Domain 2: Macroeconomics Pt 1

1. Domain 2: Macroeconomics Pt 1 Economic Indicators

2. SSEMA1 The student will illustrate the means by which economic activity is measured. A. Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports. B. Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. C. Explain how economic growth, inflation, and unemployment are calculated. D. Identify structural, cyclical, and frictional unemployment.E. Define the stages of the business cycle, as well as recession and depression. F. Describe the difference between the national debt and government deficits.

3. How is Economic Performance Measured? Gross Domestic Product (GDP) • Measures the size of a nations economy by measuring the quantity of goods and services produced. Unemployment (Unemployment Rate) • Percentage of people in the workforce that are not currently employed Price Stability (Inflation Rate) • Measures how prices change over time • Consumer Price Index (CPI)

4. Gross Domestic Product Dollar value of all final goods and services produced within a country’s borders in a year. • Dollar Value = the total of the selling prices • Final Goods and Services = products in the form sold to consumers, not in any intermediate form. • Within the country’s borders = made in the USA even if made by a foreign-owned company. • Does not include things made by American companies outside our borders. • In a year = in one calendar year

5. Consumer Spending: Household goods and services Government Spending: Military, schools, road construction Investment (Business Spending): Machinery, equipment, tools, new buildings Net Exports (X-M): Total Exports – Total Imports

6. Things Not Counted in GDP Transfer Payments (money moving from one person/group to another) Examples include Unemployment Checks Social Security Checks Welfare Stocks/bonds If transfer payments were included, they would be counted twice as money is spent For Example: Someone gets money added to their EBT card from the government, then uses it to buy groceries.

7. Intermediate Goods (example) Intermediate Goods bought by cupcake shop $0.25 $0.50 turned into… Final Good: Cupcakes $0.25 $0.50 The cost of the intermediate goods is included in the cost of the final good. $1.75 ea.

8. Limitations of GDP Doesn’t measure what people do for themselves outside of the market (nonmarket activities) - look after kids, cut their own lawn, etc. Doesn’t measure income that isn’t reported (underground economy) • illegal – drugs, etc. • legal – babysitting, lawn care, etc. Doesn’t measure unintended side effects (externalities) • power plant pollutes and pays for cleanup that is included, but not the value of the clean environment. Doesn’t measure quality of life – leisure time, nice surroundings, etc.

9. Real and Nominal GDP • Nominal GDP is measured in current year’s prices. • Real GDP is measured in constant or unchanging prices (more accurate). Adjustments are made to account for inflation.

10. Real vs Nominal

11. Business Cycle & Unemployment Unit 6, pt 2

12. BUSINESS CYCLE • DRAW THIS!!! Leave room for notes!

13. What is a business cycle? • A period of economic expansion followed by a period of contraction. • Major changes in Real GDP above or below normal levels. • Four phases: • Expansion • Peak • Contraction • trough

14. Phases of the Business Cycle • Peak = height of expansion, GDP stops rising. • Contraction = economic decline, falling real GDP, unemployment, fall in business activity. • Trough – lowest point in contraction, real GDP stops falling. • Expansion – growth, rise in real GDP, increased employment and income.

15. Indicators • Leading indicators – indicators that show what is going to happen in the economy. (stock market, interest rates, manufacturers orders of capital goods) • Coincident indicators – change at same time as business cycle (rate of production, sales, number of nonagricultural workers employed, etc.) • Lagging indicators – lag behind changes – give clues as to what the cycle is doing (avg. length of unemployment, size of inventories, labor cost/unit, changes in price index, etc.) • US DEPT. OF COMMERCE compiles statistics for 78 economic indicators covering all aspects of the economy.

16. Other terms associated with business cycles • Economic growth – period of steady, long term increase in real GDP. • Recession – prolonged economic contraction. Real GDP falls for two consecutive quarters (6 months) • Depression – recession that is especially long and severe. • Stagflation – decline in GDP combined with a rise in price level.

17. Business Cycles are affected by four main factors • Business investment – when the economy is expanding, firms are investing in new plants and equipment, or in old ones to improve production. GDP is increasing. • Interest rates – when they are low, businesses expand and invest – GDP increases. When they are high, businesses slow down and GDP falls. • Consumer expectations – when the economy looks good, we spend more. When it looks bad, we spend less. • External shocks that are unexpected – disruption in oil supply, wars, natural disasters, etc. These things influence our output. Can be a good shock like a new discovery of oil – boost the economy.

18. Aggregate Demand and Supply Unit 6, Part 3

19. What does “Aggregate” mean? Aggregate = total Instead of looking at the supply and demand of individual items we will be looking at the supply and demand of all goods and services in the economy grouped together

20. Aggregate demand • shows the total (or aggregate) demand for final goods and services at a range of price levels for final output during a stated period of time. • Aggregate demand is commonly drawn as a line on a graph with: • total output on the horizontal axis • price level on the vertical axis. • An aggregate demand curve slopes downward

21. Changes in Aggregate Demand • Aggregate demand for an economy is divided into the following components: • Consumption • Investment • Government • net exports (exports minus imports). • Changes in SPENDING on any of these components will cause the aggregate demand curve to change • Increase in AD = Shift Right • Decrease in AD = Shift Left

23. Aggregate supply • shows the total (or aggregate) production of final goods and services available at a range of price levels for final output during a stated period of time. • Aggregate supply is commonly drawn as a line on a graph with: • total output on the horizontal axis • price level on the vertical axis. • the aggregate supply curve is drawn as an upward-sloping line

24. Changes in Aggregate Supply • The aggregate supply curve can increase or decrease for several reasons. • As an economy expands with higher population or productivity increases, aggregate supply increases • at every given price level for outputs, firms will produce a greater total quantity of goods and services. • Higher prices for key inputs such as labor or oil cause aggregate supply to decrease • Increase in AS = Shift Right • Decrease in AS = Shift Left

25. Unemployment

26. What is “unemployed”? • People available for work who made a specific effort to find work in the past month and who during the most recent survey week, worked less than one hour for pay or profit. • Also people who worked in a family business without pay for less than 15 hours a week.

27. How is unemployment measured? • It’s an important indicator of the health of the economy. • Bureau of Labor statistics polls sample of population to determine how many are employed and unemployed. • Unemployment rate is the percentage of nation’s labor force that is unemployed. • It is only a national average – it’s doesn’t reflect regional trends.

28. Full Employment • The level of employment reached when there is no cyclical unemployment (no one out of work because of downturn in the economy – everyone who wants a job has one) • 4-6% unemployment is “normal”.

29. UNEMPLOYMENT • Types of unemployment • Frictional – when people change jobs or are fired (between jobs, left one to take another) • Structural – when the skills of workers do not match the jobs that are available (big change in economy, change in the business, like a merger, or a closure.) • Seasonal – when a period of steady work is followed by a period of unemployment each year. Takes place every year, regardless of the economy. • Cyclical – when unemployment rises during economic downturns and falls when the economy improves (recession – people put off buying cars, etc. so people lose jobs). Can last 3-5 years.

30. Limitations • Figures don’t count those who have become frustrated and stopped looking for work (have to have looked for work in the past 4 weeks) • Called “Discouraged Workers” • If you have a part time job you are considered employed even if you would rather have a full time job – took this one because it’s all you could find.

31. Which type of unemployment? • You just graduated from college and are taking some time looking for work after finishing school. • Which type of unemployment? • FRICTIONAL • Change jobs or get laid off (not because of the economy)

32. Which type of unemployment? • You work for a landscaping company and get laid off during the winter. • What type of unemployment? • SEASONAL • Steady work followed by period of unemployment each year

33. What type of unemployment? • My aunt left her job to care for her sick mother and is now looking for work. • What type of unemployment? • FRICTIONAL • Change jobs or get laid off (not because of the economy)

34. What type of unemployment? • A new, robotic teacher is developed and humans are no longer needed to teach classes. I lose my job. • What type of unemployment? • STRUCTURAL • New technology developed that makes me obsolete. My skills don’t match the job that is now available.

35. What type of unemployment? • I am a ski instructor. The spring thaw comes, the snow melts, the ski lifts shut down. I am out of work until the next winter snows fall. • What type of unemployment? • SEASONAL • Steady work followed by period of unemployment.

36. What type of unemployment? • I work as a tax preparer for H&R Block during tax season. I am hired from January – April each year. After the April 15th tax deadline, I am no longer needed. • What type of unemployment? • SEASONAL • Steady work, followed by period of unemployment each year.

37. What type of unemployment? • During these hard economic times, many businesses have laid off workers as their business has slacked off. • What type of unemployment? • CYCLICAL • Unemployment that increases during economic downturns and falls when the economy improves.

38. Activity – choose one. • Draw a picture to represent each type of unemployment. • OR • Write two journal entries or letters to the editor describing two imaginary experiences as an unemployed person. Describe the reasons for your unemployment (using details of one of the types of unemployment. You should use two types of unemployment.) • OR • Skit acting out two of the types of unemployment. • OR • Conduct an imaginary interview with people who have lost their jobs – each should be unemployed for one of the four different reasons. Use two reasons in your interviews. Write out questions and answers. You could also choose to act this out.

39. INFLATION Unit 6, Notes 4

40. INFLATION • What is inflation? • Rise in general price level – generally reported in terms of annual rate of change. • How is it measured? • Look at price levels (relative magnitude of prices at one point in time, usually used for comparison) • To measure price level, a price index is constructed (such as Consumer Price Index, Producer Price Index, or implicit GDP price deflator).

41. What is a price index ? • Price index is a measurement that shows how the average price of a standard group of goods changes over time.

42. CONSUMER PRICE INDEX • Consumer Price Index – price index determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical consumer. • Computed each month by the Bureau of Labor Statistics. • Reports changes for about 90,000 items in 364 categories. • Sampled from 85 geographically distributed areas around the country. • Some items sampled in all areas, some in only a few. • There are separate indices for 28 selected areas around the country.

43. Price index = cost today X 100 cost in base year

44. How is the inflation rate computed? • Take the CPI for Year A • Subtract the CPI for Year B • Multiply by 100

45. Degrees of Inflation • Creeping inflation • Range of 1-3% • Galloping inflation • Can go as high as 100-300% • Hyperinflation • Out of control • In range of 500% • Doesn’t happen often – last stage before monetary collapse. (WW II – Hungary and Germany)

46. Hyperinflation • Looks like this:

47. Causes of Inflation • Quantity theory – too much money in the economy causes inflation. • Demand-pull theory – demand for goods and services exceeds supply – scarcity drives up prices. • Cost-push theory – producers raise prices to meet increased costs.

48. Other causes: • Government deficit – inflation blamed on deficit – destabilizes output and employment more than price levels, especially true if interest rates rise and borrowers are crowded out. • Wage-price spiral – self-perpetuating spiral – higher prices force workers to ask for higher wages. Producers try to recover this by raising prices, which forces workers to ask for higher wages….

49. Consequences of inflation • Dollar buys less – purchasing power falls as prices rise. • Spending habits change – disrupts the economy. • Distribution of income is altered. Lenders are usually hurt more than borrowers as loans made earlier are repaid with dollars that have less purchasing power. Lenders can’t do as much with the repaid money. Inflation, in the long run, favors debtors more than creditors.