Economic Goals and how we measure them Chapter 13-1

Growth—measured in GDP Gross Domestic Product Gross Domestic Product GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year.GDP is the monetary measure of the total market value of all final goods and services produced within a country in one year. Allows economists to compare the productivity from one year to the next Allows economists to compare the productivity from one year to the next

GDP includes only final products and services GDP includes only final products and services it avoids double or multiple counting by eliminating any intermediate goodsit avoids double or multiple counting by eliminating any intermediate goods GDP is the value of what has been produced, not what was actually sold GDP is the value of what has been produced, not what was actually sold

What does GDP exclude? Purely financial transactions are excluded. Purely financial transactions are excluded. stocks or money transfers (they are not producing anything)stocks or money transfers (they are not producing anything) Intermediate products Intermediate products Secondhand sales are excluded Secondhand sales are excluded Non-market transactions—mowing your lawn, the work of a homemaker or other home repair Non-market transactions—mowing your lawn, the work of a homemaker or other home repair Underground economy Underground economy

GDP = C + I + G + Xn GDP is divided into the categories of buyers in the market GDP is divided into the categories of buyers in the market Personal Consumption—(C)Personal Consumption—(C) Gross Private Domestic Investment—(I)Gross Private Domestic Investment—(I) Government Purchases– (G)Government Purchases– (G) Net Exports—(Xn)Net Exports—(Xn) If it is not made here it is not part of GDP If it is not made here it is not part of GDP if it is a factory owned by the U.S. but is outside the boarders, it does not count. if it is a factory owned by the U.S. but is outside the boarders, it does not count.

CPI Chapter 13-2 Consumer Price Index, measures inflation Consumer Price Index, measures inflation Select a base year to compare price changesSelect a base year to compare price changes Market basket of goods (aprox. 80,000 goods in 364 categories)Market basket of goods (aprox. 80,000 goods in 364 categories) Changes occasionally in order to modernize the market basketChanges occasionally in order to modernize the market basket Real Vs. Current GDP Real Vs. Current GDP Real GDP is what GDP would be if prices had not changed from the base year.Real GDP is what GDP would be if prices had not changed from the base year.

Chapter 14-1 The business cycle: The business cycle: Recession—period when GDP is declining two quarters in a row (on average they last 9 months)Recession—period when GDP is declining two quarters in a row (on average they last 9 months) Peak—the point where GDP stops going upPeak—the point where GDP stops going up Trough—the turnaround point where GDP stops going downTrough—the turnaround point where GDP stops going down Expansion—period of recovery from a recessionExpansion—period of recovery from a recession Trend lineTrend line Depression—A severe recession (play track 9 of Mac)Depression—A severe recession (play track 9 of Mac)

Ch cont. Causes of the business cycle: Causes of the business cycle: There is no one cause, but…..There is no one cause, but….. New technology or innovation can have a big impact (internet)New technology or innovation can have a big impact (internet) Political instabilityPolitical instability Prediction of the cycle: Prediction of the cycle: GDP and other indicators (index of leading indicators)GDP and other indicators (index of leading indicators)

Unemployment Ch People aged 16 and over who have looked for a job in the last 4 weeks, but can’t get a job. People aged 16 and over who have looked for a job in the last 4 weeks, but can’t get a job. Overstated employment: Overstated employment: Part time workers are includedPart time workers are included “discouraged workers” are not included“discouraged workers” are not included

Unemployment cont. Kinds of unemployment: Kinds of unemployment: Frictional Unemployment (always there)—workers who are between jobs due to leaving, newly entering the labor force, or being laid offFrictional Unemployment (always there)—workers who are between jobs due to leaving, newly entering the labor force, or being laid off Structural Unemployment—due to a fundamental change in the economy (8 track manufacturer or defense industry after the fall of USSR)Structural Unemployment—due to a fundamental change in the economy (8 track manufacturer or defense industry after the fall of USSR) Cyclical Unemployment—caused by the business cycleCyclical Unemployment—caused by the business cycle

Unemployment cont. Types of Unemployment Cont.: Types of Unemployment Cont.: Seasonal Unemployment—results from changes in weather or demand for certain products (ski resort in the summer)Seasonal Unemployment—results from changes in weather or demand for certain products (ski resort in the summer) Technological Unemployment—When machines replace people (glass blowers or automated tellers)Technological Unemployment—When machines replace people (glass blowers or automated tellers) Full employment—about 4 to 5% Full employment—about 4 to 5%

The Federal Reserve and Monetary Policy Ch Made up of 12 district banks Made up of 12 district banks Each district bank is “owned” by its member banksEach district bank is “owned” by its member banks Quasi-public/private organization Quasi-public/private organization Owned by the banks, but decisions are made by The Board of GovernorsOwned by the banks, but decisions are made by The Board of Governors

What is the purpose of The Fed.? Ch “Monetary Policy”, Control of the economy through the manipulation of the money supply “Monetary Policy”, Control of the economy through the manipulation of the money supply “Easy Money Policy” “Easy Money Policy” “Tight Money Policy” “Tight Money Policy”

How does The Fed control the supply of money? Answer: Black Magic! Answer: Black Magic! (AKA Fractional Reserve System)(AKA Fractional Reserve System) History of the fractional banking systemHistory of the fractional banking system How many Twinkies can you buy with $1000, at one dollar each? How many Twinkies can you buy with $1000, at one dollar each? One person’s spending becomes another’s income One person’s spending becomes another’s income

Tools of Monetary Policy Reserve Requirement change Reserve Requirement change Rarely used because it causes big changesRarely used because it causes big changes Discount Rate Discount Rate The interest rate The Fed charges for banks to borrow moneyThe interest rate The Fed charges for banks to borrow money Rarely used, “bank of last resort”Rarely used, “bank of last resort” Federal Funds Rate Federal Funds Rate The interest rate that banks charge one another for loansThe interest rate that banks charge one another for loans Changes every dayChanges every day

Tools of Monetary Policy (cont.) Federal Open Market Operations Federal Open Market Operations Buying and selling of bondsBuying and selling of bonds This is the most common tool of Monetary PolicyThis is the most common tool of Monetary Policy Used every dayUsed every day