Transcript Unit 3 - Macroeconomics

Unit 3 - Macroeconomics
Standard -
What is Macroeconomics?


Macroeconomics is the study of
large scale economies.
Macro – examines entire economies


Ex. Unemployment in the US
Productivity in China
Micro – examines a single
household or business
How do economists measure an
economy?


There are several macroeconomic
indicators.
Most Common: GDP
Gross Domestic Product (GDP):


1.
2.
3.
The total dollar value of all final goods
and service produced within a country in
one calendar year
Must consider:
Final Output (not the intermediate
phases…think tree – lumber – house)
Current Year (not used cars or second
hand clothes)
Output Produced Within National Borders
(not international factories)
How is GDP Calculated?

Output-Expenditure Model

GDP= C + I + G + (X-M)
C = Personal Consumption
Expenditures


1.
Consumer purchases…anything
new that you buy
2 Types:
Durable Goods – last longer than 1
year
Examples: cars, houses,
computers
C = Personal Consumption
Expenditures
2.
Nondurable Goods – last less than
1 year
Examples: food, make-up, etc.
I = Gross Investment
o
Total investment in capital goods
o
Factories, office space, raw
materials
G = Government Purchases
o
Includes federal, state, and local
spending…highways, education,
national defense, transfer payments
o
Transfer Payments: govt taxes
“transferred” to others
(X – M) = Net Exports
(Exports – Imports)



May have a trade surplus or trade
deficit
Surplus (Exports > Imports)
Deficit (Exports < Imports)
Limitations of GDP:
1.
Accuracy and Timeliness of Data

2.
Gathering data is slow process
Nonmarket Activities

Performing activities at no
charge…mowing the lawn
Limitations Cont.
3.
Underground Economy

4.
Illegal or unreported legal activity
“Goods” and “Bads”

Things that are beneficial are
sometimes not reported and things
that are detrimental are reported
GDP


Nominal GDP – current dollar
amount of GDP
Real GDP – dollar amount adjusted
for inflation
The Business Cycle: the regular ups
and downs in an economy
Peak:
•Highest Point in an economy
•Strong Economy
Expansion:
•Period of economic growth
•GDP
Contraction:
•Period of economic slowdown
•GDP
(or increasing at a slower rate)
Trough:
•Lowest Point in an economy
Business Cycle Continued…

Recession: a decline in the rate of
national economic activity


Usually measured by a decline in real
GDP for at least 2 consecutive quarters
(6 months)
Depression: a severe, prolonged
economic contraction
Types of Unemployment (p.331)




Seasonal
Frictional
Cyclical
Structural

Seasonal:

Frictional:

Cyclical:

Structural:
Is there anything we can do
to maintain a stable
economy?
How do we do it?
1.
2.
Monetary Policy (The Fed)
Fiscal Policy (Congress)
Money and the Money Supply



Money: anything that is generally
accepted as final payment for g/s
Money Supply: Currency (coins and
paper $) in the hands of the public plus
checking-type accounts
The supply of money in the economy is
important for price stability and
economic growth.
Key Points about the Money Supply
1.

Too much money in the
economy can cause inflation.
Inflation: rise in the average price
level of g/s

Money doesn’t “go as far”…it isn’t
worth as much
2.

Too little money in the
economy can lead to falling
prices and falling production.
Deflation: a decrease in the avg.
price level of g/s
Money Supply Continued…


The Federal Reserve controls the
money supply through monetary
policy.
Monetary Policy works by increasing
or decreasing the money supply.
The Federal Reserve System




“The Fed”
The bankers’ bank and the govt’s
bank
Created in 1914 after a series of
bank failures.
The Fed Board of Governors:


7 members appointed by the President,
confirmed by the Senate
President appoints chairperson to a 4
year term
The Fed

Current Chair:
Ben Bernanke
The Fed – 12 Regional Banks


Located in major
cities around the
country
Each bank has
president chosen
by board of
directors (local
business/banking
community)
Tools of Monetary Policy


Stimulate Economy – Increase
Money Supply
Control Inflation – Decrease Money
Supply
Tools of Monetary Policy (3)
1.
Open Market Operations:



when the Fed buys or sells U.S. govt.
securities (bonds)
Buy securities…more money in
circulation (stimulate economy)
Sell securities…less money in
circulation (slow down economy)
Govt. Bonds/Securities
Essentially…a loan to the US Govt.
…with a promise of earning interest!
Tools of Monetary Policy:
2.
Changes in Discount Rate:



The interest rate the Fed charges on
loans to banks
Lower rate…banks are encouraged to
make more loans (money supply
increases)
Raise rate…banks are discouraged
from making loans (money supply
decreases)
Tools of Monetary Policy:
3.
Changes in Reserve Requirement:
 The minimum percentage of deposits
that banks must keep on reserve to
back up checking-type accounts
 Lower reserve requirement…banks have
more money to lend (increases money
supply)
 Raise reserve requirement…banks have
less to lend (decreases money supply)
Fiscal Policy


Is what the government
(Congress) can do to influence the
economy
2 Types:
1.
2.

Contractionary (slow down)
Expansionary (stimulate)
Limitations:


Slow
Political
Tools of Fiscal Policy
1.
Tax: either increase
(contractionary) or decrease
(expansionary)



Proportional: flat tax…burden on poor
Progressive: income tax…burden on
rich
Regressive: sales tax…burden on
poor
2.
Spend: either increase
(expansionary) or decrease
(contractionary)


3.
Purchases –g/s purchased by the
govt.
Transfer Payments – money payment
sent to individuals (welfare, Social
Security)
Borrow
Multiplier Effect

The idea that increased spending by
consumers, businesses, or govt.
becomes income for someone else.
(then their spending becomes
someone else’s income, etc.)

“A chain reaction”
Supply Side Economics


“Voodoo Economics”
Tax cuts for big business
http://www.killerclips.com/clip.php?id
=110&qid=1287


National Debt – all the $ the
federal government owes to
bondholders
Government Deficits – spending
more than you take in during a
fiscal year

Also referred to as deficit spending
Other Economic Challenges
1.
Unemployment (4 types)


Seasonal, Frictional, Cyclical, Structural
Unemployed: those who wish to work but cannot
find jobs
Issues:
- Doesn’t include those who have given up looking for
work (discouraged workers)
- Part-time workers are counted as fully employed
- Unemployed seeking PT counted same as those
seeking FT
Unemployment Rate
# of Unemployed
# in Workforce
X 100 =___%
Practice

If there are 500 students at SCHS
who are counted in the workforce
and 100 are unemployed…what is
the unemployment rate of the
students at SCHS?
100 X 100 = 20%
500
2.
Inflation: an increase in the average
price level of all products in an economy




Occurs because aggregate demand increases
faster than aggregate supply
Also…too much money chasing too few goods
Aggregate Demand: total demand for all
final g/s at a range of price levels of an entire
economy
Aggregate Supply: total production of all
final g/s at a range of price levels of an entire
economy
S1
S2
P2
P1
D2
D1
How is Inflation Measured?



Changes in the Consumer Price
Index reflects inflation of prices.
Consumer Price Index (CPI): a
measure of the average change
over time in the price of a fixed
group of products
Market Basket: a representative
sample of commonly purchased
items


Prices of g/s in a market basket are
compared to the same g/s in a
market basket from another year.
If prices go up = inflation.
Inflation Rate Formula
B-A
X 100 = ___%
A


CPI 1979 – 163 (A)
CPI 2007 – 187 (B)
187-163 X100 = 14.72% inflation
163
Example - Have prices increased since
1987?
1987 – Base Year (100)
$3000
2007 – Current Year
$5000
5000/3000 x 100 = 166
1987 – (100)
2007 – (166)
(Prices are 66% higher)
Now calculate inflation rate…
1987 – CPI 150
2007 – CPI 166
166-150 X 100
150
10.7% inflation rate
CPI: The “Easy” Way
http://www.bls.gov/data/home.htm
Why should I care about Inflation?





Think about this…
You get a 5% pay raise (yippee!)
But inflation is 7% (oh no!)
Did you really get a pay raise or a
pay cut?
What about people living on fixed
incomes?
Zimbabwe Currency
Zimbabwe Currency- A 10 million dollar
bill!