2. Macroeconomics The GDP: National Economic Measurement

3. Gross Domestic Product

4. The GDP To compare our system with other countries’ systems, and to compare the strength of our own economy year to year, economists use something called the Gross Domestic Product (or GDP), which is the total dollar value of all final goods and services produced within a country during one calendar year

5. How economists calculate the GDP: They use final output: total production within the nation’s borders in one year without counting products more than once. Which of these would be counted in the GDP? A. A tree cut by a woodcutter who sells it to a lumber yard. B. The lumber bought by the lumber yard who then sells it to a furniture manufacturer. C. A table made by the manufacturer now sold to a couple in Detroit, Michigan.

6. The answer is C.

7. Calculating the GDP They use only products produced in the current year. This would exclude things bought at yard sales. Which of the following was used in the calculation of the GDP in 1999? A car manufactured in 1998 but sold in 1999. A used 1993 Toyota that was sold to Ms. Simpson in Memphis in 1999. A Ford F150 produced in 1999 but sold in 2000.

8. The answer is C

9. Calculating the GDP They use only items produced within national borders. Would this include or exclude Coca-Cola (a U.S. company) produced at a plant in Russia? Exclude GDP: A measure of the strength of our economy

10. Famous Economic Formula GDP= C+I +G+(X-M) C= Personal consumption expenditures (consumer spending). Includes durable goods: a lifetime of more than one year, and non-durable goods: a lifetime of less than one year, and services.

11. I = Gross Investment Total value of all capital goods produced in a given nation during one year. Fixed investment: Buildings, machinery, equipment Inventory investment: raw materials, intermediate goods, final goods

12. G = Government Purchases the dollar amount that federal, state, and local governments spend on items IE: highways, education, defense, etc.

13. Net Exports X=Exports: the value of goods and services produced domestically but sold in other countries. M=Imports : the value of goods and services produced in other countries, but bought domestically.

14. Using the figures for 1995, calculate the GDP for that year. 1995: C=4.9 I =1.1 G=1.4 X-M= -.1 7.3 billion

15. If we begin comparing GDP for each year, will price increases (inflation) cause more recent years to appear “inflated?” YES

16. Real vs. Nominal GDP To adjust GDP for price increases economists calculate both NOMINAL GDP: the current GDP expressed in current prices REAL GDP: which is adjusted for price increases-inflation

17. “Real” GDP GDP for one year expressed in the dollar of another, base year Ex: 2010 GDP in 2000 dollar value Also known as Constant GDP

18. “Nominal” GDP GDP expressed in the dollar value of a given year. Ex: 2010 GDP in 2010 dollar value Also known as Current GDP

19. GDP measures economic growth or decline Changes in Real GDP helps to determine if the economy has increased or decreased its actual production of new products

20. Limitations of GDP Non-market activities: GDP does not include goods and services that people make or do themselves i.e. baby-sitting, mowing the lawn, cooking dinner, washing cars Underground economies: production and income not reported to the government i.e. black market products: illegal drugs, weapons, stolen goods, exotic pets

21. Limitations of GDP Negative Externalities: unintended economic side effects, or externalities that have monetary value not reflected in the GDP Quality of Life: Some things that improve well-being cannot be included in GDP i.e. pleasant surroundings, ample leisure time, personal safety

22. GDP does NOT include: value of used products value of volunteer work purely financial transactions value of intermediary goods Transfer of assets

23. GNP Gross National Product: annual income earned by U.S. owned firms and U.S. citizens Market value of all goods produced by Americans all over the world in one year

24. Business Cycles

25. Fluctuations in Real GDP are referred to as Business Cycles. The duration and intensity of each phase of the Business Cycle are not always clear. Business Cycles are typical of Market, Capitalistic economies due to the free nature of those economic systems

26. Phases of the Business Cycle Expansion Peak Contraction Trough

27. Expansions are periods of increasing Real GDP. Unemployment decreases, businesses expand, and Personal Consumption increases. As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates. Expansions

28. A Word About Interest Rates The amount of money charged as a fee for lending money. The price of borrowing money. As interest rates rise LESS consumers will borrow money IF they are WILLING and ABLE As interest rates fall MORE consumers will borrow money IF they are WILLING and ABLE

29. Peak A peak is a period when the economy starts to level off. Businesses postpone new investments, and consumer saving tends to increase. Rising prices and interest rates tend to restrict purchases and investments, often leading to a Contraction.

30. Contraction A Contraction is a period of declining Real GDP. Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours. Interest rates and prices level off, and often decline during long contractions.

31. Recession: Six months of declining Real GDP Depression: Twelve months of declining Real GDP coupled with at least 15% unemployment. Long Term Contractions

32. Trough A Trough is the bottom of a Contraction. Lower interest rates and prices bring customers back to markets.

33. % Change in Real GDP Contraction Expansion Peak Trough 0%

34. Factors That Affect the Business Cycle Business Investment: High levels of business investment (capital good increases like machinery and equipment) promote expansion. Low levels of business investment contribute to contraction. Money and credit: When interest rates go up, people borrow less, and this less money is circulating in the economy, thus contributing to a contraction. (and vise versa)

35. Factors That Affect the Business Cycle Public Expectations: People will increase their spending if they believe the economy is strong. This helps promote expansion. External Factors: Like energy crisis and war.

36. Economic Indicators Economic indicators are specific economic activities that have been historically good indicators of the general cycle of the economy. Three types: Leading Coincident Lagging

37. Leading Economic Indicators Economic activities that tend to change 3 to 6 months before the general economy changes. Examples: Stock market Orders for durable goods Housing Starts Number of new businesses Money supply Average work week Number of building permits issued

38. Coincident Economic Indicators Economic activities that change at about the same time the general economy (GDP) changes Examples: Personal income Industrial production levels Retail sales Number of employed non- agricultural workers

39. Lagging Economic Indicators Economic activities that tend to change 3 to 6 months after the general economy(GDP) changes Examples: Interest rates Unemployment duration Consumer debt load Number of business loans to be repaid

40. CLASSWORK Draw a business cycle (ON THE PAGE PROVIDED IN THE PACKET) that contains all four phases. Describe the general mood that would be present among people during each phase. Most important, include an illustration, for each phase, of a related event to that phase of the business cycle – Consider the factor that affect the business cycle.

41. Economic Challenges Unemployment and Inflation

42. Unemployment To again monitor the health of our economy, economists measure the Unemployment Rate. Each month, the Bureau of Labor and Statistics survey certain Americans to find out their employment status. The U.S. Government defines “employed” as people 16 and older meeting one or more of the following criteria.

43. “The Employed” 1.Working for pay or profit for 1 or more hours this week. 2.Working without pay in a family business 15 or more hours. 3.Having a job, but being ABSENT due to illness, weather, vacation, etc.

44. The U.S. Government defines “unemployed” as: 1. NOT meeting any of the criteria above AND 2. ACTIVELY looking for work during the past 4 weeks. The most closely watched and highly publicized labor force statistic is the UNEMPLOYMENT RATE – the percentage of people in the civilian labor force who are UNEMPLOYED.

45. Measuring Unemployment 2015 Employed Not in laborforce Under 16 and institutionalized Total Population 267,901,000 Total Population 267,901,000 Laborforce157,130,000 64,767,000 93,671,000 Unemployed 8,296,000 148,834,000

46. Unemploymentrateunemployed labor force x 100 = Measuring Unemployment

47. 4 Types of Unemployment Structural Cyclical Frictional Seasonal

48. STRUCTURAL Unemployment that occurs as a result of changes in technology, consumer preferences, or in the way the economy is “STRUCTURED.” EX: Many TV repairmen had to find new work as televisions are now built with transistors instead of tubes.

49. CYCLICAL This unemployment results from contractions in the economy. This type of unemployment HARMS the economy more than any other types of unemployment. During the Great Depression, the unemployment rate reached an all time high of about 25%. As recently as 2009 and 2010, the unemployment rate reached 10.2%.

50. FRICTIONAL People who have decided to leave one job and LOOK for another typically better job. Also, new entrants and re-entrants into the LABOR FORCE. Economists consider frictional unemployment as a NORMAL part of a healthy and changing ECONOMY.

51. SEASONAL This predictable unemployment fluctuates as a result of HOLIDAYS, school breaks, and industry PRODUCTION schedules.

52. Inflation An increase in the average price level of all products in an economy

53. INFLATION As prices increase, the amount that a dollar buys decreases. Inflation reduces the real purchasing power of the dollar. Real GDP removes inflation.

54. Demand-Pull Inflation Inflation that occurs when demand for goods and services exceeds existing supplies Heavy demand make items more valuable, forcing prices up.

55. Effects of Inflation Decrease in purchasing power Erodes fixed income Interest Rates Savings Investments lose value Loaners lose profit

56. Cost Push Inflation Occurs when producers raise prices in order to meet increased costs Factors of production increase (commonly labor) which forces prices to rise.

57. DEFLATION A decrease in the average price level of all goods and services in an economy. The most prolonged and most recent deflationary period in the U.S. occurred during the Great Depression, when the unemployment rate was high and wages were low

58. How do they measure prices of all goods? How do they know that prices are going up or down?

59. Price Indexes A price index is a number that tells us how much prices have changed (%) since a base year

60. Price Index Example If the 1998 price index is 128, and the base year is 1992, then prices have increased 28% between 1992 and 1998 1998 Index = 128 1992 Index = 100 Price increase= 28 General price rises are called INFLATION

61. CPI Economists use the Consumer Price Index or the CPI to measure the average change over time in the price of a fixed group of products. To measure the CPI, the Bureau of Labor Statistics first chooses a base year against which to measure price changes.

62. Second, they select a representative sample of commonly purchased consumer items, called the market basket. They then set that base year to 100, so that other years can be compared to it easily.

63. To calculate the CPI, take the price of this year’s cost of the market basket. Divide it by the cost of the basket in the base year. Multiply the result by 100. This year’s cost / base year’s cost x 100 For ex. Use the formula to determine the CPI if the year’s cost is $7000 and the base year’s cost was $4000.

64. This year’s cost= $7000 Divided by base year’s cost($4000) = 1.75 1.75 x 100 = 175 See the Inflation Rates for 1970-2004 on page 341.

66. GDP Per Capita

67. POVERTY The poverty rate: the percentage of individuals or families in the total population that are living below the poverty threshold Poverty threshold: the lowest income as determined by the government that a family or household of a certain size needs to maintain a basic standard of living.

68. 2015/2016 Poverty Threshold Poverty Threshold In 2015, the poverty threshold for a family of four (two adults, two kids) was $24,036 2016 Poverty Guidelines for the 48 Contiguous States and the District of Columbia Persons in HouseholdPoverty Guideline For households of >8 persons, add $4,160/person 1$11,880 216,020 320,160 424,300 528,440 632,580 736,730 840,890

69. Aggregate Demand and Aggregate Supply

70. Aggregate Demand is: A schedule, graphically represented as a curve, which shows the various amounts of goods and services--the amounts of real domestic output--which domestic consumers, businesses, governments, and foreign buyers collectively will desire to purchase at each possible price level **Assumes a constant Money Supply**

71. AD Real Domestic Output (Real GDP) Price Level Less Domestic output will be produced and purchased at higher price levels and visa-versa

72. Determinants of A.D. Wealth Effect – different price levels either increase or decrease the purchasing power of accumulated assets Interest Rate Effect – different interest rates (due to different price levels) will either increase or decrease consumption of domestic output Foreign Purchases Effect – different price levels will either increase or decrease foreign purchases of domestic output (net exports)

73. Factors that Shift Aggregate Demand Changes in Consumer Spending Consumer Wealth Consumer Expectations Consumer Indebtedness Taxes (Changes in...)

74. Factors that Shift Aggregate Demand Changes in Investment Spending (Business) Interest Rates Profit expectations on investment projects Business Taxes Technology Degree of Excess Capacity

75. Factors that Shift Aggregate Demand Change in Government Spending New national spending priorities Budgetary cutbacks Change in Net Export Spending National income abroad Exchange Rates

76. AD Real Domestic Output (Real GDP) Price Level AD+ AD-

77. Examples: Higher consumer indebtedness from past spending will limit current spending. What happens to AD? AD decreases, shifts left Increases in business taxes will limit current investment spending. What happens to AD? AD decreases, shifts left Depreciation (decreasing value) of the dollar will cause foreign currencies to be more valuable, increasing exports, decreasing imports. What happens to AD? AD increases, shifts right.

78. Examples (Cont’d): Decreases in interest rates, caused by changes in the money supply, will increase consumer spending and investment. What happens to AD? AD increases, shifts right Government cutbacks in purchases (e.g. military budget) will result in lower government spending AD decreases, shifts left New technology stimulates investment spending AD increases, shifts right

79. Aggregate Supply

80. A schedule, graphically represented by a curve, showing the level of real domestic output (GDP) available at each possible price level

81. Price Levels Real Domestic Output (GDP) Keynesian Range Classical Range Intermediate Range AS

82. Aggregate Supply: Keynesian Range GDP levels in this range indicate unused or idle resources GDP levels in this range implies economic contraction with accompanying unemployment GDP output can be increased due to unused resources without an increase in price levels, resulting in horizontal AS.

83. Aggregate Supply: Intermediate Range Increases in Real GDP are accompanied by increases in price levels Uneven expansion in different product and factor markets results in increases in price levels in some market segments but not others “Bottlenecks” in labor and capital use result in uneven price level increases in different market segments.

84. Aggregate Supply: Classical Range At some specific level of GDP output, productive capacity is fully utilized. Because economy is at a level of full employment and productive capacity, higher price levels will not result in greater production.

85. Factors that Shift Aggregate Supply Change in Input Prices Resource availability and prices Market Power of resource providers Labor Unions Monopoly resource owners Changes in Productivity Changes in Legal-Institutional Environment Business Taxes and Subsidies Government regulation

86. Price Levels Real Domestic Output (GDP) AS AS+ AS- Decreased AS Increased AS

87. Macroeconomic Theories

88. Macro Model Equilibrium @ Full Employment FE AD = C+I+G+(X-M) AS Real GDP (Output) Price Levels

89. Macro Model Equilibrium @ Unemployment FE AD = C+I+G+(X-M) AS Real GDP (Output) Price Levels Solution: Increase AD with increased G and decreased taxes

90. Classical Theory Jean-Baptiste Say (1767-1832) Assumes highly competitive marketplace with little or no government interaction Assumes natural state of equilibrium at full employment Say’s Law: Supply creates its own Demand Predominant economic theory until 1930’s

91. Keynesian Theory John Maynard Keynes: The General Theory of Prices and Equilibrium There is no “natural” balance in the economy Aggregate Demand is the primary influence on employment and price levels. Advocated use of “Fiscal Policy” by government to adjust equilibrium toward full employment Fiscal Policy is the use of government taxing and spending authorities to achieve economic goals.

92. Monetary Theory (Monetarism) Milton Friedman (Nobel Prize) The supply of money in the economy will affect interest rates therefore investment, and consumption. Too much money results in inflation; too little in unemployment. Advocated a balance between money supply and economic productivity and less gov’t involvement http://pw1.netcom.com/~garretc/politics/friedman.html

93. Monetarist Model Quantity of Money MD MS M Interest Rate MS’ M’ i i'

94. Neo-Classical (Supply-Side) Gained prominence during 1970’s “Stagflation”. a.k.a. “Voodoo Economics”(George HW Bush) Re-focus on Aggregate Supply Advocated: Lower Taxes on business and investors Increased privatization of gov’t programs Decreased regulation of business Stagflation = high inflation with high unemployment

95. Supply-Side Model AD AS 1 AS 2 FE rGDP Price Level FE= Full Employment PL PL* Y Y*