Macroeconomics Chapters 12- 16
Domain Focus SSEMA1 The student will illustrate the means by which economic activity is measured.
Domain Focus SSEMA2 The student will explain the role and functions of the Federal Reserve System.
Domain Focus SSEMA2 The student will explain the role and functions of the Federal Reserve System.
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.
Macroeconomics • Reminder- Macroeconomics= the study of the behavior and the decision making of entire economies
Gross Domestic Product • Gross= total • Domestic= produced anywhere in the 50 states, by anyone • Product= final goods and services
What does GDP measure? Total amount of final goods and services produced in a country in one year. (Measure of Output)
Gross Domestic Product • Gross Domestic Product (GDP)- the dollar value of all final goods and services produced within a country’s borders in a given year • Dollar Value- the total of the selling prices of all goods and services produced in a country in one calendar year • Final Goods and Services- products in the form sold to consumers • Intermediate goods- used in the production of final goods • Produced within a country’s borders- includes cars produced in the U.S. by a Japanese automaker
Are there any cool formulas you can give us relating to this interesting concept? GDP=C+I+G+(X-M)
Expenditure Approach • C= consumption spending (think consumers) 72% • I= investment spending (think businesses investing in themselves) 15% • G= government spending 17% • (X-M)= difference between exports and imports -4%
Expenditure Approach • Expenditure Approach (output-expenditure approach) • Estimate the annual expenditures or amounts spent on four categories of final goods and services • Consumer goods and services • Durable goods- goods that last for a relatively long time (refrigerators, cars, etc.) • Nondurable goods- goods that last a short period of time (food, light bulbs, etc.) • Business Goods and services • Gov’t goods and services • Net exports or imports of goods and services • Add together the amounts spent on all four categories to arrive at the total expenditures on goods and services produced during the year
Expenditure Approach GDP=C+I+G+(X-M)
Income Approach • Income Approach • Calculates GDP by adding up all the incomes in the economy • Results from the two approaches are compared to judge accuracy
What is counted in GDP? • FINAL goods and services • Goods/Services produced here, even if by a foreign co.
What is NOT counted? • Things produced outside the country. • Illegal stuff • Purely financial transactions
Limitations of GDP • GDP does not take into account certain economic activities • NonMarket Activities- goods and services that people make or do themselves • The underground economy- black market and illegal goods, legal informal transactions • Negative Externalities- unintended economic side effects • Quality of life
Problems associated with GDP • Slow to calculate • Does not count everything (it’s an estimate) • Inflation can distort the figure Real vs. Nominal
Nominal Versus Real GDP • Nominal GDP- GDP measured in current prices • Real GDP- GDP expressed in constant, or unchanging prices
Nominal and Real GDP Year 1 Nominal GDP Year 2 Nominal GDP Year 3 Real GDP Suppose an economy‘s entire output is cars and trucks. In the second year, the economy’s output does not increase, but the prices of the cars and trucks do: To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1: This year the economy produces: 10 cars at $16,000 each = $160,000 + 10 trucks at $21,000 each = $210,000 Total = $370,000 10 cars at $15,000 each = $150,000 + 10 trucks at $20,000 each = $200,000 Total = $350,000 This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP. Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350,000. 10 cars at $15,000 each = $150,000 + 10 trucks at $20,000 each = $200,000 Total = $350,000 Real GDP for Year 2, therefore, is $350,000 Real and Nominal GDP
Economic Growth • Economic growth is measured by finding real GDP per capita (real GDP divided by the total population) • Real GDP per capita is considered the best measure of a nation’s standard of living. • The basic measure of a nation’s economic growth rate is the percentage change of real GDP over a given period of time
Per Capita GDP GDP divided by a country’s population
Other Income and Output Measures • GDP is the primary measure of output • Gross National Product (GNP)- the annual income earned by U.S. owned firms and U.S. citizens • Depreciation (the loss of the value of capital equipment that results from normal wear and tear) is not taken into account
Aggregate Supply • Aggregate Supply- the total amount of goods and services in the economy available at all possible price levels • Economists add up the total supply of goods and services produced for sale in the economy (GDP) • Calculate the price level (the average of all prices in the economy) • As the prices of most goods and services change, the price level changes. • Firms respond by changing their output (real GDP) • Prices rise- production increases • Prices fall- production decreases
Aggregate Demand • Aggregate Demand- the amount of goods and services in the economy that will be purchased at all possible price levels • Lower price levels means greater purchasing power for households; falling prices increase wealth and demand • Higher price levels causes purchasing power to decline; reduction in the quantity of goods and services demanded
AS/AD Equilibrium • Aggregate Supply/Aggregate Demand Equilibrium= AS/AD Equilibrium • Any shift in aggregate supply or aggregate demand will have an impact on real GDP and on the price level
Aggregate Demand and Aggregate Supply Lesson Factors that shift an AD Curve • Changes in • Consumer Spending • Investment Spending • Government Spending • Net Export Spending • Increases in Aggregate Demand increase real GDP and the price level • Decreases in Aggregate Demand decrease real GDP and price level
Aggregate Demand and Aggregate Supply Lesson Factors that shift an AS Curve • Changes in • The prices of inputs (land, labor, capital, and entrepreneurship) • Productivity • Technology • Government Regulations • Increases in Aggregate Supply increase real GDP and lower the price level • Decreases in Aggregate Supply decrease real GDP and raise the price level
Business Cycles • Business Cycles- a period of macroeconomic expansion followed by a period of contraction • Business cycles are not minor ups and downs- they are major changes in real GDP above or below normal levels
Business Cycle GDP
Phases of a Business Cycle • Expansion- a period of economic growth as measured by a rise in real GDP • Economic Growth- a steady, long-term increase in real GDP • Plentiful jobs, a falling unemployment rate, and business prosperity • Peak- the height of an economic expansion, when real GDP stops rising
Phases of a Business Cycle 3. Contraction- a period of economic decline marked by falling real GDP • Unemployment rate rises • Recession- a prolonged economic contraction- generally lasts from 6 to 18 months • Depression- a recession that is especially long and severe; high unemployment and low factory output • Stagflation- a decline in real GDP combined with a rise in the price level 4. Trough- the lowest point in an economic contraction, when real GDP stops falling
What affects Business Cycles? • Business cycles are affected by 4 main variables 1. Business Investment • When the economy is expanding businesses invest heavily in new plants and equipment • When firms decide they have expanded enough or demand falls they cut back on investment spending 2. Interest Rates and Credit • When interest rates are low households and firms borrow more money • When interest rates climb, investments and job growth dries up
What affects Business Cycles? 3. Consumer Expectations • Fears of a weakening economy can cause consumer confidence to fall- people begin saving their money; the opposite is also true 4. External Shocks • Negative External Shocks- Disruptions in the oil supply, wars that interrupt normal trade relations, droughts that severely reduce crop harvests • Positive External Shocks- discovery of a large deposit of oil or minerals, a perfect growing season
Business Cycle Forecasting • Leading Indicators- key economic variables that economists use to predict a new phase of a business cycle • Stock Market • Interest Rates • Manufacturers new orders of capital goods
Business Cycles in American History • The Great Depression- the most severe economic downturn in the history of industrial capitalism • John Maynard Keynes- The General Theory of Employment, Interest, and Money • Economies could fall into long-lasting contractions • Government intervention might be needed to pull an economy out of a depression
Unemployment 1. Structural 2. Cyclical 3. Frictional
Types of Unemployment Frictional Unemployment • Occurs when people change jobs, get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasons Structural Unemployment • Occurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemployment Seasonal Unemployment (DO NOT NEED TO KNOW for EOCT) • Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules Cyclical Unemployment • Unemployment that rises during economic downturns and falls when the economy improves
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.
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.
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”.