Unit 6 Measuring and Monitoring Economics (Ch 12 and 13)

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1 Unit 6 Measuring and Monitoring Economics (Ch 12 and 13) -Macroeconomics 0 & Microeconomics- Government tries to prevent free enterprise from having wild swings in economic behavior. Microeconomics - analyzes the Small Unit economic behavior of Individuals, Households and Firms to understand their decision-making process. Macroeconomics analyzes the whole economy-such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. -Changing Public Attitudes- As a result of the Great Depression Americans began to see the need for government intervention. To jump start the economy Franklin Roosevelt implemented his New Deal, creating jobs paid for by the Fed government. -Why has the American government grown so large? Government has grown to meet the needs of the growing population. Since the 1930 s the Gov ts main effort is to ease poverty with jobs or welfare. The Federal government employs the greatest number of people in the US (almost 3 million). As of March 2017, nearly 22 million people in the US work force work for the government (this includes Federal, State, & local). -Government s Necessary role- Prohibits discrimination Encourages economic growth Collects taxes -Rising standard of living: As incomes increase so do public expectations: a) More demand for public services. Stabilizes the economy Educate the consumer (Public disclosure laws) Provides public services b) Increased need for regulations to protect property rights, contracts, labor rights, & other business activities. c) Preventing abuse- stops businesses from taking unfair advantage of consumers, workers, and promotes competition. d) National emergencies- crises such as wars & storms increase public dependence of the gov t to assist in recovery. Government growth leads to government spending. -Providing Public Goods- Public Sector the segment of the economy which works with the gov t. The gov t gets involved in the economy to supply goods & services not provided by Private Sector. Public Goods- a shared good or service provided by the government Examples: Roads, dams, and National defense and education, etc. It would be impractical for consumers to pay individually for it. Not profitable or efficient for private business to do so. Those who cannot afford to pay can benefit: a) Free-rider one who receives the benefits of public goods who either can t or aren t willing to pay for them. b) Total benefits to society outweigh the costs

2 Gross Domestic Product & Growth -National Income Accounting- Because of the Great Depression, economists felt they needed to monitor our economy, so they can predict and prevent trouble. Macroeconomists analyze the economy using national income accounting, statistics that track the income, spending, and output of a nation. These estimates are based on Demand & Supply. The Dept. of Commerce collects data to determine the strength our economy. The most important of those measures is gross domestic product (GDP), -Gross Domestic Product (GDP)- - The total value of all goods and services produced within a Country s boarders in 1 year. - To be included in GDP, a good or service has to fulfill three requirements: 1. Final goods rather than intermediate goods are counted: a. Intermediate goods are those goods added to another product to create the finish product. b. Fabric used to make a shirt is an intermediate good; the shirt itself is a final good. 2. Must be produced during a set time period, regardless of when it is sold. 3. Must be produced within the nation s borders. Products made in foreign countries by U.S. companies are not included in the U.S. GDP. - Countries with high GDPs have high living standards. The United States has the largest GDP of any Country. -How is GDP determined?- The Expenditure Approach - they group national spending on final goods and services according to the four sectors of the economy- - - (GDP = C + I + G + E). Consumer Spending (C): Consumer purchases of goods and services. Investment (I): Business spending on equipment, machinery, & buildings & inventory investment. Government Purchases (G): Total value of purchases by local, state, & Federal governments. Net Exports (E): goods and services produced in the United States but sold in foreign countries Two Types of GDP - Nominal GDP - the current value of goods and services. - Real GDP - is an estimate of the GDP corrected for changes in prices from year to year. - Inflation is the difference between Real and Nominal GDP - Real GDP is adjusted for it. -Other Economic Performance Measures- Gross National Product- GNP is the total value of all goods & services produced globally (Running business in other countries) by the citizens of a country in 1 year. - Subtracts income earned in U.S. by foreign businesses and citizens. - Adds production of companies owned & operated by US citizens outside the nation. National income (NI) the total income earned in a nation from the production of goods and services in a given time period. Personal income (PI) the income received by a country s people from all sources in a given time period. Disposable personal income (DPI) is personal income minus personal income taxes. It shows how much money is actually available for consumer spending.

3 Business Cycle -The Business Cycle - 1) Business Cycle is the up and down changes of a market system s economic activity. 2) The activities which indicate changes in the business cycle include: Employment Income Production Spending/Savings Interest rates Stock prices Investment -Phases of the Business Cycle- 1. Recovery restoration of economic growth: a) Expansion: period of positive economic growth, an increase in GDP. 2. Peak point where the GDP stops rising & the country is at its strongest & most productive. The economy grows through: a) Capital per worker is increase c) Government intervention b) A higher savings rate d) Technological progress 3. Contraction economy s period of decline: a) Recession: a business slowdown- a decline in GDP for 2 economic quarters (around 6 months). b) Depression: extended period of low production, and unemployment 4. Trough economy s lowest point at which real GDP and employment stop declining. -Why Business Cycles Occur- There are four basic factors that causes these cycle shifts: 1) Decisions made by businesses - Demand slump for products or new technology: a) Aggregate demand is the total amount of goods and services purchasers will buy at each and every price level. b) Aggregate supply is the total amount of goods and services that producers will provide at each and every price level. 2) Changes in interest rates - to borrow money to make purchases. Consumers often use credit to buy new cars, home, electronics, and vacations. If the interest rates on these goods rise, consumers are less likely to buy them. The same principle holds true for businesses who are deciding whether or not to buy new equipment or make large investments. 3) The expectations of consumers: Consumer Confidence Survey report: 5,000 households are surveyed every month. 4) External shocks to the economy: Natural disasters, Wars and other conflicts. -Predicting the Business Cycle- Leading Indicators: anticipate where the economy is going by tracking: a) Number of building permits issued b) Average worker hours (manufacturing) c) Average weekly unemployment claims Coincident Indicators: reflect the current economic status: a) Personal income b) Sales volume c) Industrial production Lagging Indicators: what has taken place after a change in the cycle: a) Use of consumer credit b) Size of business income

4 Inflation & Business Cycles -Trying to control the cycles- - The Federal Reserve takes actions to regulate the economy. It tries to influence the GDP levels and inflation. - Monetary policy is the actions of the Federal Reserve determining the size and rate of growth of the money supply, which in turn affects interest rates. - There are two types of monetary policy, expansionary and contractionary. - Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending. - Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation. There is a chance it slows economic growth, increase unemployment and depress borrowing and spending. -Inflation- - Inflation - An overall increase in consumer prices - above 2% - 3% is generally viewed negatively - Inflation is a measure of consumer purchasing power: the ability to buy goods & services. - Prices are expected to increase over time. - Inflation becomes a concern when wages don t rise at the same rate. - Stagflation describes periods during which prices rise at the same time that there is a slowdown in business activity. -TYPES OF INFLATION- DEMAND- PULL: - Consumer (D) exceeds existing market (S) - DEMAND PULLS prices up! COST PUSH: Prices are raised to meet increased costs - COSTS PUSH prices up! -Consumer Price Index- Consumer Price Index is a measure of changes in the prices of goods and services commonly purchased by consumers. The Gov t Constructs a market basket: a sample of 400 variety of goods & services like: Food, housing, clothing, transportation, medical care, entertainment. Places a value on these basket items. Compares prices to a BASE YEAR - which changes every 10 years. Deflation is a decrease in the general price level. - How the Fed tries to maintains national financial stability: - Open Market Operations (OMO) - The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. a) It makes more money available to help the economy grow - (more money = more spending = more jobs) b) Taking money out of circulation to slow down the economy - (less money = less spending = slowing inflation rate) - Hyperinflation - Gov t prints too much extra money, but same amount of goods and services still exist so prices go up quickly

5 Unemployment -Unemployment- Labor Force: those 16 years & older currently working or looking for work Bureau of Labor Statistics: the government organization which keeps track of labor statistics and trends. -Unemployment Rate- The Census Bureau conducts a monthly census. A sample of 50,000 families is used as a model. To get the official Percentage: - They add the number of people unemployed and employed (Labor force) together. - Then the number of unemployed is divided by the labor force number, finally (X) % is a tolerable unemployment rate. -Types of Unemploymenta) FRICTIONAL UNEMPLOYMENT: When people are fired, laid off, or quit -Time spent between jobs when a worker is searching for another one. *THIS IS HEALTHY FOR AN ECONOMY- IT SHOWS CHOICE b) SEASONAL UNEMPLOYMENT: workers who have short-term jobs based on the season - those who work during certain times of the year. c) STRUCTURAL UNEMPLOYMENT: a situation where jobs exist but workers looking for work do not have the necessary skills for these jobs: ~ changes in technology ~ new resources found ~ change in consumer Demand ~ lack of education ~ globalization d) CYCLICAL UNEMPLOYMENT: caused by fluctuations in the business cycle: rises during a downturn, falls during the cycles up rise. -Under-employed- Underemployment: those employed in a job for which they are over-qualified for or in part time positions but desire full time jobs. Full Employment does not mean everyone has a job, because: There will always be structural, frictional and seasonal unemployment. -The Impact of Unemployment- Unemployment is inefficient. It wastes human resources, one of the key factors of economic growth. Unemployment does not follow equal opportunity rules. In an economic slowdown, those with the least experience lose their jobs first usually minorities and the young. Unemployment for long periods of time may discourage workers. Lose faith in their abilities to get a job that suits their skills. Potentially productive workers may give up their search for work. If they are underemployed, they may not be motivated to do their best work.

6 Economic Challenges -Bankruptcy- - a person or business that is Struggling to pay basic expenses or debts. 1. Chapter 7 Bankruptcy courts have your assets Liquidated{sold off}. Coin or stamp collections, properties, vehicles and cash, stocks or bonds, must be liquidated. Not eliminated: child support, alimony & student loans. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations. 70% of all bankruptcy are Chapter Chapter 13 - Individuals who make too much money to qualify for Chapter 7. The courts create a workable debt repayment plan(3 to 5 years). In exchange for repaying their creditors, the courts allow these debtors to keep all of their property. 29% of all bankruptcy s are Ch Chapter 11 - Businesses often file Chapter 11 bankruptcy, it allows a business to continue conducting its daily operations without interruption, while working on a debt repayment plan under the court's supervision. Poverty- Poverty is a situation in which a person lacks the income and resources to achieve a minimum standard of living. The government looks at various data to determine the standard of living (economic well being) of citizens. -Poverty Threshold- Poverty level - the income level which determines a sufficient income level for a family or household family = 2 or more people related by marriage, birth, or adoption. household = all people who live in the same home regardless of relation. -Poverty Level- Poverty level 2011: 1Person $10,890 2P 14,710 3P 18,530 4P 22,350 5P 26,170 One individual under age 65 is $10,880 ~ For a single parent w/ 1 child = $14,570 ~ Total incomes below these levels are considered poor. **US Dept. of Health & Human Services -Causes for Poverty- Lack of education: higher education equals higher earning potential. Location: cities have more people, more competition for jobs. Discrimination: racial and gender discrimination still exist to some extent. Family structure: more single parent homes trying to live on 1 income. -Income Distribution- Income Distribution Illustrates how the nation s total income is distributed between the poorest & richest citizens. The top 1% of wealthiest Americans own 40% of all wealth (those who earn more than $1 million/yr). A Lorenz curve graphically illustrates the degree of income inequality in a nation -Welfare- Welfare - government economic and social programs that provide assistance to the needy. Most of the programs are funded by taxes paid by citizens. Since the 1980s and 1990s, the government uses tax breaks, grants, job training, and other self-help initiatives in addition to cash benefits. Food Stamp Act of 1964, helps ensure that no one will go hungry. Qualifying individuals and families receive electronic benefit, which have replaced the paper food stamp Medicaid offers health care for the poor and is funded by both the federal and state governments. Social Security program which pays benefits to retirees, survivors, and the disabled is the largest government program - All are entitled to monthly checks to help with living expenses. From 1960 to 1995, the poverty rate of those aged 65 and over fell from about 35 percent to about 10 percent.