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Unit 2 – Economic Indicators and the Business Cycle
Essential Questions
• How is one person’s spending
another person’s income?
• How do we know if an economy is
doing well or poorly?
Enduring Understandings
• An economy’s performance can be
measured by different indicators such as
gross domestic product (GDP), the
inflation rate, and the unemployment rate.
• The economy fluctuates between periods
of expansion and contraction in the short
run, but economic growth can occur in the
long run.
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What You Need to Know
How is one person’s spending another person’s income?
Households
Product Factor Markets
Markets
Firms
Money from households flows TO Money from firms flows TO
firms through the product market. households through the factor market.
- one person’s spending on goods and - another’s person’s income via the factor
services in the product market market
becomes…
- aggregate spending - aggregate income
- GDPR expenditure approach - GDPR income approach 6
- GDPR = C + I + G + Xn - GDPR = W + R + I + P
How do we know if an economy is doing well or poorly?
GDP Inflation Unemployment Rate
How much output is the Are prices stable? What portion of the country’s
economy producing? population is in the labor force?
= C + I + G + Xn CPI =
Labor Force
How much income is being CPI in base year = 100 = employed + unemployed
earned in the economy?
=W+R+I+P GDP Deflator = Labor Force Participation Rate
=
Real GDP = Real National GDP Deflator in base year = 100
Income What portion of the country’s labor
Real GDP = force is unemployed?
GDPR per capita =
= Unemployment Rate
Nominal GDP = =
current prices x current output What’s happening to real wages?
- if nominal wages are rising faster NRU = frictional + structural
Real GDP = than inflation, then real wages are
Base year prices x current output rising Actual UR = NRU + cyclical
When cyclical U% = 0; UR = NRU
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How do we know if an economy is doing well or poorly?
Key Concepts:
• GDP
• Calculate nominal GDP and real GDP
• Calculate real GDP per capita
• Explain what’s counted and what’s not
• Explain strengths and weaknesses of GDP
• Inflation
• Calculate the inflation rate using rate of change formula
• Explain what’s happening to real wages given changes in nominal wages and the price
level
• Explain who wins and who loses when the actual inflation rate is greater than (or less
than) the expected inflation rate
• Unemployment
• Explain who is counted and who is not counted as unemployed
• Define the NRU in terms of frictional and structural unemployment
• Calculate the LFPR and UR
• Explain limitations of the unemployment rate (i.e., marginally attached and discouraged
workers, no distinction between employed and underemployed)
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How do we know if an economy is doing well or poorly?
Key graph: Business cycle
Real
Real GDP
GDP growth
ga ta
asin rate
c r e
P in
ea l GD rate
R t
stan
co n
Real GDP increasing at a
constant rate
2.5%
Time Time
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How do we know if an economy is doing well or poorly?
Key graph: Business cycle
Peak, contraction, trough, expansion
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2018 Q.3 (b-d) b.) UR =
3. Countries face trade-offs between producing =
consumer goods and producing capital goods.
a) --skip— = = 10%
The following table shows labor-market data for
Country X.
c.) LFPR =
= x100
= x 100 = .6667 x 100 = 66.67%
b) Calculate the unemployment rate in Country
X. Show your work.
c) Calculate the labor force participation rate in d.)
Country X. Show your work.
d) Draw a correctly labeled graph of the
production possibilities curve for Country X,
with consumer goods on the horizontal axis Z
and capital goods on the vertical axis. Indicate
a point on your graph, labeled Z, that reflects
the current level of unemployment.
2009 2009 Price 2010 2010 Price 2011 Form B Q.3
Quantity (base year) Quantity
Food 6 $2.50 8 $2.50
Clothes 5 $6 10 $10
Entertainment 2 $4 5 $5
a) The outputs and prices of goods and a.i.) Nominal GDP = (PCY1 * QCY1) + (PCY2 * QCY2) etc…
services in Country X are shown in the
table above. Assuming that 2009 is the = ($2.50 * 8) + ($10 * 10) + ($5 * 5)
base year, calculate each of the following. = $20 + $100 + $25
i. The nominal gross domestic = $145
product (GDP) in 2010
a.ii.) Real GDP = (PBY1 * QCY1) + (PBY2 * QCY2) etc…
ii. The real GDP in 2010
= ($2.50 * 8) + ($6 * 10) + ($4 * 5)
b) If in one year the price index is 50 and
in the next year the price index is 55, = $20 + $60 + $20
what is the rate of inflation from one = $100
year to the next?
c) Assume that next year’s wage rate will b.) Inflation rate =
be 3 percent higher than this year’s
because of inflationary expectations.
The actual inflation rate is 4 percent. = = = .10 x 100 = 10%
At the beginning of next year, will the
real wage be higher, lower, or the same
as today?
d) Assume that Sara gets a fixed-rate loan
c.) At the beginning of next year, the real wage will be LOWER
from a bank when the expected
inflation rate is 3 percent. If the actual
inflation rate turns out to be 4 percent,
d.) Sara will benefit from unexpected inflation because the
who benefits from the unexpected value of the loan payments she is paying back is less than
inflation: Sara, the bank, neither, or anticipated
both? Explain.
2007 Q. 3 GDP = the final market value of all finished goods and
services produced in an economy in a given year
3. Indicate whether each of the following
is counted in the United States gross
domestic product for the year 2006.
a) No, a used textbook is not counted
Explain each of your answers.
because it was counted in the year it
a) The value of a used textbook
sold through an online auction in was produced.
2006
b) Rent paid in 2006 by residents in b) Yes, because rent in 2006 is payment
an apartment building built in
2000
for a service delivered in 2006
c) Commissions earned in 2006 by
a stockbroker
c) Yes, because the commission is the
d) The value of automobiles
produced in 2006 entirely in fee earned by the stockbroker for
South Korea by a firm fully services rendered in 2006
owned by United States citizens
d) No, GDP accounts for domestically produced
goods and services, and automobiles
produced entirely in South Korea, even by a
US owned firm, is not part of US GDP
2006 Q. 3 a) The actual unemployment rate at the new
short-run equilibrium will be LOWER than
the natural rate of unemployment.
3. The unemployment rate is an important indicator of
the health of the United States economy.
a) Assume that with the economy at full
employment, the government implements an
expansionary fiscal policy. How does the
actual unemployment rate at the new short-run
equilibrium compare with the natural rate of
unemployment? AD1
b) Assume that a significant number of workers
are involuntarily changed from full-time to Y1
part-time employment. Explain how this will
affect the number of people who are officially b) There will be no effect on the number of
classified as unemployed. people who are officially classified as
c) Assume that the government reduces the level unemployment because full and part-time
of unemployment compensation. workers are both counted as employed.
i. Explain how this affects the natural rate of
unemployment.
ii. Using a correctly labeled graph, show how
this affects the long-run Philips curve.
2006 Q. 3
3. The unemployment rate is an important indicator of
the health of the United States economy.
a) Assume that with the economy at full
employment, the government implements an c.i) The natural rate of unemployment would
expansionary fiscal policy. How does the decrease because people would be incentivized to
actual unemployment rate at the new short-run accept jobs more quickly as unemployment
equilibrium compare with the natural rate of compensation falls.
unemployment?
b) Assume that a significant number of workers
are involuntarily changed from full-time to
part-time employment. Explain how this will
affect the number of people who are officially
classified as unemployed.
c) Assume that the government reduces the level
of unemployment compensation.
i. Explain how this affects the natural rate of
unemployment.
ii. Using a correctly labeled graph, show how
this affects the long-run Philips curve.
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Unit 2 – Economic Indicators and the Business Cycle
Essential Questions
• How is one person’s spending
another person’s income?
• How do we know if an economy is
doing well or poorly?
Enduring Understandings
• An economy’s performance can be
measured by different indicators such as
gross domestic product (GDP), the
inflation rate, and the unemployment rate.
• The economy fluctuates between periods
of expansion and contraction in the short
run, but economic growth can occur in the
long run.
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