Macro Studies: My Economy is Bigger than Yours

1. Macro Studies:My Economy is Bigger than Yours Chapter 12

2. Macroeconomic Goals Low unemployment Stable prices Continuous growth Macroeconomics uses a series of tools, signals and indicators to measure and track these areas

3. Grow Your Own! • Economic Growth needs a few things: • Population: source of workers • Small workforce means less productivity • Capital: investment • Productivity depends on available equipment and land • Yet investment is not free—money must be saved today to be spent for tomorrow

4. What’s the Big Idea? • Ideas: innovation • Unpatented ideas can be replicated endlessly for free while new buildings cost money • New methods & products, ways of organizing and conducting business lead to advancement • Stanford economist Paul Romer said, “Economic growth springs from better recipes, not just more cooking.”

5. Monitoring the National Economy • National income accounting – collects statistics on production, income, investments, and savings • Used to determine value of the economy • The most important measure is GDP • If an individual’s earnings are his/her income, then a country’s income would be GDP

6. GDP http://www.youtube.com/user/mjmfoodie#p/u/27/yUiU_xRPwMc Gross Domestic Product – dollar value of all final goods and services produced within a country’s borders in a given year If only final goods count, then Intermediate goods don’t Includes goods made IN the states by a foreign company but does not include goods made by American companies in foreign countries

7. Global GDP Growth 2010 http://www.economist.com/content/all_parities_china

8. GDP Cartogram* * Size is denoted by a country’s share of global GDP, thus richer countries are bigger.

9. Expenditure Approach Economists estimate the total of all the money spent on stuff 1. consumerspending 2. businessinvestment 3. government spending 4. net exportsor exports of goods and services minus our imports C+I+G+(X-M) = GDP

10. Consumer Goods • Combination of two categories of goods that we consume • Durable goods – last for a relatively long time (refrigerator, car) • Non-durable goods – last for a short period of time (pencil, shoes) • http://economix .blogs.nytimes.com/ http://www.visuale conomics.com/aver age-american-spend s-on-entertainment/

11. Income Approach • Adding up all the money spent on stuff • When a firm sells something they receive income • Every sale is income to someone • Provides a more accurate measure because it calculates how much the country is making, not just spending • Together these two approaches provide a significant measure of GDP

12. Nominal vs. Real GDP http://www.youtube.com/user/mjmfoodie#p/u/26/29S7FzI7s7g Measurements must be as accurate as possible, but differ based on what year’s prices are used Nominal GDP – “current” use the current year’s prices to calculate Real GDP – allows for distortion of prices, constant or unchanging prices

13. Limitations of GDP:What doesn’t count • Non-market activities – things people do for themselves (cutting their own grass) • Underground economy – production and income never recorded (markets for drugs, weapons, etc) • Negative externalities – unintended side effects • Cutting a forest—paper counts, lack of a forest doesn’t • Quality of life – additional goods and services do not necessarily improve life (no value judgments) • How quantifiable is standard of living?

15. GROSS! • Gross National Product – takes away income earned by foreign firms and foreign citizens located in the U.S. • Depreciation – loss of value of capital (wear and tear on equipment) gives us Net National Product

16. Colloquial Economics • Need to remember GDP, GNP & NNP (depreciation)? • GDP: “Whazzup son, where you at?” • Location—within a country’s borders • GNP: “Yohomes,where you from?” • Origin—nation of residence • NNP (depreciation): “What it is?” • Value of a good over time

17. Influences on GDP • Aggregate Supply – total supply • Add up total supply of goods and services produced across the economy • Calculate the price level • average of all prices in the economy • Aggregate Demand – amount of goods and services that will be purchased at all price levels

19. Business Cycles http://www.youtube.com/user/mjmfoodie#p/u/24/jGP-vPEHRRE Period of expansion followed by a period of contractions Major changes in real GDP above or below normal levels

20. 4 Phases of a Business Cycle 1. Expansion – growth, rise in GDP, lots of jobs, business prosperity 2. Peak – When GDP stops rising, height of economic expansion 3. Contraction – period of decline marked by falling real GDP, unemployment rising 4. Trough – “bottomed out” lowest point in real GDP

22. Recession • GDP falls for two consecutive quarters • 6 months of contraction = recession • Prolonged economic contraction • Marked by rising unemployment, fall in consumer confidence, decrease in spending and investment

24. Extremes Long and severe recession = depression High unemployment Low factory output Stagflation – decline in real GDP with an increase in inflation *unable to accurately predict length of cycles

25. Shifts in Business Cycles • Business investment • Interest rates and credit • Consumer expectations • External shocks • For instance, in 1973, US citizens found themselves waiting in long lines just to obtain gas for their cars because countries in the Middle East imposed an oil embargo against the United States. In 1979, the United States stopped shipping grain to the USSR after the Soviets invaded Afghanistan.

27. Unemployment

28. 4 Types of Unemployment 1. frictional – people take time to find a job 2. seasonal – affected by weather, holidays school 3. structural – worker’s skills do not match available jobs 4. cyclical – aligned with the business cycle

29. Structural Differences • 5 causes of structural unemployment • Technology: makes jobs obsolete (ipods) • Resources: new energies replace old ones (coal -> gas, gas -> electricity) • Consumer demand: consumer’s habits change based on tastes and trends dictating demand for labor (make more Snuggies!) • Globalization: companies outsource or expand to foreign markets (telemarketers) • Education: lack of skills and knowledge can keep someone from working (drop outs)

31. Measuring Unemployment • Unemployment is a clue to the health of the economy. • Census helps to identify the unemployment rate. • Made up of people 16 or older have a job or are actively looking for full time work • What does this leave out?

32. Calculating Unemployment Add up number of employed and unemployed people = Labor Force Divide the number of unemployed people by the total labor force Multiply that figure by 100. Adjusted for seasonal unemployment

34. Full Employment Full employment is not attainable in a market economy. Underemployed – people who are over qualified for a job they are working. Discouraged workers – stopped searching for employment – do not count in the unemployed rate

35. Inflation Inflation – general rise in prices Price Index – measurement that shows how the averageprice of a group of goods changes over time CPI – Consumer Price Index – determines the price of a standard group of good each month with what the same good cost previously Market Basket – representation of goods and services (p339)

36. Calculating CPI CPI = current price X 100 base period cost $360 X 100 = 180 $200

37. Hungarian man shovels currency into the gutter, after prices doubled every fifteen hours, 1946 Children play with worthless blocks of German currency in post-World War I Germany

38. Causes of Inflation Quantity Theory – too much money in the economy Demand- Pull – demand for goods/services exceeds existing supplies Cost- Push – producers raise prices to meet increased costs

39. Effects of Inflation • Purchasing power declines • PPP = (purchasing power parity) or how much of something your money buys; the buying power of your money • when gas costs more every day, your dollar buys less of it • Income is decreased • Hurts people on a fixed income (retirees)

40. Lessons from Zimbabwe • The country of Zimbabwe has experienced one of the most severe occurrences of hyperinflation in history • The most recent move of their central bank took twelve zeros off of their exchange rate • This means that $1=roughly Z$1trillion • “Teachers reported the printing of bank notes from millions to billions and then trillions skewed their pupils' sense of numeracy, making them fail to grasp the realities of numbers.  On one geography field trip, students scoffed at being told granite rocks swept over Zimbabwe by ancient glaciers were 700 million years old. That time frame seemed insignificant.  Back then in 2008, 700 million Zimbabwe dollars bought a loaf of bread.” http://finance.yahoo.com/news/Visitors-snap-up-100-trillion-apf-3558543127.html