The Health of the Economy What is wrong and what can be done?
Measuring the Health of the Economy Fixing the Economy
Unit 4 TC Gross Domestic Production Unemployment rate Inflation Enduring Understandings Real and Nominal, per capita Consumer Price Index Government actions affect economic activity. Economic decisions require the government to evaluate the costs and benefits of actions. Draw and identify phases of the business cycle Aggregate Aggregate Supply- describe both the Keynesian and Classical models Essential Questions • How should the U.S. government carry out its economic roles? • How healthy is the American economy Fiscal Policy Aggregate Demand Monetary Policy Stagflation Progressive Tax Rate Terms
Circular Flow Model TC Profit maximizing rule of hiring MRP= MRC Income Cost Resource Markets Resources- factors of production Land Labor capital entrepreneurship Resources- factors of production Demand Supply Resources and labor Gov’t Spending Business Individuals Government Taxes Taxes and loans MR= MC Profit Maximizing Rule MB= MC Utility Maximization Transfer Payments Subsidies Public Goods/Services Public Goods/Services Consumer Government Investors MSB= MSC Consumers + Investors + Government + Net Exports __________ Gross Domestic Production Gov’t Spending Goods and Services Goods and Services Goods and Services Loans Demand Supply Product Markets Interest Financial Revenue Spending (MC) S= D (MB) or (MR) Marginal- additional, MB= Marginal Benefit, MC= Marginal Cost, MR- Marginal Revenue, MRP- Revenue product, MRC- Resource cost, MSB- Marginal Social Benefit, MSC- Marginal Social Cost
Identify Key terms and answer the associated questions TC Part 1 (GDP) G.D.P. (Gross Domestic Product)- What factors contribute to the GDP? On another piece of paper chart the US GDP from 2000- 2011 (by year) What does not contribute to the GDP? Next chart US real GDP from 2008-2011 by quarter Explain: Nominal GDP Real GDP GDP per Capita Explain how unemployment is it related to GDP? Part 2 (Unemployment) Explain the different types of unemployment and what is the natural rate of unemployment? Frictional Structural Cyclical Season What is the natural rate of unemployment? Why is this ok? If our current unemployment rate is 9% how much is the cyclical unemployment? What portion of the population is not counted toward unemployment rates? What is real unemployment? What is our current unemployment rate?
Part 3: The purchasing power of money What is inflation? What does higher inflation do the purchasing power of money? How does this impact price? What is CPI (Consumer Price Index) How does the Consumer price index measure inflation? What is monetary inflation? TC Part 4: The Business Cycle Diagram and Identify the different phases of the business cycle: If the business cycle is natural and unavoidable should the government become involved? Explain your answer To economist when is the business cycle officially in a recession?
Part 5: Government Role and the Recession: Aggregate Supply and Demand (AS/AD) What is Aggregate Demand What is LRAS? What is Aggregate Supply What is the difference between Classical vs Keynesian Approach to Aggregate Supply? How would an economist who believed in the classical approach draw Aggregate Supply? Why? What would Keynesian economists say the Aggregate Supply , Aggregate Demand, and Price? How does the Aggregate Supply depending on what model you are looking at? What are the three different phases? What is Keynesian economics and what does it say about the government’s role in getting the economy out of a recession? TC
Part 7: Phillips Curve (inflation and unemployment) (Long and Short Run) TC Explain the Phillips Curve and explain how we get short run and long run Phillip’s Curve Part 8: Fiscal Policy and Monetary policy Explain Fiscal Policy: Explain Monetary policy: How do both try to fix recessions and inflation? Recession Fiscal Monetary Inflation Fiscal Monetary
Measuring The Health of the Economy
Economic Indicators TC Measure health of economy Regardless of what you learn for the next two weeks Remember these some important points: Economics is the Allocation of scarce resources to their most useful purpose. Remember the key lesson on economics- don’t look at policy in isolation, look at future phases, and measure policy by consequences and outcomes and not by intentions. This will come into play when we learn about “fixing” the health of the economy. Regardless of statistics and numbers the most important thing to consider is standard of living. Very difficult to measure happiness. Correlation does not mean Causation!!!!!!
Gross Domestic Product TC Gross Domestic Product- the market value for all final goods and services produced within a country during a given period of time. A steadily growing GDP is generally considered a sign of economic health. The Department of Commerce’s Bureau of Economic Analysis determine the GDP. Click here to find our current GDP. http://www.bea.gov/ Terms: Final Good- a new good ready to be used by a consumer- cereal, cars, toys Intermediate good- a good that is used in the production of a final good- not counted toward GDP. Example- grains, steel, rubber What else is not counted. . . The buying of financial assets are not counted because they do not reflect current production. Secondhand sales do not count because the counted for the GDP of some previous year. Intermediate goods are not counted in order to avoid double counting Market Value- price buyers are willing to pay in the market place Film on G.D.P. (Gross Domestic Product)
Gross Domestic Product TC How do we calculate GDP? C Household Consumption/ Consumer spending I Business Investment G Government Spending NX Exports Net Exports Imports GDP
Gross Domestic Product TC Types of GDP Nominal GDP: Measuring GDP with today’s prices Real GDP: Measuring GDP using a base year’s value of the dollar- this compensates for inflation (Nominal GDP/GDP Price index) * 100 GDP per Capita: GDP per person, dividing GDP by the population GDP Deflator= Nominal/Real *100
Gross Domestic Product TC Nominal GDP by nation 2011 GDP growth rate by nation 2011 http://www.tradingeconomics.com/gdp-growth-rates-list-by-country
Gross Domestic Product TC Gross Domestic Product- maps
Gross Domestic Product TC Gross Domestic Product- maps
Gross Domestic Product TC Real Growth rate
Gross Domestic Product TC Distribution of wealth 0 = total equality 1= total inequality
Gross Domestic Product TC There are some important correlations (associations/relationships) Remember correlation does not mean causation!!! Nations with high GDP’s generally have the following. . . High Literacy Rates Improved health, nutrition, and high life expectancy Lower infant mortality rates Higher standards of living
Gross Domestic Product TC There are some limitations to GDP GDP leaves out unpaid work such as households and volunteer work Volunteer firefighters, charity 2. GDP leaves out informal and illegal exchanges Babysitting, working under the table, black markets, barter GDP counts negatives as positives. rebuilding after a hurricane, war efforts, over- exploiting resources 4. GDP does not reflect negative externalities Pollution, people buying bottle water because of pollution GDP places no value on leisure time or happiness GDP says nothing about income distribution
Gross Domestic Product TC There are other limitations to GDP For example GDP measures things that were once done at home but now are considered work. Housekeeping or gardening Also it literally tries attempts to compare apples and oranges or more accurately bananas and oil. It says nothing about the time it takes to create a product.
Gross Domestic Product TC "The Gross National Product includes air pollution and advertising for cigarettes, and ambulance to clear our highways of carnage. It counts special locks for our doors, and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and missiles and nuclear warheads... And if GNP includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials... GNP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile; and it can tell us everything about America - except whether we are proud to be Americans." - Senator Robert Kennedy. 1968
Gross Domestic Product TC Evaluate the following quote from Milton Friedman “Spending isn’t good, what is good is producing. What we want to have is more goods and services. Government spending is ok for those things, those services that we believe that we can get more usefully and more effectively through government. If people are getting their money’s worth- fine. That’s why it is very desirable to have government expenditures occur as much at the local level as possible, because you as a citizen of a local community can judge if you are getting your money’s worth and you can decide if you want to spend it. But when it comes to the federal government you tend to think that you are spending someone else’s money. In a way you are, but he is spending yours. The Broken Window Fallacy What is the problem with using adding up total spending to find total production? Spending and Production are not the same thing
Unemployment rate TC The Bureau of Labor Statistics tracks the unemployment rate. Click here to track our current unemployment rate. http://www.bls.gov/ The unemployment rate is used to measure the overall health of the economy. In general a high unemployment rate indicates an unhealthy economy. The BLS will conduct a random survey to determine the unemployment rate. The are 3 classifications of people in the country. Employed- members of the labor force who have jobs. Unemployed- members of the labor force who don’t have jobs but are looking for work Not in the labor force- those who are eligible to be in the labor force but don’t have jobs and are not looking for jobs. This includes full time students, disabled, retired, and those prevented by family responsibilities.
Unemployment rate TC The labor force is found by adding all employed and unemployed workers together. To find the unemployment rate the BLS divides the unemployed by the labor force and multiples the number by 100. number unemployed Unemployment rate = ______________________________ X 100 number in labor force
Unemployment rate TC In 2008, The Phillies won the World Series Based on the data below and using the equation provided calculate the unemployment rate U.S. Unemployment rate October 2008 Employed (145.3 million) Unemployed (9.5 million) Not in labor force (79.6 million) Adult population (234.4 million) Unemployment rate = ______________________ x 100 = 9.5 million 6.1% 154.8 million
Unemployment rate TC Unemploymentlesson Types of Unemployment and Full employment Frictional Unemployment- When a worker enters the workforce or quits a job to find a better job. Structural/Technological Unemployment- when advances in technology eliminate jobs
Unemployment rate TC Unemploymentlesson Types of Unemployment and Full employment Seasonal Unemployment- When a business shuts down during part of the year Cyclical Unemployment- Occurs when there is a decline in business because of the economic downturn
Unemployment rate TC Unemploymentlesson Types of Unemployment and Full employment There will always be Frictional, Structural, and Seasonal unemployment. This is the natural rate of unemployment- NRU The NRU is about 5%. This is also considered Full Employment It is Cyclical Unemployment that we need to be the most concerned with. This happens during down periods of the economy. Currently we have a 9% unemployment rate.
Unemployment rate TC Unemploymentlesson
Unemployment rate TC Problems with Unemployment rate as an indicator 1. Unemployment does not count discouraged workers or in other words those who have given up looking for work. Some say that if we counted these people in the unemployment calculations the our real unemployment rate is 17%. 2. Additionally, involuntary part-time workers are not counted as part of the unemployment rate. These are the people who would like full time jobs but can only get part-time hours. They are partially employed. 3. Does not count under the table workers or illegal activity. Economic cost of Unemployment Lost of potential output. Loss of income by workers The unemployed do not contribute to taxes and in fact usually collect unemployment insurance If the number of unemployed becomes too large, money from other programs must be shifted to unemployment programs or taxes are raised on those who have jobs.
More important than unemployment rate is production. Providing jobs for the sake of employment and not production is one of the biggest fallacies.
Inflation Rate TC The inflation rate is the percent of increase in the average price level of goods and services from one month or year to the next. In other words inflation reduces the purchasing power of money. It is tracked by the Bureau of Labor Statistics. http://www.bls.gov/bls/inflation.htm Imagine living in a country where if you ate breakfast at a café your second cup of coffee would cost more than the first or if you burned you cash because it was worth more as fuel than as currency. Excessive Inflation can send a nation’s economy into a tailspin. What is inflation?
Inflation Rate TC Inflation is measured by using a price index. A price index measures the average change in price of a type of good over time. The Consumer Price index (CPI) is a price index for a “market basket” od consumer goods and services. Changes in the average prices of these items approximate the change in the cost of living. Also know as the Cost of living index. The CPI is determined by consumer and store surveys. The current prices are compared to a base period. 1982-1984
Inflation Rate TC Base 100- 1982-1984
Inflation Rate TC CPI is found by finding the total price of a consistent “market basket” Item 2009 2010 2011 Hot Sausage 3.00 4.00 4.50 Pasta 1.00 1.50 2.00 Ice Cream 3.00 3.50 5.00 Eggs 1.00 1.50 2.00 Milk 3.00 3.00 4.50 Bread 1.00 1.50 2.00 Total: 12.00 15.00 20.00 (Market Basket)
Inflation Rate TC What is CPI (Consumer Price Index) Market basket price for year _____________________________ x 100= CPI Market basket price for base year Year Market Basket Base year 2009 Base year 2010 Base year 2011 2009 12 2010 15 2011 20 100 100 100 Base year is always 100 Example Market price for 2009 _______________________ x 100 = CPI Base year 2009 Base year is always 100 Example 12 _______________________ x 100 = 1 12 Now complete the chart
Inflation Rate TC What is CPI (Consumer Price Index) Market basket price for year _____________________________ x 100= CPI Market basket price for base year Year Market Basket Base year 2009 Base year 2010 Base year 2011 2009 $ 12 2010 $ 15 2011 $ 20 80 60% 100 % 75% 125% 100 % 100% 133% 167% Example: To find the increase in inflation from 2009 to 2010 15 ______ x 100= 125% 12
Inflation Rate TC Limitations of CPI as a measure: Substitution Bias- People buy substitutes if prices are too high. CPI doesn’t take this into consideration. Outlet/Discount store bias- CPI doesn’t take into account that people may buy goods at a discount store. Acme- average price of a chicken fryer (small whole Chicken)- $7.41 Bottom Dollar – same item or similar item- $4.00 New Product bias Mobile phones in 1983- $3995, 1998 $200- but mobile phones were not included in the CPI until 1998. Quality change bias- technological improvements make items better and last longer.
Inflation Rate TC Nominal cost of living- the cost in current dollars of the basic good and service that people need. Real cost living- the nominal cost of basic goods and services, adjusted for inflation Nominal wages- wages based on current prices Real wages- nominal wages that have been adjust for inflation. Wages need to keep up with the cost of living if the standard of living is to remain the same. The cost of living is indeed going up—in money terms. What really matters, though, isn't what something costs in money; it's what it costs in time. Making money takes time, so when we shop, we're really spending time. The real cost of living isn't measured in dollars and cents but in the hours and minutes we must work to live. American essayist Henry David Thoreau (1817-62) noted this in his famous book, Walden: "The cost of a thing is the amount of. . .life which is required to be exchanged for it, immediately or in the long run." http://dallasfed.org/fed/annual/1999p/ar97.cfm