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Economics. Unit 4 Chapter 12. Economists keep track of the U.S. economy by monitoring data using NATIONAL INCOME ACCOUNTING which collects statistics on production, income, investment, and savings. Data is compiled and presented in the form of National Income and Product Accounts (NIPA).

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Unit 4

Chapter 12


Economists keep track of the U.S. economy by monitoring data using


which collects statistics on production, income, investment, and savings.

Data is compiled and presented in the form of National Income and Product Accounts (NIPA)


The most important NIPA measure is Gross Domestic Product.

This is the dollar value of all Final goods and services produced within a country’s borders in a given year.


GDP does not consider the price of intermediate goods, which are goods used in the production of final goods.

Also, goods made by American companies in other countries are not considered, but a foreign company making final goods in our border would be a part of the GDP calculation.


There are two (2) approaches to calculate GDP:

1. Expenditure Approach-practical measurement that is figured by calculating the annual expenditures on consumer goods/services, business goods/services, govt. goods/services, and net exports or imports of goods/services.

Consumer goods include durable goods (last longer than 1 year) and non-durable (last usually less than 1 year) goods.


There are two (2) approaches to calculate GDP:

2. Income Approach-more accurate calculation that is figured by adding up all of the incomes in the economy.


To develop additional information about the economy, economists distinguish between two (2) measures of GDP:

1. Nominal GDP-When GDP is measured in current prices.

2. Real GDP-When GDP is expressed in constant, or unchanging, prices

*A problem with Nominal GDP is that when prices go up, GDP appears to do so as well even though production and output might not have changed.

Real GDP is more reliable in the long run.


GDP does not consider:

1. Non-Market activities (caring for children, mowing your own lawn, etc)

2. The underground economy

3. Negative Externalities (value of a clean river)

4. Quality of Life (happiness not measured by what is created)


GDP can help NIPA determine other economic measurements:

1. Gross National Product (GNP)

2. Net National Product (NNP)

3. National Income (NI)

4. Personal Income (PI)

5. Disposable Personal Income (DPI)

influences on gdp
Influences on GDP
  • Aggregate supply is the total amount of goods and services in the economy available at all possible price levels.
  • Aggregate demand is the amount of goods and services in the economy that will be purchased at all price levels.

Business Cycles

Expansion – period of economic growth. Rise in real GDP. Falling unemployment and business prosperity


Contraction – period of economic decline, falling GDP. Unemployment rises.



3 Types of Contractionary Periods:

1. Recession: If Real GDP falls for 2 consecutive quarters (at least 6 straight months).

2. Depression: If a recession is especially long and severe. Usually has high unemployment and low factory output.

3. Stagflation: A decline in Real GDP (output) combined with a rise in the price level (inflation).


Business Cycles are affected by 4 main economic variables:

1. Business Investment

2. Interest Rates and Credit

3. Consumer Expectations

4. External Shocks


Economist try to predict the business cycle by looking at Leading Indicators.

Ex: Stock Market

The Conference Board (a private business research organization) maintains 10 indicators, including:

  • 1. Stock Prices,
  • 2. Interest Rates,
  • 3. Manufacturer’s new orders of capital goods,

Measuring Economic Growth:

1. Real GDP per Capita

2. Capital Deepening

3. Savings

4. Investment

5. Population Growth

6. Government Actions (raising taxes)

7. Foreign Trade

8. Technological Progress (Scientific Research, Innovation, Scale of the market, education and experience, natural resource use)



Unit 4

Chapter 13

economic challenges
Economic Challenges

Unemployment: 4 main types:

economic challenges1
Economic Challenges

1. Frictional Unemployment-when people take time to find a job.

economic challenges2
Economic Challenges

2. Seasonal Unemployment-occurs as the result of harvest schedules, vacations or when industries slow or shut down for a season.

economic challenges3
Economic Challenges

3. Structural Unemployment-occurs when workers’ skills don’t match the available jobs

economic challenges4
Economic Challenges

4. Cyclical Unemployment-rises during economic downturns and falls when the economy improves

economic challenges5
Economic Challenges

To measure unemployment,

the U.S. Bureau of the Census conducts a census related to the size and other characteristics of the population.

The Bureau of Labor and Statistics (BLS) polls 50,000 families, and from the results computes the unemployment rate.

economic challenges6
Economic Challenges

Unemployment Rate=# of ppl unemployed divided by the # of ppl in the civilian labor force x 100.

Full Employment is a goal (when there is no cyclical unemployment). This is an unemployment rate of 4-6%

economic challenges7
Economic Challenges

Underemployed: Working at a job for which one is over-qualified, or

working part-time when full-time

work is desired.

Discouraged Workers: a person who wants a job but has given up looking.

*means UR could go up when the economy is getting better b/c these workers will start looking for work again.


A general increase in prices (Inflation) creates challenges also.

It can affect the purchasing power of a consumer. This is the ability to purchase goods and services.


To compare changes in price to measure inflation, economists use

a price index. The most common is the Consumer Price Index (CPI)


The CPI looks at price of a standard group of goods meant to represent the typical “market basket” of a typical urban consumer.


Types of Inflation:

1. Core Inflation Rate-rate of inflation excluding the effects of food and energy prices.

2. Hyperinflation-inflation

that is out of control.


Causes of Inflation:

1. Quantity Theory-too much money in the economy causes inflation.

2. Demand-Pull Theory-Inflation occurs when demand for goods and services exceeds existing supplies.

3. Cost-Push Theory-Inflation occurs when producers raise prices to meet increased costs of producing the goods/services.


Effects of Inflation:

1. Purchasing Power

2. Income (esp. people on fixed incomes)

3. Interest Rates (for savings and borrowing)



Poverty Threshold-the income level below which income is insufficient to support a family or household.


Causes of Poverty:

1. Lack of education

2. Location

3. Racial and Gender Discrimination

4. Economic Shifts (last hired-1st fired, etc)

5. Shifts in Family Structure


Government’s Anti-Poverty Policies:

1.Establishment of

Enterprise Zones

2. Employment


3. Welfare Reform (replaced AFDC with TANF-Temporary Assistance for Needy Families which eliminated cash assistance and replaced it with block grants to the states with the goal of shifting from welfare to workfare.