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 nations economic product
is an imperfect measure of economic wellbeing
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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

1-8

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

1-13

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

1-17

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

1-21

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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