Economics and Business Chapter 2 – 3 Download this book for free at: ttp://hdl.handle.net/10919/70961

Review Explain the effects of changes affecting the supply and demand curves. What are the different types of competition?

Learning Objectives Describe capitalism and socialism Discuss private property rights and economic development Discuss the concept of GDP (gross domestic product). Explain fiscal and monetary policy Discuss the concept of the unemployment rate Discuss the concepts of inflation and deflation. Explain other key terms including: supply; demand; equilibrium price; monopoly; recession; depression. Download this book for free at: ttp://hdl.handle.net/10919/70961

Measuring the Economy Gross Domestic Product, GDP Value of all goods and services produced for consumer Prosperity Prosperity Recovery/ Growth Recovery/ Growth Change In GDP Recession Time The Business Cycle

Recession Negative GDP change Lasts 6 months or longer (two quarters) Must be real GDP Lasts 6 months or longer (two quarters)

Measuring the Economy Unemployment Unemployment rate Percent unemployed and actively seeking work U3 Full employment Everyone who wants a job can get one ~4% unemployment considered “full” employment U6 unemployment Broader measure Includes part-time workers wanting full-time and those not actively seeking work

Types of Unemployment Frictional Seasonal Structural Cyclical

Historical Unemployment Download this book for free at: ttp://hdl.handle.net/10919/70961

Exercise Desert island thought experiment

Measuring the Economy Inflation Consumer Price Index, CPI Measure of inflation Download this book for free at: ttp://hdl.handle.net/10919/70961

Measuring Price Level Changes Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services Market Basket—compilation of the goods and services most commonly purchased by urban consumers Producer Price Index (PPI) For Finished Goods For Intermediate Goods The Governmental Bureau of Labor Standards (BLS) tracks price levels with two indices: The Consumer Price Index (CPI) 1. measures monthly average changes in prices that consumers pay for certain goods and services 2. not a perfect measure of inflation - might actually overstate inflation by not fully accounting for changes in the goods and services that people buy The Producer Price Index (PPI) 1. tracks the differences in goods and services prices from the sellers perspective 2. Uses three measurements – finished goods, intermediate goods, and crude goods

Contents of the CPI Market Basket

Factoring out Inflation Need to compare costs over time “Nominal” is the quoted amount E.g. The nominal price of a gallon of gas in 1970 was $.36 “Real” is an adjective to describe a measure with inflation subtracted out Real = Nominal – Inflation E.g. Real gas prices, real home prices, real GDP

Historical Inflation Inflation is not a modern phenomenon 14th Century Post-plague 16th – 17th Century Spain Caused by gold and silver from America Hyperinflation Zimbabwe 2007 – 11,000% Greece 1944 – 13,800% Germany 1923 – 29,525% Hungary 1940 – 14 quintillion % Prices doubled every 15 hours Venezuela 2018 – 1 million % IMF prediction

Measuring the Economy Economic Forecasting Economic indicators Statistics about the economy Lagging economic indicators Look at past data E.g. average length of unemployment Leading economic indicators Try to predict the economy E.g. new home sales E.g. consumer confidence index

Government’s Role in Economy Monetary Policy Managed by a country’s central bank Federal Reserve Board, “The Fed” Responsible for money supply of the U.S. Primary tool is control of short-term interest rates

Government’s Role in Economy Fed Actions May increase money supply By lowering short-term interest rates “Easing” money supply Stimulates economy Stimulates inflation May decrease money supply By raising short-term interest rates “Tightens” money supply Slows economy Lowers inflation

Government’s Role in Economy Fiscal Policy Managed by Congress Primary tools Taxes Est. $3.3 Trillion in 2018* Spending Est. $4.1 Trillion in 2018* When economy is in a recession Want to stimulate growth When inflation is high May want to contract * www.cbo.gov/topics/budget

Government’s Role in Economy Fiscal Policy Actions Stimulate economy By lowering taxes By increased spending Effect is to increase money in economy Increases inflation Contract the economy By increasing taxes By reducing spending Reduces money in the economy Lowers inflation

National Debt Budget surplus Budget deficit National debt If take in more than spend Budget deficit If spend more than take in National debt Amount government owes >$21 Trillion as of 5/18 >$174,000 per tax payer www.usdebtclock.org