1. Macroeconomics The study of a nation’s economy as a whole.

2. Economic Indicators – Things that we use to measure the ‘health’ of the nation’s economy – #1= GDP

3. Gross Domestic Product and The Business Cycle

4. Gross Domestic Product (GDP) A measurement of all that is produced within a country in one year.

5. Per Capita GDP GDP divided by a countries population In other words: The GDP per person

6. The Business Cycle Peak Contraction Trough Expansion

7. Peak (a.k.a. “Boom”) Economy is at its HIGHEST Unemployment at its LOWEST

8. Contraction (a.k.a. “Recession”) Economy is DECLINING Unemployment is RISING

9. Trough (a.k.a. “Depression”) Economy is at its LOWEST Unemployment is at its HIGHEST

10. Expansion Economy is IMPROVING Unemployment is FALLING

11. Unemployment Cyclical Unemployment – Results from lack of demand for products Structural Unemployment – Results from changes in the production of a product (man-made to machine-made) Frictional Unemployment – Unemployment between jobs Seasonal Unemployment – Results from changes in outputs throughout the year

12. Stands for Consumer Price Index (CPI) – Measures inflation rates for the nation’s economy Inflation – the general rise in price over time Deflation – The general drop in prices over time Stagflation – When prices and unemployment rise simultaneously

13. Supply & Demand on the National Level Aggregate Supply – Supply of all products in an economy Aggregate Demand – Demand for all products in an economy

14. The BEST PART Aggregate Supply and Aggregate Demand work EXACTLY LIKE the supply and demand that we have already learned in class. The only difference is the label on the graph

15. Here is what it will look like on your GA Milestone!

16. Let’s Review Supply & Demand Review Activity

17. Fiscal & Monetary Policy

18. What is the purpose of Fiscal and Monetary Polices? To ensure economic expansions and contractions are not to severe NOT

19. Fiscal Policy The use of government (Congress) spending and revenue collection to influence the economy.

20. MONETARY POLICY The actions taken by the Federal Reserve to influence the stability of the economy

21. FEDERAL RESERVE The bank is not owned by the Federal government. Does not work with the public only with other banks.

22. Economic Problem: Inflation Occurs when the market is flooded with too much money in the hands of consumers So… the Goal is to DECREASE the amount of $ in the hands of consumers

23. Fiscal Policy (Congress) (Increase) Taxes (Decrease) Gov’t Spending (Decrease) Welfare payments TIGHT Fiscal Policy

24. Monetary Policy (Federal Reserve) (Increase) Interest (Discount) Rates (Increase) Reserve Ratio Sell Bonds TIGHT Monetary Policy

25. REQUIRED RESERVE RATIO Money the banks have to keep “RESERVE” at the bank. – They MUST have access to this money at all times.

26. DISCOUNT RATIO The interest rate the federal reserve charges banks to borrow money. FYI – this is one that the name does not match what it is but you just have to remember

27. Interest Rate A percentage that is charged or paid for borrowing money Higher interest rate=less spending/borrowing

28. Economic Problem: Unemployment Occurs when the market slows down due to a lack of consumer spending. So… the Goal is to INCREASE the amount of $ in the hands of consumers

29. Fiscal Policy (Congress) (Decrease) Taxes (Increase) Gov’t Spending (Increase) Welfare payments LOOSE Fiscal Policy

30. Monetary Policy (Federal Reserve) (Decrease) Interest (Discount) Rates (Decrease) Reserve Ratio Buy Bonds Easy Money Policy

31. BONDS Sold by the federal reserve and increases in value over time

32. United States and International Trade

33. Interdependence Countries are dependent on one another in order to focus on what they have an advantage in producing.

34. NAFTA North American Free Trade Agreement goal to eliminate all tariffs and trade barriers between Canada, the United States, and Mexico by 2009.

35. OPEC Organization of the Petroleum Exporting Countries is an intergovernmental organization of 13petroleum- exporting nations. The 13 countries account for 40% of global oil production and 73% of the world's "proven" oil reserves, making OPEC a major influence on global oil prices.intergovernmental organizationpetroleumglobal oil productionthe world's "proven" oil reservesglobal oil prices

36. European Union (EU) The EU is a unique economic and political partnership between 28 European countries that together cover much of the continent.28 European countries The EU was created in the aftermath ofWWII. The first steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict.

37. ASEAN The Association of Southeast Asian Nations, or ASEAN, was established in 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration by the Founding nations of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.ASEAN Declaration

38. WTO The World Trade Organization (WTO) is an intergovernmental organization which regulates international trade.intergovernmental organizationinternational trade

39. UN The United Nations (UN) is an intergovernmental organization to promote international co-operation.intergovernmental organization

40. Barriers to Free Trade Tariffs Quotas Embargoes

41. Tariffs Taxes placed on imported goods increase the price and cost of shipping items

42. Quotas Limits placed on items – Ex. Import Quota – a limit on the amount of a good that can be imported – The U.S.A. can only import… 908, 764 kilograms of raw cotton from India and Pakistan. 621,780 kilograms of raw cotton from China 355,532 kilograms of raw cotton from Egypt and Sudan

43. Embargoes political tools used to economically hurt another country by not trading with them Ex: CUBA – U.S. Trade Embargo against Cuba. It is illegal to trade with companies in Cuba, we disagree with the communist ruler Fidel Castro and his government. We are hurting Cuba economically by not trading and raising the living standards of the country.

44. Balance of Trade The monetary difference between the exports and imports of merchandise. – Charts demonstrate a countries unfavorable balance of trade by showing the countries exports are less than their imports

45. Types of Trade Restrictions Trade Video

46. Why do Countries Restrict Trade Another Trade Video

47. Absolute and Comparative Advantage

48. Absolute Advantage Absolute advantage is when someone is the best at doing something – America is the best at producing entertainment – Colt Brennann (Hawaii) is the best at throwing touchdown passes – Lance Armstrong is the best cyclist Are there cases where someone might be the best at something but it’s better for them to not do it?

49. Comparative Advantage Yes! If Lance Armstrong is the best cyclist and the best typist, while Susie Smith is a weak cyclist and a moderate typist, who should do which task? – Comparative advantage is when a person can produce something at a lower cost than anyone else – In this scenario, Susie has the comparative advantage because it cost her less (in giving up a weak cycling skill) to perform the typing.

50. Comparative Advantage In order to find people’s comparative advantage you DO NOT compare their absolute advantage. – Instead compare their opportunity costs – Why? Because we all know that superhuman that is way better than us at everything—but can they do it all? Nope. Therefore, we have to look at who has the lower opportunity cost to determine who should do what task (make which good).

51. Comparative Advantage America has an absolute advantage in technology production and answering service calls when compared to India – So why does India answer the phones (even with hard to understand accents for the caller)? Simple, America has to give up too many technology producers (a very complex field) to answer phones – It is better to give away the inferior task, even if it’s not going to be done to the superior nature it could have been if it results in a higher quantity of the first option (technology) being produced

52. Before learning Specialization Look at the chart below—notice how much each area is able to produce Before Specialization Hours WorkedProduction and Consumption Alaska4 (making salmon) 5 pounds of salmon 4 (making coffee) 1 pound of coffee Brazil4 (making salmon) 1 pound of salmon 4 (making coffee) 5 pounds of coffee If Alaska works 8 hours with NO TRADE they have 5lbs salmon and 1lb of coffee If Brazil works for 8 hours with NO TRADE they have 1lb of salmon and 5lbs of coffee

53. After Learning Specialization After Specialization Hours Worked Production Alaska8 (making salmon) 10 pounds of salmon Brazil8 (making coffee) 10 pounds of coffee If they specialize and make what they make best Alaska spends all it’s time making salmon while Brazil only makes coffee Okay, so now what? The Alaskan has 10 pounds of salmon, but no coffee. How can the Alaskan make this work to his benefit? TRADE! If he gives the Brazilian half his salmon, he will still have 5 pounds of salmon and now he’ll have 5 pounds of coffee too! Before specialization the Alaskan only had 1 pound of coffee—so in in the end, he comes out with an extra 4 pounds of coffee and didn’t have to do any additional work! This is why America, despite being awesome at most things chooses to have other countries produce some (okay, many) of our goods. This allows us to specialize in what is going to make us the most money (bring most utility)

54. Sample Problems CarsComputers United States124 Japan106 Who has absolute advantage in cars? – United States Who has absolute advantage in computers? – Japan

55. Sample Problems CarsComputers United States124 Japan106 Who has comparative advantage in computers? Japan has comparative advantage in computers because they only have to give up 5/3rds of a car versus the U.S. who has to give up 3 cars to make 1 computer HINT: always put the item asked about in the denominator United States’ opportunity cost of computers: 123 ----- = ----- = 3 cars 4 1 Japan’s opportunity cost of computers: 105 ---- = ----- = 5/3rds of a car 63

56. Sample Problems CarsComputers United States124 Japan106 Who has comparative advantage in cars? United States has the comparative advantage because they only have to give up 1/3 rd of a computer versus 3/5ths that Japan has to give up United States’ opportunity cost of computers: 41 ----- = ----- = 1/3 rd of a computer 12 3 Japan’s opportunity cost of computers: 63 ---- = ----- = 3/5 th of a computer 105

57. Video Clip Economics in 60 Seconds http://www.youtube.co m/watch?v=38hvvAzgX ZY http://www.youtube.co m/watch?v=38hvvAzgX ZY

58. You Try BananasRice Fiji105 China102 Who has absolute advantage in bananas? Who has absolute advantage in rice? Who has comparative advantage in rice? Who has comparative advantage in bananas?

59. You Try BananasRice Fiji105 China102 Who has absolute advantage in bananas? – Neither-both produce 10 bananas Who has absolute advantage in rice? – Fiji has absolute advantage

60. You Try BananasRice Fiji105 China102 Who has comparative advantage in bananas? Explain. China China only gives up 1/5 rice whereas Fiji has to give up 1/2 rice Fiji’s opportunity cost of bananas: 51 ----- = ----- = 1/2 rice 10 2 China’s opportunity cost of bananas: 21 ---- = ----- = 1/5 rice 105

61. You Try BananasRice Fiji105 China102 Who has comparative advantage in rice? Explain. Fiji Fiji only has to give up 2 bananas whereas China has to give up 5 bananas Fiji’s opportunity cost of rice: 102 ----- = ----- = 2 bananas 5 1 China’s opportunity cost of rice: 105 ---- = ----- = 5 bananas 21

62. Deficits, Surpluses, and Debt: Past, Present, and Future

63. Budgets and Budget ConceptsDiscretionary The government sets a spending limit annually Mandatory: Annual expenditure depends on how many people meet the requirements Federal Budget: A statement of income (receipts) and expenditures (outlays) for a specific period of time (a year). Unified Budget: The federal budget with Social Security included Net Budget Balance: The bottom-line; total receipts minus total outlays Off-budget surplus: The surplus regarding the Social Security portion of the unified budget On-budget surplus: The surplus regarding the Non-Social Security portion of the unified budget

64. Historical Budget Perspective 1980 1960 1970201020001990 1962-1997: Almost an unbroken string of budget deficits 2020 1998-2001: The federal government achieves a surplus in the unified budget How to fix the budget is a: 1.Pocket Book Issue 3. Fairness Issue 2.Productivity and Economic-Growth Issue 4. International Issue In 2001, tax cuts, a recession, and growing demands for money to fight terrorism depleted the surplus

65. The Public Debt Gross Federal Debt: The debt of the federal government held by both the public and government agencies Public Debt: The portion of the gross federal debt held by the public; the value of all government bonds that have been sold to the public and are still outstanding 3.5 Million 2.7 Million Public Debt is a major concern for businesses and financial markets because it effects the economy. 1962-1997: Growing period for public debt 1998-2001: Public debt fell due to the Treasury using the surpluses to redeem maturing bonds

66. The Long-Run Budget and Debt Projections The Congressional Budget Office (CBO) projected in 2001 a 10-year surplus. September 11 and a recession caused the CBO to change their forecast to deficits from 2002-2005 and surpluses from 2006-2012 CBO Projections from 2012-2075: 1.Tax policy will remain unchanged (including the expiration of the tax cut provision in 2001) 2.SS, Medicare and Medicaid, and Net interest are primary drivers of expenditures and will constrain other areas of the budget 3.There will be surpluses from 2006-2025. A negative budget balance will cause the deficit to grow as a percentage of GDP for the next 50 years

67. Measurement Issues Some economists say the federal budget deficits are overstated due to: Structural Deficit: The deficit at full employment Actual Deficit: The amount by which actual government expenditures exceed actual government revenues 1. Inflation 2. Business Cycles 3. Government Investment 4. State and Local Government Deficits and Surpluses Consumption-type Expenditures: Food stamps and farm subsidies Investment-type Expenditures: Education, Research, and Highways Eliminate this portion

68. Economic Effects of a Deficit Keynesian ViewModern View Deficits are desirable in recessions because the increase disposable income Depends on the way a deficit is financed: -Public -Social Security -The Federal Reserve Increase in Output and Employment if the economy is at less than full-employment The Public: Expansionary, but by less than the Keynesians thought Social Security: Does not affect the budget due to no market transactions The Federal Reserve: No harmful effect to the deficit if the economy is operating at less than full-employment Modern View Increase in Output and Employment if the economy is at less than full-employment Keynesian View Deficits are desirable in recessions because the increase disposable income Increase in Output and Employment if the economy is at less than full-employment

69. Public and Federal Reserve Financing Effects Public Financing Interest Rate Demand for and Supply of Loanable Funds D0. S0 i0 D1. S1 i1 D0. D1 S0 Demand for loanable funds (funds available for borrowing by households, firms, and government = Interest Rates Higher Interest rates lead to: Reduced investment Effect on Net Exports and Imports -Increased demand leads to dollar appreciation -Dollar appreciation= Decreased US Exports and Increased US Imports Federal Reserve Increases the money supply causing demand to increase if the economy is operating at less than full-employment If the economy is operating at full-employment, the price level will increase, causing inflation to rise

70. The Burden of the Debt Invalid Arguments About the Budget Deficits: The federal government should be required to balance its budget annually. The federal government should make the debt zero The national debt is owed to ourselves

71. Taxes

72. Regressive Tax Purpose: – As income increases, the percentage of taxes paid decreases – Hurts the poor Example: – Sales Tax

73. Progressive Tax Purpose: – As income increases the percentage of taxes paid increases – Hurts the rich Examples: – Income Tax

74. Excise Tax Purpose: – A tax on the sale or production of luxury or harmful goods Examples: – Tax on cigarettes, alcohol, gasoline