Six Key Economic Variables

• Real Gross Domestic Product (GDP)

– is corrected for changes in the price level (real)
– includes the replacement of worn-out and obsolete
equipment and structures as well as new
investment (gross)
– counts economic activity that happens in the
United States (domestic)
– represents the production of final goods and
services (product)

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 Six Key Economic Variables
• Real Gross Domestic Product
– often divided by the number of workers in the
economy
– measures how well the economy produces goods
and services that people find useful
– does not indicate the relative distribution of the
nation’s economic product
– is an imperfect measure of economic well-being

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 Figure 1.4 - Officially Measured Real GDP
per Worker in the United States

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 Six Key Economic Variables
• The Unemployment Rate
– to be unemployed, a person must want to work and
be actively looking for a job (but have not yet found
one)
– the labor force consists of those who are employed
and those who are unemployed
– the unemployment rate is equal to the number of
unemployed people divided by the labor force

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 Figure 1.5 - The U.S. Unemployment Rate

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 Six Key Economic Variables
• The Unemployment Rate
– frictional unemployment occurs because workers
and firms spend time searching for the best match
– cyclical unemployment occurs during recessions
and depressions

– the unemployment rate is the best indicator of how

well the economy is doing relative to its productive
potential

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 Six Key Economic Variables
• The Inflation Rate
– is a measure of how fast the overall price level is
rising

– hyperinflation occurs when the price level is rising

by more than 20% per month

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 Figure 1.6 - Inflation in the United States

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 Six Key Economic Variables
• The Interest Rate
– is important because it governs the redistribution of
purchasing power across time
– the many different interest rates in the economy
vary by duration and degree of risk
• often move up and down together

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 Six Key Economic Variables
• The Interest Rate
– nominal interest rate is the interest rate in terms of
money
• does not take into account the effects of inflation
– real interest rate is the interest rate in terms of
goods and services
• does take into account the effects of inflation

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 Figure 1.7 - U.S. Real Interest Rates,
1960-1999

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 Six Key Economic Variables
• The Stock Market
– is heard about most often (every day)

– is an index of expectations for the future

• a high value means that investors expect economic
growth to be rapid, profits to be high, and
unemployment to be low

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 Figure 1.8 - Real Stock Index Prices

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 Six Key Economic Variables
• The Exchange Rate
– governs the terms on which international trade and
investment take place
– nominal exchange rate is the rate at which monies
of different countries can be exchanged for one
another
– real exchange rate is the rate at which the goods
and services produced in different countries can be
exchanged for one another

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 Six Key Economic Variables
• The Exchange Rate
– if domestic currency appreciates
• its value in terms of other currencies increases
• foreign-produced goods are relatively cheap for domestic
buyers
– imports are likely to be high
• domestic-made goods are relatively expensive for
foreigners
– exports are likely to be low

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 Six Key Economic Variables
• The Exchange Rate
– if domestic currency depreciates
• its value in terms of other currencies declines
• domestic-produced goods are relatively cheap for foreign
buyers
– exports are likely to be high
• foreign-made goods are relatively expensive for domestic
buyers
– imports are likely to be low

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 Figure 1.9 - The U.S. Real Exchange Rate:
The Dollar against a Composite Index
of Foreign Currencies

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 The Current
Macroeconomic Situation
• The United States - 2001
– economic growth has slowed to a very weak pace
• forecast for 2001 is that real GDP will grow by no more
than 1.8%
– interest rates lowered through Fed policy
• due to lags, effects of lower interest rates will not be felt
until end of 2001 (at the earliest)
– inflation continues to be low

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 The Current
Macroeconomic Situation
• The United States - recent past
– from early 1990s to 2000, there was an
economic boom
– unemployment fell during the 1990s
• lowest unemployment rate in two decades
(4%)
– real wages increased only slightly
• helped to keep inflation low

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 The Current
Macroeconomic Situation
• Europe
– economic growth in countries belonging
to the European Monetary Union slowing
– low inflation
• less than 2% per year
– relatively high unemployment
• near 10%

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 The Current
Macroeconomic Situation
• Japan
– slow growth rate
• real GDP grew only 1.8% in 2000
• real GDP is expected to grow only by 1.4% in
2001
– deflation is occurring
• the overall price level fell by 0.7% in 2000

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 Chapter Summary
• The key indicators in macroeconomics
are
– real GDP
– the unemployment rate
– the inflation rate
– the interest rate
– the level of the stock market
– the exchange rate

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