Ch Gross Domestic Product & Growth Sect. 1 - Gross Domestic Product Gross Domestic Product - The dollar value of all final goods and services produced in a country in a year - indicator of how economy is doing Final Goods - goods sold to consumers Ex. - computer chip is an intermediate good computer is a final good Goods produced in U.S. by foreign company count Goods produced in foreign country by U.S. company don’t count Actual Production may be less than GDP in this situation

5 Expenditure Approach - The total amount spent on four categories of goods 1. Consumer goods & services - Durable goods - last a long time like a refrigerator - Nondurable goods - last a short time like food, soap 2. Business goods & services 3. Government goods & services 4. Net exports - exports minus imports Income Approach - Total of all of the incomes in the economy Ex. - The selling price of a house is equal to the income earned by all of the people who built and sold it. Economists use both b/c between the two, they can get more accurate figures.

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8 Nominal GDP - GDP measured in current prices to show current year output Can be misleading due to inflation Real GDP - GDP adjusted for changing prices by using constant prices of a base year Depreciation - GDP does not account for depreciation - the loss of the value of capital equipment due to wear and tear over time

BasketballsGallons of MilkHaircuts YearPrice Number sold Price Number sold Price Number sold 2000$ $ $ $ $ $ $ $ $15300 Nominal GDP: 2000 _______ 2004 _______ 2008 _______ Real GDP: 2000 _______ 2004 _______ 2008 _______ $7980 $10,935$11,950 $11,675$15,230 x ++ x x

BasketballsGallons of MilkHaircuts YearPrice Number sold Price Number sold Price Number sold 2004$ $ $ $ $ $15265 Nominal GDP: 2004 _______ 2008 _______ Real GDP: 2004 _______ 2008 _______ $10,935$10,574 $11,675$13,499

11 Nominal GDP - GDP measured in current prices to show current year output Can be misleading due to inflation Real GDP - GDP adjusted for changing prices by using constant prices of a base year Depreciation - GDP does not account for depreciation - the loss of the value of capital equipment due to wear and tear over time

Explain This… The movie Avatar, released last year, is the highest earning film in GDP. The film Gone with the Wind, released in the 1930s, is also the highest earning film in GDP 12

13 Influences on GDP Aggregate Supply - The total amount of goods and services available in the economy - supply curve for the whole economy based on the price level -Price level- average of all prices in an economy - as price level and aggregate supply rise, GDP rises Aggregate Demand - The total amount of goods and services in the economy that will be purchased Aggregate Supply/Demand Equilibrium - Where AG supply and AG demand curves intersect - An increase in either changes the equilibrium and GDP

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15 Aggregate Supply/Demand

16 Aggregate Supply - The total amount of goods and services available in the economy - supply curve for the whole economy based on the price level - as price level and aggregate supply rise, GDP rises Aggregate Demand - The total amount of goods and services in the economy that will be purchased Aggregate Supply/Demand Equilibrium - Where AG supply and AG demand curves intersect - An increase in either changes the equilibrium and GDP

Sect. 2 - Business Cycles Business Cycle - Period of economic expansion followed by economic contraction - consists of four phases 1) Expansion - Economic growth and increase in GDP - decrease in unemployment 2) Peak - GDP stops rising - economy has reached its peak 3) Contraction - Period of falling GDP - rising unemployment 4) Trough - GDP has bottomed out - new period of expansion begins

Business Cycle

Sect. 2 - Business Cycles Business Cycle - Period of economic expansion followed by economic contraction - consists of four phases 1) Expansion - Economic growth and increase in GDP - decrease in unemployment 2) Peak - GDP stops rising - economy has reached its peak 3) Contraction - Period of falling GDP - rising unemployment 4) Trough - GDP has bottomed out - new period of expansion begins

Recession - A prolonged economic contraction - 6 to 18 months - unemployment from 6% - 10% Depression - Very long and severe recession - very low economic output -economists realized the economy might not recover on its own -Third world or modern market economies (Great Depression) Stagflation - Decline in GDP combined with a rise in inflation

What effects the business cycle? 1) Business investment – Business expansion creates jobs and increases production 2) Interest Rates / Credit - Lower interest rates increase spending and investing 3) Consumer Expectation - Confidence in economy increases spending - low confidence causes contraction 4) External Shocks - Unforeseen events effecting economy - negative or positive Ex.: war, oil supply disruption, natural disaster

Effects on Business Cycle

Economic Indicators Economists use several indicators to try and predict business cycles in our economy –Stock Market –Interest Rates 25

Section 3 - Economic Growth GDP and Population Growth - GDP must grow at least as fast as population to increase per capita GDP Used to compare standard of living at different times or between countries

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Section 3 - Economic Growth GDP and Population Growth - GDP must grow at least as fast as population to increase per capita GDP Used to compare standard of living at different times or between countries GDP and Quality of Life - GDP is not necessarily a good indicator of quality of life Unequal distribution of wealth can leave much of the population in poverty - other factors: freedom, environment, stress,

29 Real GDP per Capita

Section 3 - Economic Growth GDP and Population Growth - GDP must grow at least as fast as population to increase per capita GDP Used to compare standard of living at different times or between countries GDP and Quality of Life - GDP is not necessarily a good indicator of quality of life Unequal distribution of wealth can leave much of the population in poverty - other factors: freedom, environment, stress,

Capital Deepening - With more physical & human capital, each worker can be more productive More capital leads to economic growth Saving and Investment Banks lend your saved money to businesses to help them expand Government - - Higher taxes can reduce spending and investing But: - If government invests taxes in public goods and services it can stimulate and grow the economy

Foreign Trade - If exports exceed imports it creates economic growth - A trade deficit can reduce economic growth Technological Progress - -Scientific innovation, increase in efficiency -increase in economic growth - producing more with limited resources

Ch Economic Challenges Sect. 1 - Unemployment Frictional Unemployment - Unemployment that occurs when people are looking for work - laid off, changing jobs, just out of school, returning to work Structural Unemployment - When workers’ skills do not match those needed as the job market changes - new technologies, consumer demand shift, outsourcing / offshoring, lack of proper education

34 Structural Unemployment

Ch Economic Challenges Sect. 1 - Unemployment Frictional Unemployment - Unemployment that occurs when people are looking for work - laid off, changing jobs, just out of school, returning to work Structural Unemployment - When workers’ skills do not match those needed as the job market changes - new technologies, consumer demand shift, outsourcing / offshoring, lack of proper education

Seasonal Unemployment - Occurs when employers hire temporarily for summer, holidays, harvest - may collect unemployment when laid off

Seasonal Unemployment - Occurs when employers hire temporarily for summer, holidays, harvest - may collect unemployment when laid off Cyclical Unemployment - Unemployment that follows phases of “business cycle” - More common in production jobs when consumer demand is low Unemployment Rate - % of labor force that is unemployed - indicator of how the economy is doing Number of people unemployed 7 million divided by total workforce150 million X 100 =.046 x 100 = 4.6%

Seasonal Unemployment - Occurs when employers hire temporarily for summer, holidays, harvest - may collect unemployment when laid off Cyclical Unemployment - Unemployment that follows phases of “business cycle” - More common in production jobs when consumer demand is low Unemployment Rate - % of labor force that is unemployed - indicator of how the economy is doing Number of people unemployed 7 million divided by total workforce150 million X 100 =.046 x 100 = 4.6%

Full Employment - Zero unemployment is not achievable, % is normal Full employment is when there is no Cyclical Unemployment (business cycle contraction) Underemployment - When workers are working in a job for which they are overqualified, or part time when they desire full time

Full Employment - Zero unemployment is not achievable, % is normal Full employment is when there is no Cyclical Unemployment (business cycle contraction) Underemployment - When workers are working in a job for which they are overqualified, or part time when they desire full time Discouraged Workers - Those that have given up looking for work - Do not count in unemployment rate - rate would be much higher

Full Employment - Zero unemployment is not achievable, % is normal Full employment is when there is no Cyclical Unemployment (business cycle contraction) Underemployment - When workers are working in a job for which they are overqualified, or part time when they desire full time Discouraged Workers - Those that have given up looking for work - Do not count in unemployment rate - rate would be much higher

Frictional Unemployment - Structural Unemployment - Seasonal Unemployment - Cyclical Unemployment - A) When employers hire temporarily for summer, holidays B) Unemployment that follows phases of “business cycle” C) Unemployment that occurs when people are looking for work D) When workers’ skills do not match those needed as the job market changes Calculating Unemployment Rate: Number of people unemployed divided by total workforce X 100

Checkpoint: When the economy slows down, what can happen to unemployment? a)It falls because the demand for labor goes up b)It rises because the demand for goes down c)It rises because the cost of labor goes up d)It rises because production speeds up 47

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Sect. 2 - Inflation Inflation - A general increase in prices across the economy

Sect. 2 - Inflation Inflation - A general increase in prices across the economy Purchasing Power - As prices increase your dollar buys less - purchasing power decreases - $100 dollars is worth less today than 25 yrs. ago

51 Inflation ESC&adjust_yr=2013&p=.htm

Sect. 2 - Inflation Inflation - A general increase in prices across the economy Purchasing Power - As prices increase your dollar buys less - purchasing power decreases - $100 dollars is worth less today than 25 yrs. ago Consumer Price Index - CPI Calculated each month by the BLS - by measuring the price of a “market basket” of goods - Used to determine inflation rate

Market Basket - Representative basket of goods in eight categories - Updated every ten years

Calculating CPI - Current cost of “market basket” base period cost - Current base period is (CPI = 100) Example: $360 Base - $200 Inflation Rate - Inflation rate is percent change from year to year - ??? difference in CPI original CPI 80 divided by 100 =.80 X 100 = 80% 80 divided by 30 yrs. = 2.6% - Inflation of 1-3% is considered normal CPI = X 100 = 1.80 x 100 = 180 X 100

Hyperinflation - Inflation that is out of control - can be over 100% Can lead to total collapse of the economy

Causes of Inflation - Quantity Theory - Too much money in the economy - supply of money should increase at same rate as the economy grows Change in Aggregate Demand - Demand Pull Theory When aggregate demand exceeds supply, prices rise - demand for labor also increases Change in Aggregate Supply - Cost Push Theory Rising production costs increase prices ( Producers raise prices to meet increased costs) When rising wages are the cause it is known as a wage / price spiral

Analyze What typically happens to the inflation rate when unemployment falls to very low levels??

Unemployment and Inflation There is a trade-off between inflation and unemployment As unemployment falls, workers are empowered to push for higher wages. Firms try to pass these higher wage costs on to consumers, This creates higher prices and an increase in the inflation rate 61

Sect. 3 - Poverty Poverty Threshold - The income level below which is sufficient to support a family or household

Poverty Rate - The percentage of people with income below the official poverty threshold

Causes of Poverty - Family Structure - Divorce and unmarried parents has led to significant increase in poverty since 1960s Location - Inner city and rural households have more poverty than in the suburbs - Those who can afford to tend to move to suburbs Race / Gender - Income inequality favors white males - usually are the primary wage earners for the family

Decline in Manufacturing - Shift to service economy eliminated many higher paying manufacturing jobs - Unskilled service jobs today are usually low paying Lack of Education - - College graduates earn more than three times as much - Urban minorities / rural dwellers usually have less education Lorenz Curve - Graph that illustrates income distribution of the entire population - shows how unequal it is

68 Income Distribution

Decline in Manufacturing - Shift to service economy eliminated many higher paying manufacturing jobs - Unskilled service jobs today are usually low paying Lack of Education - - College graduates earn more than three times as much - Urban minorities / rural dwellers usually have less education Lorenz Curve - Graph that illustrates income distribution of the entire population - shows how unequal it is

Income Gap - The top 20% wealthiest households earn more than the other 80% combined Earned Income Tax Credit - - Tax credit up to $5,000 for families living in poverty Welfare Reform Welfare Reform - replaced federal welfare programs with Block Grants to the states to handle anti-poverty programs Block Grants: federal funds given to the states for distribution to workfare programs Also put time limit on receiving benefits

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