Macroeconomics

How do we measure our economy?

Macroeconomics vs. Microeconomics

Macroeconomics is the study of our economy as a whole. GPD- Real vs. Nominal Circular Flow of Economic Activity Inflation Consumer Price Index Business Cycle Aggregate Demand and Aggregate Supply Unemployment

GROSS DOMESTIC PRODUCT

C + I + G + NX

WHAT IS IT?

Gross Domestic Product (GDP)=the final value of all goods and services made within a country's border over a give period of time.

the total output of a nation measurement of a national income and output all the goods and services produced the amount of goods and services produced by the

firms in the product market

HOW IS IT MEASURED?

C +I+G+(X-M)= GDP the total consumption (C) plus business

investment (I) plus government spending (G) and the difference between imports and exports (x-m) [exports - imports]

add all goods and services produced within an economy over time

the amount of money flowing from the firms to the households in the factor market

What is excluded from GDP???

financial transactions-no new goods produced, only ownership transferred (stocks and bonds)

transfer payment by the government-nothing received in return

household production - difficult to place a value on black-market activity - no record of transaction imports – not produced within the country Second hand sales- only new production is included so buying

used goods does not count.

WHAT DOES IT TELL US?

how the economy is doing/ good vs. bad whether production is increasing or decreasing unemployment rates dependent on growth efficient use of resources standard of living if you determine per capita

GDP/population wealth of a nation

Real vs. Nominal GDP

Real GDP is GDP in real dollars. Inflation is factored out using the GDP deflator.

Nominal GDP is GDP in today’s current and inflated dollars.

GDP and Population

As population grows so do the factors of production.

Population can distort GDP and GNP. If population grows faster than its output there could be too many mouths to feed.

Population affects quality of life.

Population in the United States

Census- official count of all people living in the United States

Urban Population- people living in towns with more than 2,500 people

Rural Population- the rest of the population living in sparsely populated areas.

Historic Growth Steady decline in population growth over the history of

America 1790-1860- 3% , Civil War- 1900- 2.2%, 2002- .9%

Regional Changes

Population growth is different in different regions of the country.

South and West are growing, where as the North and East population growth is slowing and decreasing in some areas.

Center of Population- Balancing point of the country based on population. In 1790 it was 23 miles east of Baltimore, Maryland now its 2.8 miles east of Edgar Springs Missouri

Factors affecting Population Growth Fertility Rate Life expectancy Net Immigration Race and Ethnic origin

Economic Growth Real GDP per capita

dollar amount of real GDP produced per person Importance of Economic Growth

Standard of living Government Spending, Tax Base Domestic Problems- poverty, medical care, opportunity

Factors Influencing Economic Growth Land- room to grow, renewable resources Capital- capital-to-labor ratio, high ratio is good for economic

growth Labor- more labor you have the more you can grow. Labor

Productivity Entrepreneurs- no new ideas, no or slow economic growth.

Circular Flow of Economic Activity

Addition of Banks and the Government

Circular Flow Diagram

Inflation

Inflation is the rise in prices over time.Goods are more expensive $’s have less purchasing powerWealth Effect

Deflation is the drop in prices over time.Goods are cheaper$’s have increased purchasing power

Stagflation

an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity.

An economic condition that is characterized by slow growth, rapidly rising consumer prices, and relatively high unemployment.

Measuring Inflation

Consumer Price Index Producer Price Index GDP Deflator

Causes of Inflation

Demand-Pull Theory- prices pulled up by high demand

Deficit Spending- government debt drives down the value of the dollar

Cost-Push- high cost of producing products push the price of goods higher and higher

Many not one- combination of factors cause inflation Excessive Monetary Growth- money supply grows

faster than real GDP

Consumer Price Index-CPI

Measuring Inflation and Price Levels

WHAT IS IT?

Consumer Price Index a measurement of a current basket of goods

compared to another year (base year) to determine price changes x 100 to convert to %

measures the amount of goods purchased at certain price from one year to another

includes food, clothing, housing costs, entertainment and transportation costs and others

helps to determine the cost of living

CONSUMER PRICE INDEX

current-year cost index number = _-----------------------_ x 100

base-year cost

HOW DO YOU MEASURE IT?

items are weighted in terms of importance percentage change is calculated from base

year to current year; difference in value/ earlier year value X 100

index number = current year/base year cost X 100

WHAT DOES IT TELL US?

helps to determine the value of money determines whether inflation causes the

value of money increases or decrease determines the real value of money helps to determine unemployment rates;

Phillips Curve

Inflation: Who is Helped? Hurt?

Helped:People paying fixed payments

Hurt:People living on fixed incomesBanks receive fixed income payments

The Business Cycle

Real GDP and Price Level

Business Cycle

Phases of the business cycleRecessionTroughPeakExpansionTrend LineDepression

Business Cycles in the United States Lowest point was the 1930’s Great

Depression Since WWII US economy has reached

new heights.

The Great Depression

Black Tuesday- Oct 29, 1929 1929-1933 Great Depression GDP fell from 103 billion to 55 billion Unemployment rose 800% 1.6 to 12.8 million. 25%

unemployment Avg. manufacturing wages fell from 1928-.55 to

1933-.05 dollars “Bank Holiday” closed the banks for several days Towns begin to print depression scrip

Causes of the Great Depression

The disparity in the distribution of income. Easy and plentiful credit. International Trade- Private institutions of

US stop loaning money to countries, thus they can no longer afford US goods.

High American Tariffs on imports caused trade to decline

Business Cycle since World War II

Massive government spending during WWII provided a giant stimulant to the economy for most of the 1940’s

Short recession in 1945 (only a few months) After the war consumer spending increased

greatly Avg. recession 11 months Avg. expansion 43 months

Causes of the Business Cycle

Capital Expenditures- Consumers buying, businesses expanding, then they stop investing which causes layoffs and eventually recession

Inventory Adjustments- high inventory during expansion, low inventory during economic slow down

Innovation and Imitation- Expansion of new investment then slowdown ( internet bubble)

Causes of the Business Cycle

Monetary Factors- Easy Money Policies- Expansion. Hard Money Policies- Recession

External Shocks- Outside forces that can have an effect on our economy. ( change in oil prices, wars, natural disasters)

Predicting Business Cycles

Output-expenditure modelGDP= C+I+G+(X-M)

Econometric ModelGDP= a+.95(DI)+I+G+(F-S)

Aggregate Demand and Aggregate Supply

Demand for all products

Supply of all products

AGGREGATE DEMAND AND AGGREGATE SUPPLY CURVES

WHAT IS IT?

GDP adjusted for inflation (real) at certain price levels aggregate demand (AD) = C+I+G+NX total spending by the nation;

national income aggregate supply (AS) = total production within the nation; GDP short run aggregate supply equals production that continuously

changes with the market (SRAS) equilibrium - for every transaction there is a seller and a buyer, so

AD=AS long run aggregate supply (LRAS) indicates where and economy

wants to be, at full employment of resources (similar to the PPC) whether the economy is below, at or above full employment at

certain price levels

HOW IS IT MEASURED?

calculate GDP, adjust for inflation (price index) = SRAS

add C+I+G+NX to determine AD add GDP to determine SRAS determine maximum full employment of

resources for LRAS

WHAT DOES IT TELL US?

where an economy is currently producing in relationship to full employment (where it wants to be)

whether business inventories are building up (AD less that AS) or if they are selling most goods and services (AD greater than AS)

if AD/SRAS intersect below LRAS, there is lack of use of resources (recession)

if AD/SRAS intersect beyond LRAS, there is overproduction; the economy is overheated = inflation

an intersection of AD/SRAS beyond LRAS will not last; temporary overproduction i.e. wartime

Unemployment

Unemployment Rates

WHAT IS IT?

percentage of people without jobs, but are actively looking for one

those civilians 16 and over who are without jobs, but want one

the total of those who can work vs. those who cannot find work

percentage of labor involved in production of goods and services

UNEMPLOYMENT

The unemployment rate (UR) is defined as

number of unemployed UR = ____________________ x 100 labor force

The labor force participation rate (LFPR) is defined as: number in labor force LFPR = ____________________ x 100 adult population

HOW IS IT MEASURED?

divide the number of unemployed by the total labor force multiplied times 100 for a percentage

U.S. census helps determine unemployment rates

files for unemployment compensation

Types of Unemployment

Structural Unemployment When the structure of the economy changes and your job is no longer

needed. Frictional Unemployment

When someone is in between jobs. Or going from one job to another, or holding out for a job they are qualified for.

Seasonal Unemployment Jobs that are only working during certain seasons of the year

Technological Unemployment When your job has been replaced by technology and is no longer

needed Cyclical Unemployment

Unemployment related to the swings of the business cycle.

WHAT DOES IT TELL US?

the percentage of unused resources if the GDP is at its greatest rate if we are producing at our maximum potential;

inside or outside of PPC/LRAS helps determine whether inflation is a problem

(Phillips Curve shows inverse relationship between unemployment and inflation)

crime rates increase with increases in unemployment

Phillips Curve

Poverty and Distribution of Income Lorenz Curve- shows how much disparity there is

from actual distribution of income to equal distribution of income.

Reasons for Income Inequality

Education Wealth Discrimination Ability Monopoly Power

Poverty

Poverty Guidelines People in Poverty

35 million Americans, 12.4 % Why the growing gap??

Structural change in the economy from good production to service production.

Income of well educated workers and poorly educated unskilled workers

Declining Unionism Shift from two parent families to single parent families.

Antipoverty Programs

Income assistance General Assistance- food stamps Social Service Programs Tax Credits Enterprise Zones Workfare Programs Negative Income Tax