Question

Utilizing the concepts (real GDP, CPI and unemployment) provide a description or overview of the current macroeconomic state of the US. Include one equation such as the "implicit price deflator and one graph or chart. The equation and graph must include the most recent data available.

Answer 1

Unemployment :

• Many people think that the unemployment rate is a measure of who is receiving an unemployment insurance check, in fact, it includes many more people than that.
• Because unemployment insurance records relate only to persons who have applied for such benefits, and since it is impractical to actually count every unemployed person each month, the Government conducts a monthly sample survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country. The CPS has been conducted in the United States every month since 1940 when it began as a Work Projects Administration project. It has been expanded and modified several times since then. As explained later, the CPS estimates, beginning in 1994, reflect the results of a major redesign of the survey.
• If the unemployment rate is 3.9%, then 3.9% OF WHAT are unemployed? It is NOT 3.9% of the population, but rather 3.9% of the LABOR FORCE.

Calculating the Unemployment Rate

The unemployment rate is defined as the percentage of the labor force that is not employed. Note that it is NOT the percentage of the POPULATION.

To calculate the unemployment rate:

UE rate = (# unemployed / labor force) x 100

So using the data for 2007 above:

• the labor force = 153.1 million people
• those unemployed = 7.1 million people

So the unemployment rate was:

(7.1 / 153.1) x 100 = 4.6 % of the labor force.

Cyclical unemployment is a type of unemployment caused by insufficient total spending (or by insufficient aggregate demand). It is unemployment caused by the recession phase of the business cycle. If there is less aggregate demand firms respond by producing less. Output and employment are reduced. The extreme unemployment during the Great Depression (25 percent in 1933) was cyclical unemployment.

Gross domestic product (GDP) :

• Measures the market value of all final goods and services produced within a country in a given period of time. Several key points regarding the measurement of GDP are worth noting:
• GDP measures the market values of goods (tangible) and services (intangible), which are calculated by using market prices.
• GDP includes all items produced and sold legally in the economy. It does not include illegal activities (e.g. drug trafficking) and household production (e.g. cleaning and cooking at home).
• GDP includes only final goods only.Intermediate consumption is not included in GDP. The value of intermediate consumption is already included as part of the value of the final good.
• GDP measures the production that takes place within the geographical boundaries of a particular country (e.g. the US) or region (e.g. Hong Kong SAR).
• GDP measures the production that takes place in a given period of time (a quarter or a year).

The growth rates of GDP can be measured by the following equation: Y’ = (Y2 – Y1) / Y1 x 100% Where Y’ is the growth rate of GDP, Y1 is the GDP of last year and Y2 is the GDP of current year.

CPI:

• The CPI is a measure of the average change over time in the prices paid by urban consumers for a constant-quality market basket of goods and services—that is, a sample of goods and services that consumers purchase for day-to-day living. Produced monthly, the CPI weights the price of each item in the market basket on the basis of the amount of spending reported by a sample of families and individuals.
• The CPI has two primary inputs: prices and expenditure weights. Data on prices are collected from the BLS Commodities and Services (C&S) Survey and Housing Survey. The C&S survey collects price data on approximately 80,000 goods and services per month in roughly 23,000 retail establishments in 87 urban areas around the United States. The Housing Survey collects approximately 6,000 rent quotes per month in the same 87 urban areas. Retail establishments for which price data are collected are selected primarily via a sampling process that uses data from the Telephone Point-of-Purchase Survey (TPOPS), administered quarterly by the U.S. Census Bureau on behalf of BLS. Once retail establishments are selected for price collection, field staff employed by BLS visit the establishments, select a unique item for pricing, and continue to collect the price data monthly or bimonthly, unless the item is no longer sold or a different retail establishment is selected in the next TPOPS rotation. Housing units are selected by means of a different survey process, one that relies on data from both the decennial census and the U.S. Census Bureau’s American Community Survey for sampling.
• The second primary input into the CPI, the expenditure weights, is based on Consumer Expenditure (CE) survey data collected by the U.S. Census Bureau for BLS. The CE survey identifies the dollar amount households spend on a broad range of goods and services. About 14,000 1-week diaries and 28,000 quarterly interviews are collected from the current CE survey sample each year.
• Once price and expenditure data are collected, price indexes can be calculated with the use of price index formulas. The CPI uses a hybrid of geometric and arithmetic mean calculation, depending on whether “lower level” or “upper level” indexes are being constructed. Currently, the CPI measures price change for 211 item categories (e.g., breakfast cereal) in 38 geographic areas (e.g., Boston–Brockton–Nashua), forming 8,018 basic item–area index cells (211 × 38) that serve as the building blocks from which aggregate indexes are constructed. These building blocks are the so-called lower level indexes. Aggregate indexes constructed from them are the so-called upper level indexes. For example, the intermediate upper level index for cereals and cereal products is constructed from three item categories: (1) flour and prepared flour mixes; (2) breakfast cereal; and (3) rice, pasta, and cornmeal. The index for cereals and cereal products can be computed for the Boston–Brockton–Nashua metropolitan area, for a set of cities that make up the Northeast urban geographic area, or for all cities in which prices are collected. The last forms an index at the level of the U.S. city average. In total, the CPI consists of thousands of indexes that measure price change for narrow and broad categories of goods and services across multiple geographic areas. The result is a set of CPI indexes that measure the average change over time in the price paid specifically by urban consumers for a constant-quality market basket of goods and services.
• The CPI uses an arithmetic mean (or Laspeyres) formula for all upper level index calculation, but employs a geometric mean for approximately 60 percent of all lower level indexes in terms of weight (a Laspeyres formula is used for the remaining 40 percent). The geometric mean formula allows the CPI to reflect changes in consumer spending patterns among goods and services within item–area combinations—changes that occur in response to changes in relative price. The formula assumes that the change in quantity is equal (in percentage terms), and inversely related, to the change in price. Thus, if the relative price of one brand of bananas in the Boston–Brockton–Nashua metropolitan area increases, then the quantity purchased of that brand is assumed to decrease percentagewise by the same amount. Similarly, if a pint of ice cream increases in (per-unit) price relative to a quart of ice cream, then the quantity purchased of a pint is assumed to decrease by a percentage reflective of the change in relative price.²
• Unlike the geometric mean formula, the Laspeyres formula implemented in the CPI is an arithmetic mean of price relatives weighted by expenditures that implicitly contain information on quantity. Because expenditure data are updated every 2 years, the month-to-month changes in upper level CPI indexes reflect price change under the assumption that quantity remains fixed. This assumption means that the CPI does not account for real-time changes that may occur in expenditure shares across aggregate categories of goods and services, perhaps in response to changes in relative price across the same aggregate categories. In short, the Laspeyres formula introduces “consumer substitution bias” into the CPI; that is, it does not account for the possibility that consumers will switch to different products or shop in different outlets in response to increases in the price of close substitutes.
• In sum, the CPI is a measure of price change across a set of goods and services purchased by urban consumers and is calculated with the use of a combination of geometric and arithmetic means that can capture some degree of consumer substitution limited to goods and services within item groups.