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 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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