23 An Introduction to Macroeconomics. McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Performance and Policy Real GDP – measures the value of final goods and services within a nation’s borders during a year Nominal GDP - $ value of goods and services produced in a nation’s borders using their current price during year of production LO1 23-2

Unemployment You must be willing and able to work – actively looking for a job The current unemployment rate in the US is 5.8 % - in Texas the rate is 5.2

Inflation Inflation is an increase in overall level of prices September 2014 inflation rate has been calculated to be 1.7% Inflation reduces the family’s purchasing power of savings – basically $1 of goods would cost $1.02 in September

Modern Economic Growth Standard of living measured by output per person – GDP Per Person (per capita) No growth in living standards prior to Industrial Revolution due to the fact that as the economy grew, so did the population LO3 23-6

Modern Economic Growth Output per person rises Not experienced by all countries but a growth rate of 2% annually doubles the average citizens income every 35 years and again 35 years after that. (Rule of 70)

Global Perspective LO All currencies are changed into US dollars GDP is divided by population Purchasing power parity adjusts for price differences between countries

Savings and Investment Saving = current consumption is less than current output Investment = resources are devoted to increasing future output Financial investment – assets, stocks bonds, etc. Economic investment is creation/expansion of business enterprise**Key***Investment is limited by the amount of saving LO4 23-9

Uncertainty, Expectations, and Shocks The future is uncertain and this changes behavior - expectations affect investment Shocks - What happens is not what you expected Demand shocks – unexpected change in demand for g or s – economists believe these cause short run fluctuations in GDP Supply shocks – unexpected change in supply of g and s LO

Uncertainty, Expectations, and Shocks Demand shocks and flexible prices Price falls if demand is low Sales are unchanged Production levels and unemployment levels would be constant – only the price changes LO

Demand Shocks Cars Per Week Price DMDM DLDL DHDH 900 $40,000 $37,000 $35,000 Flexible Prices LO

Demand shocks and sticky prices Prices are inflexible Adjusting production is very expensive because companies operate at lowest cost and produce constantly at optimum output Maintain inventory – store extra product but can cause a revenue issue if maintained too long Sales fall, unemployment rises, production falls

Demand Shocks Cars Per Week DMDM DLDL DHDH $37,000 Fixed Prices Price LO

Sticky Prices Many prices are sticky in the short run – this leads to fluctuations in GDP and employment over the course of a business cycle Consumers prefer stable prices and producers know this Firms want to avoid price wars Coke and Pepsi LO

Long Run Flexibility of Price All prices are flexible in the long run Firms adjust to the unexpected and there are permanent changes in demand