1. Macroeconomics
The branch of economics that studies the entire economy, especially such topics as aggregate production, unemployment, inflation, and business cycles.

2. The student will illustrate the means by which economic activity is measured
Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports
Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand
Explain how economic growth, inflation, and unemployment are calculated
Identify structural, cyclical, and frictional unemployment
Define the stages of the business cycle, as well as recession and depression.
Describe the difference between the national debt and government deficits.

3. Three (Macro)Economic Goals
Full Employment
Stability
Economic Growth

4. Full Employment
0% unemployment is not possible in a market economy (someone will always be unemployed!)
4-6% unemployment is desirable (somewhere around 5%) – and is called “full employment”
Unemployed people = people who are out of work but are actively seeking a job

5. Stability
Limiting macroeconomic fluctuations in prices, employment, and production.
One primary focus of this stability goal is to keep inflation in check. High or unpredictable inflation rates can cause uncertainty and haphazardly redistribute income and wealth.
How do we measure inflation?
With the CPI

6. Economic Growth
The long-run expansion of the economy & the economy’s ability to increase output.
Economic growth is made possible by increasing the quantity or quality of the economy's resources (labor, capital, land, and entrepreneurship).
Long-term economic growth means a higher standard of living.

7. Growth in Aggregate Output, 1948–2004
Panel (b) shows the same data presented in a different form: it shows real GDP from 1948 to From it we see that given a sufficiently long period of time to be independent of the business cycle, real GDP has grown substantially.

8. Ways to measure the health of the macro economy
GDP: Gross Domestic Product and Real GDP
Inflation: use the Consumer Price Index (CPI)
Unemployment
Aggregate Supply and Demand

9. Gross Domestic Product (GDP)
The dollar value of all final goods and services produced within a countries borders in a given year.

10. How do we measure GDP? With the EXPENDITURES approach. GDP= C+I+G+Xn
C: Consumer goods bought
I: Business goods bought
G: Government good bought
Xn: Exports - Imports

11. Expenditures approach/ MACROECONOMIC SECTORS
The four aggregate sectors of the macroeconomy that are responsible for four expenditures on gross domestic product.
C: Consumption - (Household spending)
I: Investment (Business spending)
G: Govt. spending
Xn: Foreign (exports) - To get this we must subtract imports from exports.
GDP = C + I + G + Xn

12. Rules Products must be NEW (a new car sold counts, not a used car)
Products must be FINISHED (not a car bumper, but a whole new car)
Services count (things such as RENT)
INCOME from services count (your paycheck)
Purely financial transactions do NOT count (buying stocks and/or bonds)
New houses built count as INVESTMENT
Transfer Payments (welfare checks, social security – do NOT count)

13. Real GDP Real GDP is GDP adjusted for inflation.
Inflation is a general rise in prices over time.

14. Question: Why do we use Real GDP instead of GDP?
Answer: Because of inflation - prices have changed (risen) over time.
This would make it look like GDP has gone way up, even if people weren’t really buying more cars, houses, etc.

15. How Much things cost in 1955 Average Cost of new house $10.950.00
Average Monthly Rent $87.00
Average Yearly Wages $
Minimum Hourly Rate $1.00
Average Cost of a new car $1, Cost of a gallon of Gas 23 cents

17. GDP versus GNP
GDP - Gross Domestic Product: All new goods produced within a country’s borders
EXAMPLE: New Hondas built in Ohio count towards the United States’s GDP
GNP - Gross National Product: New goods produced by American companies, regardless of location
EXAMPLE: NIKE shoes made in Vietnam would be counted in the United States’s GNP

18. Answer: We measure economic health by looking at:
How do we know whether the economy is healthy or not? If it is growing, or if we are in a recession?
Answer: We measure economic health by looking at:
GDP (we already looked at how we measure GDP using the expenditures approach)
Inflation
Unemployment
Aggregate Supply and Demand.
What do we want?
Answer: Growing Real GDP, low unemployment, average inflation, and high aggregate demand!

19. How do we measure inflation?

20. With the Consumer Price Index
Used to measure inflation
First, we select a market basket of goods.
Total this market basket and establish our baseline year.
Compare future years with the market basket to see how much prices have gone up.

21. Quantity in Year 1 Year 1 Price Cost 300 gallons milk $1.20 $360
50 paperback books $5 $250
2 plastic sofas $110 $220
Total cost of Basket in Base Year $830
Quantity in Year 2 Year 2 Price Cost
300 gallons milk $1.80 $540
50 paperback books $5.50 $275
2 plastic sofas $100 $200
Total cost of Basket in Year 2 $1015
If a person's paycheck is $1000, then they could buy the entire basket in Year 1 and still have $170 left over. In Year 2, they would find themselves unable to buy the entire basket, and economist would say that real wages had dropped, for even though the
monetary amount is the same for both years ($1,000), its purchasing ability has fallen.

22. Inflation A rise in price level. When prices rise, income buys less!
Inflation can distort GDP growth.
This is why we use the CPI and Real GDP
When inflation is high during a recession, this is particularly bad, and called Stagflation.
Inflation can cause uncertainty and reduce capital investment.

23. Unemployment We use unemployment to measure the health of the economy.
High unemployment is a sign that the economy is slowing or is in a recession.

24. How do we measure unemployment?
People who are 16 years or older and either have a job or are actively seeking a job are used to measure employment/unemployment..

25. Unemployment Rate: The percentage of available workers (labor force) that are not employed.
Full Employment: our economy is considered to be at full employment when the unemployment rate is around 5 percent
4%-6% unemployment is normal
Discouraged workers are non-working people who are capable of working but are not actively looking for a job.
Types of unemployment to memorize: cyclical, structural, frictional

26. Frictional Unemployment: when people take time to find a new job
Frictional Unemployment: when people take time to find a new job. Being “in-between” jobs.
Structural Unemployment: When workers’ skills do not match available jobs. The economy changes because of technology, globalization, or other factors that change the skills needed.
Cyclical Unemployment: unemployment that goes along with recessions, or economic downturns

27. Aggregate Supply & Demand
Aggregate Demand: The demand for ALL goods and services within a nation
The Aggregate Demand Curve is downward sloping (remember the law of demand?)
Aggregate Supply: The supply of ALL goods and services within a country.
The Aggregate supply curve is upward sloping

28. Things that Decrease Aggregate Demand
And cause a shift of the Aggregate demand curve to the left:
Higher Taxes
Increase Savings (reduced spending)
Lower transfer payments from government (a decrease in social security benefits, welfare, etc)
A decrease in aggregate demand signals that Real GDP is falling and could mean a recession

30. Things that Increase Aggregate Demand
And cause the Aggregate demand curve to shift right:
Lower taxes
Reduced savings/increased spending
Increased transfer payments

31. Things that change aggregate supply
Decrease/Shift to the left: Higher taxes, increased costs of production (more expensive factors of production), higher interest rates
Increase/shift to the right: Lower taxes, reduced costs of production (cheaper resources), lower interest rates, increases in technology.

32. Copy the business cycle on page 311. Then label it with this:
There are four phases to the business cycle:
Expansion: period of economic growth. Includes a rise in real GDP, increasing employment.
Peak: when real GDP stops rising
Contraction: a period of economic decline as measured by falling real GDP. May include rising unemployment
Trough: When the economy has reached its lowest point in a contraction, or “bottomed out”

33. Recession
A recession is typically defined as a decrease in real GDP that lasts for more than two or three consecutive quarters of a year (6-18 months).
During a recession, unemployment generally rises into the range of 6 to 10 percent.

34. Depression
A depression is worse than a recession. It is marked by a steep fall in total output coupled with a high unemployment rate, with both these factors lasting for at least more than a year.

35. Stagflation
Stagflation is a decline in real GDP combined with a rise in the price level (inflation).

36. Business Cycle
The business cycle illustrates the ups and downs of a market economy.

37. The Phases of the Business Cycle
Expansion
Recession
Expansion
Jan.-
Mar
Total Output
Apr.-
June
July-
Sept.
Oct.-
Dec.
Boom
Peak
Upturn
Downturn
Expansion
Secular growth trend
Contraction
Trough
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

38. The Unemployment Rate and Recessions Since 1948
The unemployment rate normally rises during recessions and falls during expansions. As shown here, there were large fluctuations in the U.S. unemployment rate during the period after World War II. Shaded areas show periods of recession; unshaded areas are periods of expansion. Over the entire period from 1948 to 2004, the unemployment rate averaged 5.6%.
Source: Bureau of Labor Statistics; National Bureau of Economic Research.

40. QUESTIONS

41. What are the economic indicators used to measure the health of the economy?
GDP (real GDP)
Inflation (CPI)
Unemployment Rate
AS/AD

42. What are the macroeconomic goals we want to achieve?
Full Employment
Stability
Economic Growth

43. How do we know we have achieved economic growth?
An increase in Real GDP over time shows economic growth.

44. How is economic growth related to standard of living?
Economic growth leads to an increase in standard of living.

45. What do economists consider full employment to be?
Having an unemployment rate of around 4-6%
Meaning about 95% of employable people have jobs.

46. How do we know if we have economic stability?
A major measure of economic stability is prices (INFLATION).
Inflation is normal, but excessive inflation (hyperinflation) or deflation indicates that our economy has issues.

47. What are “final goods and services?”
NEW goods and services ready to be purchased and/or consumed.

48. What is the expenditures approach?
A way to calcuate GDP
GDP = C + I + G + X-M

49. A severe recession with high unemployment, acute shortages, and excess manufacturing capacity is known as
a trend line.
a trough.
depression.
a business fluctuation.

50. An assembly line worker in an automobile plant is laid off during a recession. She is
seasonally unemployed.
cyclically unemployed.
frictionally unemployed.
technologically unemployed.

51. To an economist, full employment is reached when the unemployment rate drops below (pick the most approximate number)
1 percent.
3.5 percent.
2.5 percent.
5.5percent.

52. What is the difference between a recession and a depression?
A recession is a period of economic growth while a depression is a period of economic contraction.
A recession is more severe than a depression and lasts longer.
A depression is a particularly deep recession with high levels of unemployment.
Unlike a recession, a depression includes high levels of inflation.

53. What is the dollar value of all final goods and services produced within a country’s borders in a given year called?
Gross National Product
Gross International Product
Gross Domestic Product
Gross Product

54. Why is Real GDP a better and more accurate measure of output than Nominal GDP?
Real GDP is inflated
Nominal GDP is adjusted for inflation
Real GDP is adjusted for inflation
Nominal GDP is in constant dollars

55. The market basket is a method of
regulating the stock exchange.
creating national grain surpluses.
tracking prices of consumer items and calculating inflation.
providing food to needy families.

56. What is a general rise in prices over time called?
Stagflation
Inflation
Depression
Recession

57. To construct a price index, all of the following are needed EXCEPT
a base year.
a market basket.
the current inflation rate.
the price of market basket items.

58. What do economists call a period of recession that also has high levels of inflation?
Deflation
Expansion
Stagflation
peak

59. When Alison, a college math professor, leaves her job at a small rural college and starts looking for a job at large urban university, she is
frictionally unemployed.
cyclically unemployed.
structurally unemployed.
a discouraged worker.

60. Aggregate demand will increase
if the dollar declines in value.
when productivity is low.
if consumers save more and spend less.
if consumers save less and spend more.

61. Decreases in aggregate supply can be caused by
decreases in fuel and transportation costs.
reduced government regulation.
lower taxes.
increased production costs

65. Growth in Aggregate Output, 1948–2004
Panel (a) above, shows the annual rate of growth of U.S. aggregate output from 1948 to 2004.
Although output grew in most years, with an average growth rate of 3.3%, the actual growth rate fluctuated with the business cycle, and output actually declined in some years.
Real GDP is a measure of aggregate output, the output of the economy as a whole.

66. U. S. Business Cycles 20 10 –10 –20 ‘90 ‘80 1860 ‘70 1900 ‘10 ‘20 ‘30
–10
–20
‘90
‘80
1860
‘70
1900
‘10
‘20
‘30
‘40
‘50
‘60
2000
World War II
World War I
Recovery
of 1895
Civil War
Korean War
Vietnam War
Panic
of 1893
Panic
of 1907
Great
Depression
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

67. The student will illustrate the means by which economic activity is measured
Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports
Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand
Explain how economic growth, inflation, and unemployment are calculated
Identify structural, cyclical, and frictional unemployment
Define the stages of the business cycle, as well as recession and depression.
Describe the difference between the national debt and government deficits.
TODAY - Diagnostic “Test” - Will count as a classwork grade - (no notes, no book, no help)