MICROECONOMICS The part of economics concerned with individual decisions made by households and businesses, as well as individual markets

MACROECONOMICS The part of economics that is concerned with the economy as a whole National Economic measurements Gross Domestic Product (GDP) Inflation Unemployment Business Cycle

GROSS DOMESTIC PRODUCT The primary measure of the overall output of the U.S. economy The total market value of all final goods and services produced in a given year within the United States Includes U.S. and foreign owned firms

GROSS DOMESTIC PRODUCT GDP is a monetary measure U.S. Department of Commerce Bureau of Economic Analysis 1929 – $103.6 Billion 1930 - $91.2 Billion 1931 - $76.5 Billion 1932 - $58.7 Billion 1945 - $223.1 Billion

GROSS DOMESTIC PRODUCT 1955 - $414.8 Billion 1965 - $719.1 Billion 1975 - $1.64 Trillion 1985 - $4.22 Trillion 1995 - $7.40 Trillion 2000 - $9.82 Trillion

GROSS DOMESTIC PRODUCT 2001 - $10.13 Trillion 2002 - $10.47 Trillion 2003 - $10.96 Trillion 2004 - $11.69 Trillion 2005 - $12.42 Trillion 2006 - $13.18 Trillion 2007 - $13.81 Trillion 2008 - $14.26 Trillion 2009 - $14.27 Trillion 2010 - $14.87 Trillion

GROSS DOMESTIC PRODUCT GDP only measures final goods and services in order to avoid multiple counting (aka – double counting) In other words, we only count the final value of the Ford automobile, not the tires, brakes, stereo equipment, etc…

GROSS DOMESTIC PRODUCT Once again, GDP is a measure of productive output The following do NOT count toward GDP because they do not involve the output of final goods and services

GROSS DOMESTIC PRODUCT Purely Financial Transactions Social Security payments Welfare payments Veterans payments

GROSS DOMESTIC PRODUCT Private Transfer Payments Cash gifts from your parents/relatives Stock Market Transactions Buying and selling of securities ***Paying for the service of a stock broker IS counted

GROSS DOMESTIC PRODUCT Secondhand Sales Used car sales Garage sales

GROSS DOMESTIC PRODUCT There are two different ways to calculate GDP We can look at the sum of all money spent in buying the output – Expenditures Approach Or, we can look at the income derived from producing the output – Income Approach

EXPENDITURES APPROACH C + I + G + Xn Consumer spending Business Investment Government purchases Exports (Net)

+ + + + + + Two Approaches to GDP G D P = = Expenditure Approach Income Approach Consumption by Households Wages + + Rents Investment by Businesses + G D P + = = Interest + Government Purchases + Profits Net Exports (Exports Minus Imports)

C - Consumption Consumer purchases of goods and services Aka – Personal Consumption Expenditures

Ig – Gross Private Domestic Investment All final purchases of machinery, equipment, and tools by businesses All construction, including household construction Why? It could be used to provide goods or services Changes in business inventories Increases are unused output

G – Government Purchases Government purchases of goods and services Government spending on infrastructure (roads, schools, etc…) Does NOT include transfer payments like social security payments or unemployment insurance payments

Xn – Net Exports C + Ig + G + Xn Exports – Imports This tends to be a negative number. C + Ig + G + Xn What is the largest component, by far?

2010 GDP C – 10.5 trillion Ig – 1.8 trillion G – 3.0 trillion Xn – minus .5 trillion Now complete All About GDP practice

World GDP What are the top 5 countries in Nominal GDP? (2010 numbers – CIA World Factbook) 5 – France 2.6 trillion 4 – Germany 3.3 trillion 3 – Japan 5.4 trillion 2 – China 5.8 trillion 1 – United States – 14.8 trillion

World GDP What are the top 5 countries in Nominal GDP per capita? (2010 numbers - IMF) 5 – Denmark ($55,113) 4 – Switzerland ($67,074) 3 – Qatar ($74,422) 2 – Norway ($84,543) 1 – Luxembourg ($104,390)

Selected Growth Rates GLOBAL PERSPECTIVE U.S. France Germany U.K. Percentage Change (annual rate) Japan Italy 1997 1999 2001 2003 2005 Source: Economic Report of the President, 2006

REAL GDP A way of comparing GDP statistics from one year to another (apples to apples) Economists identify a BASE YEAR, then convert all GDP amounts to what that value would be in the base year’s dollars

ECONOMIC GROWTH Increase in Real GDP Increase in Real GDP per capita

The Business Cycle PEAK Graphic measurement of Real GDP over time Overall trend is upward (economic growth) PEAK Business activity/Real GDP has reached a temporary maximum The economy is at or near full employment Price level is likely to rise (inflation) during this phase

The Business Cycle

The Business Cycle Contraction/Recession Trough 6 months or more decline in Real GDP/Output Unemployment rises Trough The “bottoming out” of the recession

The Business Cycle Recovery/Expansion A rise in Real GDP after a period of contraction Unemployment declines May see a rise in prices

The Business Cycle

MACROECONOMIC PROBLEMS Two major macroeconomic problems Unemployment Inflation

UNEMPLOYMENT Calculated by the U.S. Bureau of Labor Statistics Defining Employment 16 years and older Worked at least one hour for pay last week Worked for a family business for at least 15 hours without pay Have a job but not working because of illness, vacation, strike, bad weather, or personal family obligation

UNEMPLOYMENT Defining Unemployment 16 yrs. and older Actively seeking a job (last 4 weeks) and do not have one Not working but waiting to be called back after being laid off

Unemployment Labor Force, Employment, and Unemployment, 2005 Under 16 And/or Institutionalized (70.5 Million) Not in Labor Force (76.8 Million) Total Population (296.6 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million)

UNEMPLOYMENT Who does not count toward this statistic? Under 16 (not in the labor force) Institutionalized (prison, mental, nursing) In the military

UNEMPLOYMENT Discouraged Workers Not actively seeking work (last 4 weeks) Believe there is no work for them Believe they are being discriminated against Literally discouraged b/c they can’t find a job

UNEMPLOYMENT Elizabeth Lloyd reported to the interviewer that last week she worked 40 hours as a sales manager for the Western Beverage Company. Employed, Unemployed, or not in the Labor Force? Elizabeth is employed.

UNEMPLOYMENT Steve Hogan lost his job when the local plant of the Chariot Aircraft Manufacturing Company was closed down. Since then, he has been visiting personnel offices of other businesses in town trying to find a job. Employed, Unemployed, or not in the Labor Force? Steve is unemployed.

UNEMPLOYMENT Linda Coleman is a homemaker. Last week, she was occupied with her normal household chores. She neither held a job nor looked for a job. Her 80-year-old father who lives with her has not worked or looked for work because of a disability. Employed, Unemployed, or not in the Labor Force? Linda and her father are not in the labor force.

TYPES OF UNEMPLOYMENT Frictional Unemployment There is ALWAYS a level of unemployment in a capitalist economy Frictional Unemployment Workers “between jobs” Temporarily laid off (Seasonal unemployment) It is inevitable and often desirable (especially if it leads to a more productive job)

TYPES OF UNEMPLOYMENT Structural Unemployment When workers find that their skills are no longer needed Buggy-whip makers at the advent of automobiles Workers who sew clothing

TYPES OF UNEMPLOYMENT Frictional plus Structural Unemployment equals the NATURAL RATE OF UNEMPLOYMENT Most economists place that at about 4-5% In other words, the Natural Rate of Unemployment is 4-5% FULL EMPLOYMENT is 4-5% Unemployment

TYPES OF UNEMPLOYMENT Cyclical Unemployment Unemployment that results from a downturn of the business cycle Consumer demand declines, businesses produce less, lay-off workers Complete UE worksheet

Unemployment GLOBAL PERSPECTIVE Unemployment Rates in Five Industrial Nations, 1995-2005 France Italy Unemployment Rate (percent) Germany U.S. Japan 1995 2000 2005 Source: Bureau of Labor Statistics

FULL EMPLOYMENT Frictional and structural employment are inevitable/natural Therefore there is a natural rate of unemployment The Natural Rate of Unemployment is somewhere between 4 and 5% Unemployment

FULL EMPLOYMENT The Natural Rate of Unemployment is the same as Full Employment Full Employment is the absence of Cyclical Unemployment Full employment is 4-5% Unemployment

Costs of Unemployment Lost output – Real GDP that is less than what it would be at full employment (aka – The GDP Gap) Certain groups are more likely to suffer from unemployment Teenagers Low-skilled workers Black Americans and Hispanics Less educated http://www.deptofnumbers.com/unemployment/demographics/

Costs of Unemployment Psychological depression Political change Social upheaval

INFLATION A rise in the general level of prices (not necessarily ALL prices) Each dollar of income buys less goods and services than before Reduces the purchasing power of the dollar (“The value of the dollar has declined”) 1970’s and early 1980’s

INFLATION Compiled by the Bureau of Labor Statistics (BLS) The main measurement of inflation is the CONSUMER PRICE INDEX (CPI) CPI – the price of a “market basket” of consumer goods and services

Consumer Price Index (CPI) Price of market basket of goods in a specific year CPI = X 100 ------------------------------------------------------------ Price of the same market basket of goods in the base year This is how you calculate the INDEX NUMBER

The year you’re comparing it to CPI This formula produces an index number Base year index – 100 Calculating the rate of inflation (using the index numbers) Year you’re looking at –Year you’re comparing it to X 100 ------------------------------------------------------------------------ The year you’re comparing it to

Calculating the Rate of Inflation Calculate the rate of inflation: Year 1 to Year 2 Year 2 to Year 3 Year 3 to Year 4 Year 4 to Year 5 Year 1 to Year 5 Year 2 to Year 4 1 – 126 2 – 132 3 – 140 4 – 149 5 – 152

Inflation Annual Inflation Rates in the United States, 1960-2005 Inflation Rate (percent) Source: Bureau of Labor Statistics

TYPES OF INFLATION DEMAND-PULL INFLATION Consumer demand exceeds overall supply, thus driving up prices “Too much money chasing too few goods”

TYPES OF INFLATION COST-PUSH INFLATION The supply side of the economy experiences increased costs causing prices to rise Oil Shock of the 1970’s

WHO’S HURT BY INFLATION? People on a fixed income The elderly Retirement income no longer adequate Creditors/Financial Institutions The value of the money they lent out is worth more than the value of the money that was paid back

WHO CAN BENEFIT FROM INFLATION? Debtors The money they borrowed is worth more than the money paid back

Cost of Living Adjustments (COLAs) Social Security payments are adjusted for inflation

FISCAL POLICY Government’s manipulation of taxing and spending to bring about desirable macroeconomic results (low UE and low Inflation)

FISCAL POLICY Expansionary Fiscal Policy During a recession/contraction to stimulate Aggregate Demand (C+Ig+G+Xn) Cut taxes (personal or business) Increase government spending Combo of both

FISCAL POLICY Contractionary Fiscal Policy During a period of inflation to slow down demand-pull inflation Raise taxes Reduce government spending Combo of both

Limitations of Fiscal Policy Can run up deficits (expansionary) Not always politically popular (tax hikes or less government spending) Time lags The wheels of democracy turn slow Between the passage of legislation and the economic impact

Limitations of Fiscal Policy Crowding Out Government borrowing necessary for an expansionary fiscal policy means less credit available for American businesses and American consumers

UNEMPLOYMENT Graphic representations Production Possibilities Frontier (PPF) any point inside the curve AD/AS Framework