January 28, 2014 fogelpvmhs

1. January 28, 2014www.fogelpvmhs.com • New Seating Chart • Begin AP Macroeconomics • Notes: Macro Intro and Comparative vs. Absolute Advantage • AP Micro Final and Qtr 2 Scores • HW: Comparative Advantage Input and Output problems

2. Unit 1: Measuring Economic Performance Ch. 23, 24, 26 Vocab Due: 2/13 Unit 1 Exam: 2/13 & 2/14 2

3. Macroeconomics Intro • Macroeconomics is the study of the large economy as a whole (the “Big picture”) • Macroeconomics was born during the Great Depression (Government didn’t really know how to fix a depressed economy with 25% unemployment.) • Macroeconomics used to: • Measure the health of the economy. • Guide government policies to fix economic problems.

4. Absolute Advantage vs. Comparative Advantage • Why do two parties engage in trade? What is the benefit(s)? • Mutually advantageous trade…who should specialize in what? • Absolute Advantage: The ability of a country, individual, firm, etc. to carry out a particular economic activity more efficiently (lower cost per unit) than another individual or group. • Examples: • The United States produces 700 million gallons of wine per year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage because it produces many more gallons of wine (the output) in the same amount of time (the input) as the United States. • Jane can knit a sweater in 10 hours, while Kate can knit a sweater in 8 hours. Kate has an absolute advantage over Jane, because it takes her fewer hours (the input) to produce a sweater (the output).

5. Absolute Advantage vs. Comparative Advantage • Comparative Advantage: Ability of a firm or nation to produce goods or services at a lower opportunity cost than other firms or individuals: • Countries or companies specialize in producing products in which it has a comparative advantage. • Two ways to calculate opportunity cost: • Output Method: Quantity of output produced from given amount of inputs (tons of wheat per acre, miles per gallon, apples per tree.) • Input Method: Amount of inputs necessary to create one unit of output (# of hours to do a job, # of gallons to paint a house, # of acres to feed a horse • Video Clip: Comparative Advantage

6. January 29, 2014 • Review HW: Absolute & Comparative Advantage • The Business Cycle: Introduction to Macroeconomic Indicators • HW: none 

7. The Business Cycle:Macroeconomic Indicators • Employment Act of 1946 established 3 major goals for economy: • Full Employment (when most of labor force is working) • Price Stability (A situation in which prices in an economy don't change much over time) • Economic Growth (When economy produces increasing amounts of goods/services over time) • How does the government measure these? • Macroeconomic Indicators: Statistics that indicate the current status of the economy • Measuring Employment: Unemployment Rate • Measuring Price Changes: Price Index (CPI- Consumer Price Index) measures changes in price of goods and services. • Measuring Short-Run Economic Growth: Measure fluctuations in output by measuring increases/decreases in quantity of goods and services produced using GDP (Gross Domestic Product: The dollar value at market prices of all FINAL goods and services produced during specific period. • Real GDP is the GDP adjusted for changes in prices of goods. • The business cycle refers to the ups and downs as measured by the indicators.

9. Macroeconomic Indicators • 4 phases: • Expansionary: Output increasing while unemployment decreasing (Inflation?) • Peak: GDP at highest point • Contractionary: Output decreasing, unemployment rising; Recession: 2 consecutive quarters of negative growth in real GDP (Inflation subsides) • Trough: Lowest point of GDP (Depression?) • Business cycle is all in hindsight.

10. January 31, 2014 • Collect Current Event • AP Exam Sign-Up Reminder • AP Macro Unit “1” Practice Quiz  • Continue Notes?: GDP

11. February 3, 2014 • AP Exams sign-up • Notes: GDP • Circular Flow Diagram and GDP Practice • HW: GDP Practice Worksheet

12. GDP Intro • Product Market: Firms provide goods and services to the households; households pay firms for these. • Factor (Resource) Market: Households provide firms with factors of production (resources); firms pay households for resources (land, labor, capital, entrepreneurial ability.)

13. GDP is $ value of all final goods and services produced in an economy during a given period. • Expenditures Approach-Add up all the spending on final goods and services produced in a given time period. • Income Approach-Add up all the income that resulted from selling all final goods and services produced in a given time period. • Both ways generate the same amount since every dollar spent is a dollar of income. • Also, there are leakages from and injections into the flow which happen through government, financial institutions, and international trade. • Leakages: Savings, imports, taxes. • Injections: Investments, exports, government spending.

14. GDP • GDP includes output exchanged in markets. • Only final goods/services. • No intermediate or illegal commodities. • Tangible and Intangible • GDP is sum of the purchases of goods and services from all buyers (households, firms, government, consumers in other countries) in an economy. • Expenditures Equation: • GDP= C + I + G + Xn • Four components of GDP: • C: Consumer Spending (Ex: $5 Domino’s Pizza)- Largest component at about 2/3 • I: Investments -When businesses put money back into their own business (Ex. Machinery or tools) OR output produced and not sold (Unplanned Inventories) • G: Government Spending (Ex: Bombs or tanks, NOT social security) • Xn: Net Exports -Exports (X) – Imports (M) (Ex: Value of 3 Ford Focuses minus 2 Honda Accords.)

15. February 4, 2014 • Review GDP Homework • Finalize GDP with Practice FRQ • Notes: Inflation and Real vs. Nominal (time permitting) • HW: Keep up with Unit 1 Vocab- due. Feb. 13

16. A Little More GDP…USA: $15.68 Trillion

17. 17

18. Calculate the GDP of Fogelville • $10.00 for movie tickets • $5M Increase in defense expenditures • $45 for used economics textbook • Ford makes new $2M factory • $20K Toyota made in Mexico • $10K Profit from selling stocks • $15K car made in US, sold in Canada • $10K Tuition to attend college • $120 Social Security payment to Bob • Farmer purchases new $100K tractor

19. GDP=$7,125,010 • $10.00 for movie tickets • $5M Increase in defense expenditures • X $45 for used economics textbook • Ford makes new $2M factory • X $20K Toyota made in Mexico • X $10K Profit from selling stocks • $15K car made in US, sold in Canada • $10K Tuition to attend college • X $120 Social Security payment to Bob • Farmer purchases new $100K tractor

20. Year 2 - Year 1 % Change in GDP = Year 1 How can you measure GDP growth from year to year? X 100 • Country X’s GDP in 2007 was $4000 • Country X’s GDP in 2008 was $5000 • What is the % Change in GDP? • Country Y’s GDP in 2007 was $2,000 • Country Y’s GDP in 2008 was $2,100 • What is the % Change in GDP? • GDP can also be calculated using Income Approach: • National Income = Wages + Rent + Interest + Profit

21. Nominal vs. Real GDP Introduction • Nominal: Economic value expressed in monetary terms • Real: Nominal value adjusted to remove effects of price level changes over time (represents purchasing power.)

22. How can you figure out which is the most popular movie of all time? Nominal Box Office Receipts

23. Real Box Office Receipts (adjusted for inflation)

24. 2007 FRQ

25. February 6, 2014 • Inflation Handout • Notes: Price Index and Real GDP • Practice

26. Calculating Price Index • Now we need to convert nominal values to real values to create a price index… • Price changes over time are measured by comparing prices each year to the prices in a selected year (base year.)

27. Inflation • 1. Consumer Price Index (CPI): A statistical estimate of the level of prices of goods and services (market basket: list of roughly 300 items) bought for consumption purposes by households. • FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) • HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) • APPAREL (men's shirts and sweaters, women's dresses, jewelry) • TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) • MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) • RECREATION (televisions, toys, pets and pet products, sports equipment, admissions); • EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); • OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

28. Nominal GDP to Real GDP • Real GDP (Nominal GDP adjusted for price changes) is a better method of measuring economic performance. • It takes out effects of price changes and allows focus ONLY on changes in output.

29. February 7, 2014 • Collect Current Event • Review Price Index and GDP Homework • Notes: GDP Deflator • Videos on Website • HW: Practice Packet

30. GDP Deflator • A measure of the level of prices of all new, domestically produced, final goods and services in an economy. • The GDP deflator is another measure of price inflation. • It is calculated by dividing nominal GDP by real GDP and multiplying by 100.

31. Real vs. Nominal GDP Example 2008 10 cars at $15,000 each = $150,000 10 trucks at $20,000 each = $200,000 Nominal GDP = $350,000 The GDP in year 2008 shows the dollar value of all final goods produced. The nominal GDP in year 2009 is higher which suggests that the economy is improving. But how much is the REAL GDP? How do you get it? 2009 10 cars at $16,000 each = $160,000 10 trucks at $21,000 each= $210,000 Nominal GDP = $370,000 Use 2008 Prices. The Real GDP for 2009 is the same as 2008 after we adjust for inflation. 2009 10 cars at $15,000 each = $150,000 10 trucks at $20,000 each= $200,000 REAL GDP = $350,000

32. Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices.

33. Does GDP accurately measure standard of living? Standard of living (or quality of life) can be measured, in part, by how well the economy is doing… But it needs to be adjusted to reflect the size of the nation’s population. Real GDP per capita (per person) • Real GDP per capita is real GDP divided by the total population. It identifies on average how many products each person makes. Real GDP per capita is the best measure of a nation’s standard of living.

34. February 10, 2014 • Nominal GDP, Real GDP, and GDP Deflator HW Review • Notes: 3rd Economic Indicator: Unemployment • More practice

35. Measuring Unemployment • How well are we achieving the goal of full employment? • 60,000 household survey. • 3 categories: Employed, Unemployed, Not in Labor Force. • LF = E + U • Official Population Categorization • Labor Force Participation Rate (LFPR)- measures % of total population available to produce. • Unemployment Rate (UR)- Proportion of the labor force that is unemployed. • UR differs by age, race, ethnicity, duration, etc. • Discouraged Workers • UR is underestimated when there are discouraged workers. • Underemployed workers: People working part time but would like full time OR people who hold a job that they are over-qualified for (Could be more productive elsewhere.)

36. Types of Unemployment • UR does not provide information about why people are unemployed… • 4 types: • Structural: Mismatches between job seekers and job providers (Unemployed lack certain new skills as technology advances- new structure of economy changes demand for labor) • Frictional: People temporarily between jobs or searching for first job. • Seasonal: Agriculture, Winter and Summer resort jobs, etc. (DOES NOT AFFECT UR) • Cyclical: Downturn in economy = less demand for labor (natural phase of business cycle) • THERE WILL ALWAYS BE FRICTIONAL AND STRUCTURAL UNEMPLOYMENT! • CYCLICAL EXISTS DURING CONTRACTIONARY PERIOD OF BUSINESS CYCLE- THIS IS THE PRIMARY TYPE OF UNEMPLOYMENT MACRO POLICY MAKERS ADDRESS

37. February 12, 2014 • Wrap-Up Unemployment? NRU • Review yesterday’s practice FRQ’s • Time for: Macro Unit 1 Practice Exam orUnit I Study Guide • Survey Unit 1 Vocabulary Due Tomorrow Unit 1 Exam (MC) Tomorrow Unit 1 Exam (FRQ) Friday

38. Unemployment Wrap-Up • Full Employment: Something less than 100 percent employment of the labor force. • It occurs when there is no cyclical unemployment.  • Frictional and Structural unemployment still exist. • Natural Rate of Unemployment (NRU): When the economy is producing its greatest potential output. • The NRU occurs when the number of skilled job seekers equals the number of job vacancies requiring those skills: This is full employment!