Economics Unit Four. Macroeconomics

Transcription

1 Economics Unit Four Macroeconomics

2 Macroeconomics Macroeconomics is the study of the whole economy together the aggregated spending, saving, and investing decisions of all consumers and businesses describes the health of the economy as a whole!

3 Key Economic Indicators The health of the economy and the big picture of economics is measured in several ways These include: Gross Domestic Product (GDP) The Consumer Price Index (CPI) This is a measure of the rate of inflation Unemployment

4 Gross Domestic Product (GDP) Gross Domestic Product (or GDP), which is the total dollar value of all final goods and services produced within a country during one calendar year.

5 Gross Domestic Product

6 The Net Exports (NM/NX) Sector The reason we subtract our imports from our exports is this: Exports - The money other countries spend on our exports adds value to our economy Imports - The money we spend on goods imported from other countries takes money out of our economy So, the foreign sector s expenditure is calculated only when the transactions add value to our economy!

7 Real vs. Nominal GDP To adjust GDP for price increases economists calculate both NOMINAL GDP: the current GDP expressed in current prices REAL GDP: which is adjusted for price increases-inflation Changes in Real GDP helps to determine if the economy has increased or decreased its actual production of new products

8 Limitations of GDP Non-market activities: GDP does not include goods and services that people make or do themselves i.e. baby-sitting, mowing the lawn, cooking dinner, washing cars Underground economies: production and income not reported to the government i.e. black market products: illegal drugs, weapons, stolen goods, exotic pets

9 Limitations of GDP Negative Externalities: unintended economic side effects, or externalities that have monetary value not reflected in the GDP Quality of Life: Some things that improve well-being cannot be included in GDP i.e. pleasant surroundings, ample leisure time, personal safety

10 GDP does NOT include: value of used products value of volunteer work purely financial transactions value of intermediary goods Transfer of assets

11 GNP Gross National Product: annual income earned by U.S. owned firms and U.S. citizens Market value of all goods produced by Americans all over the world in one year

12 Consumer Price Index The Consumer Price Index (CPI) is a measure of the change in prices in an economy Economists add up the total price of a market basket of typical items bought by the average family in a month Then, they compare the total price of these goods to the total price of the same items during a base period (or previous year) by dividing the total by the base Then, they multiply the result by 100 to have an index figure for comparison purposes CPI = cost of today s market basket cost of a market basket in previous time X 100

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14 Unemployment To again monitor the health of our economy, economists measure the Unemployment Rate. Each month, they survey certain Americans to find out their employment status. The U.S. Government defines employed as people 16 and older meeting one or more of the following criteria.

15 Criteria to be considered Employed 1. Working for pay or profit for 1 or more hours this week. 2. Working without pay in a family business 15 or more hours. 3. Having a job, but being ABSENT due to illness, weather, vacation, etc.

16 The U.S. Government defines Unemployed" as: 1. NOT meeting any of the criteria above AND 2. ACTIVELY looking for work during the past 4 weeks. The most closely watched and highly publicized labor force statistic is the UNEMPLOYMENT RATE=the percentage of people in the civilian labor force who are UNEMPLOYED.

17 Measuring Unemployment Unemployment rate = unemployed labor force x 100

18 4 Types of Unemployment Structural Worker s skill sets no longer match up with job needs usually requires retraining for a new job Cyclical Worst kind due to downturns in the economy Frictional Workers looking for a better job Seasonal Predictable due to school schedules, weather, production schedules, etc.

19 The Business Cycle Economies go through a cycle of good times and bad times alternating periods of growth (upturns) and recession (downturns) This is called the Business Cycle

20 Business Cycles Fluctuations in Real GDP are referred to as Business Cycles. The duration and intensity of each phase of the Business Cycle are not always clear. Business Cycles are typical of Market, Capitalistic economies due to the free nature of those economic systems

21 Phases of the Business Cycle Expansion Peak Contraction Trough

22 Expansions Expansions are periods of increasing Real GDP. Unemployment decreases, businesses expand, and Personal Consumption increases. As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates.

23 Peak A peak is a period when the economy starts to level off. Businesses postpone new investments, and consumer saving tends to increase. Rising prices and interest rates tend to restrict purchases and investments, often leading to a Contraction.

24 Contraction A Contraction is a period of declining Real GDP. Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours. Interest rates and prices level off, and often decline during long contractions.

25 Long Term Contractions Recession: Six months of declining Real GDP Depression: Twelve months of declining Real GDP coupled with at least 15% unemployment.

26 Trough A Trough is the bottom of a Contraction. Lower interest rates and prices bring customers back to markets.

27 Factors That Affect the Business Cycle Business Investment: High levels of business investment (capital good increases like machinery and equipment) promote expansion. Low levels of business investment contribute to contraction. Money and credit: When interest rates go up, people borrow less, and less money is circulating in the economy, thus contributing to a contraction. (and vise versa)

28 Factors That Affect the Business Cycle Public Expectations: People will increase their spending if they believe the economy is strong. This helps promote expansion. External Factors: Like energy crisis and war.

29 Economic Indicators Economic Indicators are specific economic activities that have historically been good indications of the general cycle of the economy. There are three types: Name Leading Timing 3-6 months before a business cycle change Coincident About the same time as the business cycle change Lagging occurs after the business cycle change it confirms what is going on

30 Monetary Policy Monetary policy is the responsibility of The Federal Reserve The Federal Reserve has several tools they can use to help the economy: Open-Market Operations (buying and selling bonds) Discount Rate Reserve Rate

31 Tools of the Federal Reserve Tool Open-Market Operations Buying & Selling Bonds Discount Rate The interest rate the Fed charges their banks for loaning money to them Reserve Rate Amount banks have to keep on reserve for demand withdrawals To Increase Consumer Spending Buy Treasury Bonds - puts more $$ in economy Lower the discount rate - lowers consumer interest rates - encourages spending Lower the reserve rate - frees up bank deposit money so that it can be used for consumer loans - encourages loans & spending To Decrease Consumer Spending Sell Treasury Bonds - takes $$ out of the economy Raise the discount rate - increases consumer interest rates - discourages spending Increase the reserve rate - banks have to keep more deposit money on reserve - reduces the amount of money available for loans - reduces loans & spending

32 Buying Bonds Increases money supply Lowers Interest Rates Selling Bonds Decreases money supply Interest Rates Go Up

33 Fiscal Policy Like the Fed, the government also tries to carry out actions that aim to promote economic growth and stability However, unlike the Fed, the government can t print money or directly control the money supply (i.e. monetary policy) Instead, the government can change its taxing or spending decisions to try to influence the economy

34 Fiscal Policy Tools Tools Taxing Spending To Increase Consumer Spending Lower Taxes - consumers have MORE money to spend Increase Government Spending - increases demand for goods & services >> increases production of goods & services >> leads to additional jobs >> more income >> more spending To Decrease Consumer Spending Raise Taxes - consumers have LESS money to spend Decrease Government Spending - lowers overall demand for goods & services >> suppliers produce less >> can lead to fewer jobs >> less income >> less spending

35 The Deficit and Debt If the government spends more money than it takes in for the year, it is operating under a budget deficit This is more of a prediction the idea that the government will have less money in the end If the government has a deficit, it needs to borrow money to finance the difference this is called the national debt It is all of the money that the government borrows to make up for the extra money it spends!