Unit 3: Macroeconomics

ECONOMIC MEASUREMENTS
Covers GSE SSEMA1a-e
SSEMA1 Illustrate the means by which economic activity is measured. 
a. Identify and describe the macroeconomic goals of steady economic growth, stable prices, and full employment. 
b. Define Gross Domestic Product (GDP) as the sum of Consumer Spending, Investment, Government Spending, and Net
Exports (output expenditure model). 
c. Define unemployment rate, Consumer Price Index (CPI), inflation, real GDP, aggregate supply and aggregate demand and
explain how each is used to evaluate the macroeconomic goals from SSEMA1a. 
d. Give examples of who benefits and who loses from unanticipated inflation. 
e. Identify seasonal, structural, cyclical, and frictional unemployment. 
f. Define the stages of the business cycle, including: peak, contraction, trough, recovery/expansion as well as recession and
depression. 

So first, we’ve been looking at the market for one item up to this point. We’ve been asking “what is the supply and
demand for socks, or cars, or lightbulbs, or smartphones?” etc. It’s like we’re looking at our economy under a
microscope – that’s why it’s called MICROeconomics. Now were going to look at the whole economy, and that’s
called MACROeconomics.

What’s the difference between microeconomics and macroeconomics?

Micro vs Macro
The standard says Illustrate the means by which economic activity is measured [SSEMA1]. That means
you’ve got to know how we determine if our economy is doing well or not.

When you go to the doctor for anything, they always do three things – do a height/weight check, take your
temperature, and then your blood pressure. There are many other things they can check but they always start with
these three. If one or more of these is off then they’ll start checking other things to figure out what is wrong with you.

It’s the same with the economy. Economists usually look at three things to determine the “health” of the economy. If
one of these is wrong, then they’ll start looking at other things to determine the specific problem.

What they look at is found in the first element of the standard: a. Identify and describe the macroeconomic
goals of steady economic growth, stable prices, and full employment.

Three Economic Goals

We want our economy to do well, and we use three goals to do that: (1) Is our economy doing better than previously?
(2) Are prices rising (they always rise) at an acceptable rate? (3) Are most people who are looking for a job finding
one?

If we can answer “yes” to all three of these, then our economy is doing okay. If one or more of these is a little off, then
our economy isn’t doing as well as it could be.

In the second part of macroeconomics when we learn about monetary and fiscal policy, we’ll find out how a slow
economy may be given a boost.

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Now we’re going to look at the three indicators, or measures used to determine how active, or how healthy our
economy is. But first, you need to learn the Most Important Sentence in Macroeconomics:

THE ECONOMY DOES WELL WHEN PEOPLE BUY STUFF.

-or-
ECONOMIC ACTIVITY IS IMPROVED PRIMARILY BY CONSUMER DEMAND.

What this basically means is that the more Americans buy, the better the U.S. economy, and anything that promotes us
buying stuff (pizzas, computers, apps, college educations, cruises, purses, haircuts, etc.) helps our economy grow.

To prove my point, as of right now, during the 2020 COVID-19 pandemic, Congress has just agreed to give checks for
around $1,200 to most individuals in the U.S. Why? So they’ll spend it! While our economy is pretty strong, the
impact of commerce (business) slowing down or stopping is gonna hurt. By giving so many people money, the
government hopes they will spend it where they can which will help our economy.

Three Key Measures

We measure economic health (or activity) using GDP (gross domestic product) growth, stable prices with the CPI
(consumer price index), and unemployment with the unemployment rate.

Just as a starting place, for the U.S. right now, we like to see the GDP growth rate at around 3%, the CPI at 2%, and
unemployment around 5%. 3, 2, & 5… got it? Or 3 + 2 = 5.

What are the three basic ways to measure our economy?

The next element in the standard wants you to b. Define Gross Domestic Product as the sum of Consumer
Spending, Investment, Government Spending, and Net Exports (output expenditure model).

We’re going to learn a little bit about what GDP really is, first.

GDP growth
You probably know what GDP stands for, but do you know what it IS? Simply, it is the value of every good or service
produced in a country in a year.

Just pile up every bit of clothing, farm equipment, every pick-up truck, washing machine and lamp, every song, book
and illustration (goods), plus all the visits to the dentist, the car-detailing, the lawn-mowing, the latte-making and sink-
fixing (services) and total up the price of everything. That’s GDP!

GDP Definition
Here’s the official you’re-in-high school-now definition: The total market value of all final goods and services
produced in a country in a year.There are four parts to the definition of GDP:

total market value: remember equilibrium price? That’s the market value. No BOGO offers, no coupons or sales,
just the normal everyday price.

final goods and services: It has to be new, and it has to be the finished product and not the ingredients or parts that
make it up. The bag of flour a baker uses to make bread is not counted, but the bag of flour your mom buys to
fry chicken is.

produced in a country: Made in the USA. iPhones? Nope, even though Apple is an American country they are
made in China. Kia car company, which is South Korean, makes a car called the Sorrento here in Georgia.
They’re counted.

in a year: while you can use any period of time, we usually make it a year.

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 Can you explain the four parts of the definition of GDP?

On the EOC, they will give you a list of items and ask which one would (or
wouldn’t) be counted as part of the GDP.
Items counted for GDP will be new, bought by the end user, not on sale, and made in the
past year in the U.S.

Right now our GDP is about $21.7 trillion dollars which makes us number one in the world. This is useful in
comparing countries. China is number two at about $12.2, a little over half ours. This basically means our “economic
activity” is the highest in the world – we make more stuff than anyone else.

A more accurate way to compare countries is by taking GDP and dividing it by the population. Our population is a
little over 323 million, so 21.7 trillion divided by 323 million is…? About 67,000.

This means each person in the US (even little babies) produce about $67,000 worth of goods and service. In China,
with a population of 1.4 billion, their per capita GDP works out to about $9,000. That’s a lot less than our $67,000!

Straight GDP and per capita GDP is not what we measure, however. What we measure is GDP growth.

How much more did we produce this year than last year? If you remember from above, we like our growth rate to be
about 3%. In 2017, our growth rate was 2.3%, which lower than we’d like, but at least we’re growing. We don’t want
it too high or like a balloon, our economy could go “pop” like during when the Great Depression happened. China’s
GDP growth rate in 2017 was about 6% which is good for them because their economy is becoming more modern.
Ours was like that about 100 years ago as we became fully industrialized.

So that’s the first key measure of our economy – GDP growth.

What type of GDP do we use to measure economic activity?

GDP formula
Another thing about GDP you need to know is how it is calculated. It’s pretty easy: C+I+G+X N.

The C stands for consumer spending. That’s everything we buy.

The I stands for investments. That represents all the money put into stocks, bonds, mutual funds, IRAs and other
investment options. Money in savings accounts do not count.

The G stands for government spending. Everything Uncle Sam spends (state and local governments, too) on building
roads, the military, foreign aid, welfare programs, and the salaries of everyone who works for the government.

Finally, XN is the net value of our exports. If you remember from personal finance, your net income was your pay
minus taxes. Well, net exports is what we export (what we earn from overseas) minus imports (what we spend
overseas). For the U.S., this is usually a negative number. Yup, we buy more stuff from other countries than we sell
to them.

You add these all up and that’s how we get our GDP. Then we just compare it to last year’s and see how much more
(or less) it is.

Explain the parts of the GDP formula.

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 On the EOC, you may be given an amount for each of the four parts of the GDP formula and
be asked for the total.
WARNING!
NX is usually a negative number so don’t forget that when you add a negative number, you
actually subtract it.

Now you need to be able to c. Define unemployment rate, Consumer Price Index (CPI), inflation, real
GDP, aggregate supply and aggregate demand and explain how each is used to evaluate the
macroeconomic goals from SSEMA1a.

Too much? Let’s go out of order and start with defining the Consumer Price Index (CPI) and inflation.

CPI
The next of the three key measure is prices. You know how old people say they remember when a pack of gum cost a
quarter, when a gallon of gas was under $1, or something like that? Well, prices are always going to go up, and that’s
okay as long as our economy keeps growing. But we want them to go up at a steady pace. Remember that goal here is
“stable” prices, prices that don’t go up or down suddenly.

To figure out what that pace is, we use the consumer price index, or CPI. An “index” is like the end of a ruler when
you’re measuring something. It’s the starting point. The starting point for the CPI is last years’ CPI. How much have
prices risen compared to last years prices?

What is indexed with the CPI?

You need to know how they figure this out every year. The government (the Bureau of Labor Statistics to be specific)
does this by comparing the value of the exact same list of goods and services month-to-month. This list is called a
market basket.

Imagine 40 people across the country going to the store on the first day of the month and all of them putting the exact
same items in their grocery cart (the market basket). They take their price totals (which will be different across the
country) and average them. Then they compare it to the previous month’s average. How much more is the average
cost of the grocery cart than last year? 1% more? 10% more? We like it at around 2%, remember?

That grocery cart is the market basket we just mentioned, but instead of just groceries, the government includes a little
bit of everything we consumers (individuals and businesses) might buy in addition to what you can pick up at a
supermarket or a department store, including the cost of a new jet airliner, a college education, or a dump truck.

How are market baskets used to compute the CPI?

Inflation
While prices are always going up, know that if they go up to fast there’s a problem. Again, we like the CPI at 2%, but
if it jumps up past 3% we start getting worried and people start using the word inflation as a bad word. That’s because
prices have suddenly increased but people’s income hasn’t, and now everybody is buying less. Remember the “Most
Important Sentence in Microconomics”? That’s not good because people are buying less and that doesn’t help our
economy.

Remember the circular flow diagram with businesses on one side and households on the other? How money and goods
whirl around in our economy? Are you beginning to see how it all works together?

Prices might also go down from what they were, and that’s called deflation. While we as consumers may think that
sounds good, it’s definitely not good for producers, and they’re the ones who give us jobs so we can earn money so we
can spend it.

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There’s also this thing called stagflation – a combination of the words stagnant and inflation. It’s when prices don’t
rise or fall and our economy is growing or slowing down. It’s stagnant. That only happened back in the 1970s and
economists aren’t really sure what happened, but they agree it wasn’t a good thing.

One last thing about the CPI. This is what the government and businesses use to determine if they need to raise
salaries, benefits, entitlement (welfare) payments, or social security payments. This usually doesn’t occur every year
so if prices are going up over several years, but the amount of money you bring in doesn’t, you’ll have to buy less and
less every year. The real concern is when prices go a lot unexpectedly.

This has to do with this element: d. Give examples of who benefits and who loses from unanticipated
inflation. 

If you are on a fixed income, and this usually means people who are retired or on social security and get a check for
the same amount every month, prices rising suddenly (inflation) hurts exactly because your income doesn’t increase
like prices do.

If you’re a debtor (you’ve borrowed money), suddenly rising prices are actually beneficial. If you borrowed $40,000
to buy a car today, you’ve spent less than if you would’ve waited to buy the car until you’ve saved up for it, because
then that car would cost a lot more than $40,000 (and the extra interest from borrowing) because of inflation!
Whom do rising prices benefit? Who loses because of it?

On the EOC, they might give you a scenario and ask if this person will benefit or suffer
because of inflation.

Unemployment Rate
Let’s start finishing this all up by talking about the final key measure of our economy’s health, the unemployment rate.
This is the first part of c. Define unemployment rate, Consumer Price Index (CPI), inflation, real GDP,
aggregate supply and aggregate demand and explain how each is used to evaluate the
macroeconomic goals from SSEMA1a.

This number is also produced monthly by the Bureau of Labor Statistics. They record the number of people who are
looking for a job or seek to collect unemployment insurance. These people must be at least 16 who have been looking
for a full-time job for the past four months.

They compare that to the number of people in the “labor force,” those working and those considered unemployed.
They come up with a percentage that represents the unemployment rate. People who chose not to work, like a stay-at-
home parent is not included in the labor force.

We like it at around 4%, and that’s called full employment. Not everyone has a job, so why is it called full
employment? First, because there will always be someone in-between jobs or looking for the right job or looking for
their first job.

Second, if it gets lower than 4% we get worried about inflation (because there’s more demand, prices will rise – think
of the equilibrium price and quantity and then shift the demand curve to the right (increase in the population of
workers) and the EPQ rises.).

For some perspective, right now the national unemployment rate is 3.6%. At the height of the Great Recession in
2007-09 it reached 10%. That’s one out of every ten people on the labor force. At it’s worst, the unemployment rate
was 25% during the Great Depression in the 1930s. That’s one out of every four who couldn’t find a job.

Types of Unemployment
There are four types of unemployment as stated in the element: e. Identify seasonal, structural,
cyclical, and frictional unemployment. 

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Seasonal unemployment is pretty simple to explain. People who pick crops can only do it at certain times of the year.
Same goes for the Santa Clauses parents bring their kids to for a photo.

Cyclical unemployment will make more sense in the next lesson, but basically you know that our economy has its ups
and downs. When the economy is good, unemployment is low. When the economy is down (like during the Great
Recession), unemployment rises.

Frictional unemployment is people in between jobs because they wanted a better one or got fired from their last one, or
especially in May, all the college graduates who go out to find a job.

Finally, structural unemployment is when a person’s skills (human capital) are no longer useful. There used to be
navigators – they would monitor the planes’ position and tell the pilot where to go. Since the implementation of GPS
(global positioning system), navigators were no longer needed. They had to find other jobs. Another example would
be a high school graduate who doesn’t have appropriate math or literacy skills to find a job.

On the EOC, they might ask you to identify which type of unemployment a person’s situation
is an example of.

Aggregate Supply and Demand

The last part of c. Define unemployment rate, Consumer Price Index (CPI), inflation, real GDP,
aggregate supply and aggregate demand and explain how each is used to evaluate the
macroeconomic goals from SSEMA1a we need to go over is aggregate supply and demand. You already know
about supply and demand, so here’s what aggregate means.

Aggregate simply means “all.” This is MACROeconomics, remember? In microeconomics we looked at the market
for sodas, or cars, or truck drivers; one good or service. Now, in macroeconomics, we’re looking at the supply of and
demand for everything. Nothing else changes. Aggregate supply and demand curves behave exactly the same, they
just have different labels.

Okay, that’s about it. To sum up, we use GDP growth, the CPI, and the unemployment rate to monitor our
economy’s activity. If one or more of these is off, then our economy is in trouble. Like going to the doctor’s office, it
could just mean your fighting off a cold, or it could be something much worse. Soon we’re going to learn what the
doctor (two doctors, actually) can do to fix it.