumed
• Average Quantity consumed
• Price

2. PRODUCER PRICE INDEX

(PPI)

PRODUCER’S MARKET BASKET:

• RAW COMMODITIES
• Ex: Steel, electricity, Coal, etc.
• These prices fluctuate before the finished products do. It’s usually a sign of things to come.

3. GDP Deflator

The Price fluctuation from calculating the REAL GDP.

• NOMINAL GDP v. REAL GDP
• “Inflation raises nominal GDP but not real GDP, causing the GDP deflator to rise.”
• So… “If NOMINAL GDP doubles but REAL GDP does not change, the GDP deflator indicates that the aggregate price level has doubled.”

​

MARKET BASKET PRICE CHANGES

PRE-FROST = $95

POST-FROST = $175

DIFFERENCE = $+80 (+84%)

$175

$95

x 100

184.21

CALCULATING PRICE INDEX

What’s the inflation rate?

DIFFERENCE = +$30

• EQUATION -- $30/$120
• ANSWER:
• 25%

PRACTICE

Inflation from Year 4 to year 5 is...

DIFFERENCE = +$25

• EQUATION -- $25/$125
• ANSWER:
• 20%

PRACTICE

What is the Price Index for Year 2 with Year 1 as base year?

ANSWER:

• 115

PRACTICE

What is the Price Index for Year 3?

• EQUATION -- 105/100 = 1.05 x 100
• ANSWER:
• 105

PRACTICE

HELPED OR HURT?

1. Jack retired five years ago and now lives on a fixed-income annuity and a small savings account that pays him 1% interest on the balance. The current inflation rate is 1.7%.
2. Jill has worked at her current position without a raise for 4 years. Because inflation has risen 5% over the course of the 4 years, she has struggled to pay day-to-day living expenses and her house payment. She asked her employer for a raise and he gave her a 6% raise because she is such a good worker.
3. Peter has been saving his money to buy his girlfriend an engagement ring. He decided to give the money to his mother to hold for him so he wouldn’t spend it rather than put it in a savings account at the bank. During the time he was saving, the price of the ring he picked out increased by 10%.

HURT

(-0.7%)

HURT

(-0.7%)

HURT

(-0.7%)

HELPED OR HURT… CONT

• Wendy manages a bank in the local area. The previous manager made several fixed-rate loans to customers at low interest rates to bring in new depositors. Inflation is now rising at 3% per year, which is higher than the previous manager’s fixed-rate loans.
• Luke works for a building contractor and is a member of the local ironworkers union. The contractor is currently building 5 skyscrapers in the Chicago area. His union just negotiated a new 5-year contract that includes small annual raises and a “cost of living adjustment” (C.O.L.A.).
• Lando signed a 4-year fixed rate lease for the condo he is going to live in while he attends college.

HURT

(Inflation > Rate)

HELPED

(Whatever the inflation is, a COLA ensures raises will keep up with inflation)

HELPED

(The fixed lease ensures that rent will not go up with inflation)