Transcript The BIG Picture - Integrated Social Science

The BIG Picture
MACROECONOIMCS
The Big Picture
Circular Flow Model - Simplified
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Shows how people and business interact in the
market
Focus on the private sector
Participants: Households & Firms
Two Markets
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Factor Market – inputs/factors of production
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Product Market – finished goods & services
The Big Picture
More Complete Circular Flow
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Shows how a domestic economy functions
within the context of the larger global economy
Includes: Private and Public sectors
Participants: Households, Firms, Government,
Banks, International Trade
Shows: Flow of products & factors, money,
taxes and government services, imports &
exports, savings and investments
Leading Economic Indicators
Indicators that help us determine the health
of the overall economy include…
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Gross Domestic Product
Inflation Rates & Consumer Price Index
Unemployment Rate
Interest Rates
GDP – Gross Domestic
Product
Total market value of a
nation’s final output of
goods and services
What length of time is GDP calculated?
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1 Year
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4 business quarters
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1st quarter – January to March
2nd quarter – April to June
3rd quarter – July to September
4th quarter – October to December
2 ways to calculate GDP
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Income Approach -
Total of all income
earned in a year.
 Measured by totaling wages, interest, profits,
rents, (anything that brings in income)
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Expenditure Approach -
Total spending
for new goods and services produced in a year.
 Measured by totaling consumer spending,
business investments, government spending,
and net foreign spending (difference between
exports and imports)
Consumer Spending
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Total spending on all durable goods,
nondurable goods, and services
Toothpicks to Homes
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Nondurable = do not last a long time,
consumed as soon as purchased, ex:
food
Durable = last for a long time, used over
again, ex: cars, homes, appliances
Biggest part of GDP; takes up about
2/3 in US
Business Investments
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The physical investment in capital
(inputs) to make business better
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Buying a new factory or office building
Buying new technologies to improve
research and development
Buying new tools/machines for
production
Government Spending
Guns vs. Butter
Guns = military spending
Butter = social policy
spending
Note: Discretionary
spending = Expenditures
within the U.S. budget that
are negotiated between the
Branches of Congress and
the President's Office each
year. Mandatory spending
is not up for debate.
GUNS – Military Spending
Net Foreign Exports
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The difference between exports and imports
 Negative number = Trade Deficits occur
when a country imports more than it
exports
 Positive number = Trade Surpluses
occur when a country exports more than
it imports
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US Balance of Trade 1970-2006
GDP is not perfect
…problems with the calculation
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Double Counting
Underground Economy
GDP per capita
Inflation
Double Counting
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Occurs when the value of a contributor
is counted more then once into GDP
Buying a used car – the value of that
car should not be added to GDP
because the value of its production
was already counted
Underground Economy
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Unpaid house work
Barter
Black market
GDP per capita (per person)
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Assume GDP is the same in two countries
 $500 billion
Country A has a larger population than country B
 A = 200 million
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B= 80 million
Country B is going to have a larger GDP per capita
 A = $2500
 B = $6250
Country B by comparison is therefore more well off
Inflation
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Inflation – A rate of increase in the general price
level of all goods and services
Makes figures appear higher than they really are
Nominal (current dollar) vs. Real (constant dollar)
GDP
 Nominal does not adjust for inflation
 Real adjusts for inflation
Consumer Price Index (CPI) is the measure of the
average price level in the economy.
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US Annual Averages through history ; Inflation Rate
Causes of Inflation
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Too much money in the economy
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Federal Reserve prints money
People continue to make more money & spend it
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Demand exceeds supplies - demand can't
keep up, business raise their price to adjust
to the shortage
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Cost of inputs goes up and those increases
get passed on to the consumer with higher
prices on products
Hyper and Deflation
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Hyperinflation
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Excessive & rapid rise in price levels
Money rapidly looses its value
100% inflation – something that cost
$100 on Monday costs $200 Tuesday
Deflation
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Decline in price levels
Usually cause by a reduction in spending
Historical look at US inflation
For the past 20 years, inflation in the US has been less than 5%,
typically falling between 2-3%.
Computing Real GDP
Real GDP = Current Dollar (nominal) GDP
Adjustment for inflation
Calculating Real GDP
1994 real GDP $625 billion
1995 GDP $640 billion – inflation was 4.8%
Was there really an increase of $15 billion?
If inflation was 4.8% (.048), then prices the second
year were 1.048 times the prices in the first
year
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Actually there was a ___________
Unemployment Rate
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The percentage of the labor force that
does not have a paying job.
Labor force includes those 16+ years old:
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who are working
who are actively looking for a job
Low unemployment is desirable; high is
undesirable.
US Unemployment rates ; by president
The Business Cycle
Peak
Peak
Trough
Trough
A series of rises and falls in the overall level of
economic activity, measured by real GDP
Expansion
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Economic recovery
People begin _______ money and
opening businesses
Demand brings _______ production
Employment _______
People begin to invest
Peak
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Period prior to contraction/shrinking
economy– as good as it is going to get
A period of prosperity
People are spending money on
________ goods
Economy is very productive
Unemployment is _________
People are investing
Contraction
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Prosperity begins to wear off – economy
begins to _________
Production begins to ________
People aren’t buying as much as they
normally do
Unemployment is _______
If contractions last long enough they can be
considered recessions and potentially
become depressions
Recession
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Any period of at least 6 months (2
business quarters) in which the
economy does not grow (negative
growth)
Characterized by slowing business,
consumption, and investment
Depression
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A severe and prolonged decline in the
level of economic activity
Characterized by falling prices,
business failures, surpluses, and high
unemployment
Trough
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Period before expansion/economic recovery
– as bad as it is going to get
Extreme _______of the economy
People are not typically spending money on
_______goods; demand in general is
_______
Productivity is at its ________
Unemployment is ________ than normal
Pains of Market Fluctuations
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High unemployment during recessions
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Unemployment results in lower
production (real GDP) and therefore
lower income and consumption levels
High inflation during big expansions
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People on fixed incomes who can’t buy
as many goods & services
What can be done to help the
economy?
Stabilizers:
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Fiscal Policy - Changes in government
spending and/or taxes
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Automatic
Discretionary
Monetary Policy
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Federal Reserve System
Fiscal Policy – Automatic Stabilizers
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Some government expenditure and tax
revenues automatically rise or fall with
changes in the economy
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If the economy suffers a recession,
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government spending for unemployment and
welfare increases
revenues from income and sales taxes fall.
If the economy experiences a great
expansion, vice versa.
Fiscal Policy – Discretionary
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Government can adopt countercyclical
changes in spending and taxes
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Increasing spending or cutting taxes
during recessions
Decreasing spending or increasing taxes
during periods of high inflation.
Monetary Policy – the FED
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Objective: to influence the availability
and cost of money and credit as a
means of helping to promote national
economic goals
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promote "maximum" sustainable output
control inflation and stabilize prices
The FED manipulates interest rates to
improve the economic condition
Interest Rates
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A rate which is charged or paid for the
use of money
Change as a result of inflation and FED
policies.
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Increase rates to keep prices affordable
(control inflation)
Decrease rates to encourage spending