Macro Overview Unit 4

What it is? ► Remember: Macroeconomics is the part of economics that looks at the behavior of the whole economy collectively, rather than at the individual economic behavior of people or businesses. ► When we talk about “the economy,” what do we mean? What exactly are we referring to?  GDP, Unemployment, Inflation, the Business Cycle

What’s up, GDP? ► Gross Domestic Product (GDP) is what we use to measure a country’s standard of living, or well-being (like our nation’s “net worth”). ► What does it measure? It’s the total market value of goods & services produced in a year.

“Real” versus “Nominal” GDP ► GDP doesn’t allow for changing price levels (inflation, etc. – more on that in a bit) ► This is called NOMINAL GDP – it is NOT adjusted for price levels ► So, we typically measure using REAL GDP ► That is, we calculate the difference in the value of the dollar (price level) and use it in figuring GDP

GDP ► The “Expenditure Approach” calculates GDP like this: GDP = Consumer spending (“C”) + Business Investments (“I”) + Government Purchases (“G”) + Net Exports: meaning exports minus imports (“X-M”) GDP = C + I + G + (X – M) or sometimes GDP = C + I + G + F (for “Foreign sector”)

The Business Cycle (GDP)

The Business Cycle ► KNOW THE DIFFERENT PHASES OF THE BUSINESS CYCLE! (GDP)

Unemployment ► Unemployment is defined as: the condition of those who are willing and able to work and are actively seeking work but who do not currently work ► The Civilian Labor Force is defined as: the total number of people in the working age group (16+) who are either employed or actively seeking work

Unemployment ► The Unemployment Rate is: the percentage of the civilian labor force that is considered unemployed ► Is calculated by the following formula: Number Unemployed # in Civ. Labor Force

The Costs of Unemployment ► Unemployment hurts the economy, because it keeps us from producing to our fullest potential – it does not add to our GDP, and personally, it hurts people and their families’ ► Leads to crime, higher rate of disease, and other social problems

Types of Unemployment ► Cyclical Unemployment: results from a low level of aggregate demand, or an economic downturn – think due to “business CYCLE” ► Frictional Unemployment: unemployment of people who are temporarily between jobs, or recent grads interviewing for career ► Structural Unemployment: results from skills that do not match what employers require or from being geographically separated from job opportunities

Types of Unemployment (cont.) ► Seasonal Unemployment: unemployment of people who are out of work because of factors that vary with the time of year

Reducing Unemployment ► “Full” Employment: employment of about 95 percent of the labor force  This allows about 5 percent for frictional and seasonal unemployment ► Education and Training ► Match Skill Requirements to Job ► Lower Minimum Wage ► Increase Aggregate Demand

Aggregates ► Aggregate Demand: the total demand of all people for all goods and services produced in an economy ► Aggregate Supply: the total supply of all goods and services in an economy

Average Price Level Total Output in Constant Dollars (Real GDP) Aggregate Supply Aggregate Demand Macroeconomic Equilibrium Equilibrium Price Level Equilibrium Level of Output

Inflation ► Inflation refers to an increase in the average price of goods and services bought by the average consumer. ► Deflation is a decrease in the average price of goods and services. ► Stagflation occurs when prices increase but the economy isn’t growing (this is very bad!) ► Our measure of inflation is the Consumer Price Index (CPI).

Price Index ► What is a price index? A number that compares prices in one year with some earlier base year -- it’s how we measure inflation ► The main price index: The Consumer Price Index (CPI) – a number used to calculate changes in the average level of prices for a number of items typically bought by urban families (gov’t checks the prices of about 400 items)

CPI ► CPI = (Cost of basket today) x100 (cost of basket in base year) Example: if market basket cost $960 in base year 2006 and $1000 in year 2007, we’d calculate it like this: CPI = 1000 x 100 = 1.04 x 100 = What does this mean? Prices rose by about 4%

Inflation ► Let’s check out these websites: ► Minneapolis Fed Inflation Calculator Minneapolis Fed Inflation Calculator Minneapolis Fed Inflation Calculator ► Morgan’s Inflation Page Morgan’s Inflation Page Morgan’s Inflation Page

Who Benefits from Inflation? ► Debtors benefit from inflation, because the money they pay back later actually has a lower value than the money they borrowed (because the value of money has decreased, right?! Yes!)

Who is Hurt by Inflation? ► People who are on a fixed income are hurt most by inflation. For example, if your grandparents have a set retirement of $12,000 per year, and inflation occurs, that $12,000 will have less and less value. ► Creditors are also hurt by inflation, because if inflation is higher than the interest rate, they lose money.