2. Opener ?’s
How would we be able to determine if you are better off as you got older? What measures could/would we use?
What things could we use to determine if a country is better off over time? Factors?

3. Table of Contents Access Prior Knowledge New Information Set Goals
Activity
Conclusion
Is This Part of
GDP?
“GDP”
Targets
What Is GDP?
Calculating GDP
“GDP”
Targets
What GDP
Does Not Measure
GDP: Production
Approach
GDP: Expenditure
Approach
GDP: Income
Approach
Nominal vs. Real
GDP
Real GDP per Capita

4. Is This Part of GDP?
GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an “I” in the blank. If you think it is excluded, place an “E” in the blank.
Click “Forward” to see the list.

5. Is This Part of GDP?
GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an “I” in the blank. If you think it is excluded, place an “E” in the blank.
Show Answers
7) Pepsi donates money to the Susan G. Komen Foundation.
1) Hair cut is purchased.
2) Honda purchases steel for producing new cars.
3) Dell Computers sells computers to Japan.
4) McDonald’s purchases a brand new grill.
5) Macy’s pays its employees an hourly wage.
6) Students purchase airplane tickets to Hawaii.
8) A stereo is purchased on e-Bay.
9) Citizens pay property tax.
10) Government buys supplies for the military.
11) Stay-at-home mothers create community garden.
12) Chevrolet purchases a new factory.
13) Ben & Jerry’s purchases milk for making ice cream.
14) Wall Street traders purchase stocks.
15) Ford Motor Company pays for the land it uses in production.
16) U.S. citizens purchase oil from Saudi Arabia.
17) Wells Fargo Bank gives a student loan.
18) Wells Fargo Bank is paid interest for the loan it made to Wal-Mart.
19) Owner of NFL team makes millions in profits.
20) Lemonade is sold at a neighborhood lemonade stand by 8-year olds.
____
Give students time to come up with answers. They can work in pairs, individually, groups, or however you want. They should have some success with this activity since they have hopefully been exposed to the concept of GDP in a previous social studies class. Before showing the answers, feel free to ask students which ones they were unsure about and come up with a solution as a class. An answer key document is included for reference.

6. Is This Part of GDP?
GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an “I” in the blank. If you think it is excluded, place an “E” in the blank.
____ I
1) Hair cut is purchased. E
____
11) Stay-at-home mothers create community garden.
____ E
2) Honda purchases steel for producing new cars.
____ I
12) Chevrolet purchases a new factory.
____ I
3) Dell Computers sells computers to Japan.
____ E
13) Ben & Jerry’s purchases milk for making ice cream. I
____
4) McDonald’s purchases a brand new grill.
____ E
14) Wall Street traders purchase stocks. I
____
15) Ford Motor Company pays for the land it uses in production. I
____
5) Macy’s pays its employees an hourly wage. I
____
6) Students purchase airplane tickets to Hawaii.
____ E
16) U.S. citizens purchase oil from Saudi Arabia. E
____
7) Pepsi donates money to the Susan G. Komen Foundation.
____ E
17) Wells Fargo Bank gives a student loan.
____ I
18) Wells Fargo Bank is paid interest for the loan it made to Wal-Mart.
____ E
8) A stereo is purchased on e-Bay. I
____
19) Owner of NFL team makes millions in profits.
____ E
9) Citizens pay property tax. E
____
20) Lemonade is sold at a neighborhood lemonade stand by 8-year olds.
10) Government buys supplies for the military.
____ I

7. “GDP” Targets
Knowledge 3 Understand the various components of Gross Domestic Product (GDP).
Reasoning 1 Explain why sustained growth in GDP per capita is desirable.
Skill 2 Calculate data regarding GDP.

8. What Is GDP?
The Gross Domestic Product is the value of all final goods and services produced by a country.
Gross National Product (GNP) is not mentioned in this slideshow for the sake of simplicity. GNP is different than GDP because GNP counts every citizen of a particular country--whether they live within the country’s borders or not--and excludes non-citizens within a country’s borders. The concept of GNP is mentioned in some fields of research, but GDP is the more important calculation used by economists.

9. What Is GDP?
The Gross Domestic Product is the value of all final goods and services produced by a country.
1) It is a measure of aggregate output defined in terms of the current price level.

10. What Is GDP?
The Gross Domestic Product is the value of all final goods and services produced by a country.
1) It is a measure of aggregate output defined in terms of the current price level.
2) Useful for making comparisons over time or between countries.

11. What Is GDP?
The Gross Domestic Product is the value of all final goods and services produced by a country.
1) It is a measure of aggregate output defined in terms of the current price level.
2) Useful for making comparisons over time or between countries.
3) GDP only measures final products, not intermediate ones.

12. What Is GDP?
The Gross Domestic Product is the value of all final goods and services produced by a country.
1) It is a measure of aggregate output defined in terms of the current price level.
2) Useful for making comparisons over time or between countries.
3) GDP only measures final products, not intermediate ones.
4) Intermediate products are used up when producing a final product. (Like steel for a car.)

13. What Is GDP?
The Gross Domestic Product is the value of all final goods and services produced by a country.
1) It is a measure of aggregate output defined in terms of the current price level.
2) Useful for making comparisons over time or between countries.
3) GDP only measures final products, not intermediate ones.
4) Intermediate products are used up when producing a final product. (Like steel for a car.) NOT INCLUDED!!!
5) Counting only final products eliminates double counting.

14. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.

15. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.
1) Used goods, such as cars or houses.

16. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.
1) Used goods, such as cars or houses.
2) Financial assets, such as stocks or bonds.

17. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.
1) Used goods, such as cars or houses.
2) Financial assets, such as stocks or bonds.
3) Anything not produced within the country’s borders.

18. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.
1) Used goods, such as cars or houses.
2) Financial assets, such as stocks or bonds.
3) Anything not produced within the country’s borders.
4) Household production or subsistence farming.

19. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.
1) Used goods, such as cars or houses.
2) Financial assets, such as stocks or bonds.
3) Anything not produced within the country’s borders.
4) Household production or subsistence farming.
5) Underground markets or unreported economic activity.

20. What GDP Does Not Measure
It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP.
1) Used goods, such as cars or houses.
2) Financial assets, such as stocks or bonds.
3) Anything not produced within the country’s borders.
4) Household production or subsistence farming.
5) Underground markets or unreported economic activity.
6) The amount or distribution of wealth in a country.

21. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.

22. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.
1) Economists count only each producer’s value added amount.
Value Added = (Sales Price) - (Price of Inputs)

23. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.
1) Economists count only each producer’s value added amount.
Value Added = (Sales Price) - (Price of Inputs)
a) VA = $1 - $0 = $1
2) For example:
a) A wheat farmer grows a bushel of wheat that costs $1.
In this example the farmer has no input prices to worry about. $1

24. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.
1) Economists count only each producer’s value added amount.
Value Added = (Sales Price) - (Price of Inputs)
a) VA = $1 - $0 = $1
2) For example:
b) VA = $2 - $1 = $1
a) A wheat farmer grows a bushel of wheat that costs $1.
b) A miller buys the wheat for $1 to turn into flour, which costs $2. $1 $1

25. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.
1) Economists count only each producer’s value added amount.
Value Added = (Sales Price) - (Price of Inputs)
a) VA = $1 - $0 = $1
2) For example:
b) VA = $2 - $1 = $1
a) A wheat farmer grows a bushel of wheat that costs $1.
c) VA = $5 - $2 = $3
b) A miller buys the wheat for $1 to turn into flour, which costs $2.
c) A baker buys the flour for $2 to turn into bread, which costs $5. $1 $1 $3

26. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.
1) Economists count only each producer’s value added amount.
Value Added = (Sales Price) - (Price of Inputs)
a) VA = $1 - $0 = $1
2) For example:
b) VA = $2 - $1 = $1
a) A wheat farmer grows a bushel of wheat that costs $1.
c) VA = $5 - $2 = $3
d) VA = $9 - $5 = $4
b) A miller buys the wheat for $1 to turn into flour, which costs $2.
c) A baker buys the flour for $2 to turn into bread, which costs $5.
d) A grocer buys the bread for $5 to sell it to consumers for $9. $1 $1 $3 $4

27. GDP: Production Approach
The first way to calculate GDP is to add up the value of all the final goods produced in the economy.
1) Economists count only each producer’s value added amount.
Value Added = (Sales Price) - (Price of Inputs)
a) VA = $1 - $0 = $1
2) For example:
b) VA = $2 - $1 = $1
a) A wheat farmer grows a bushel of wheat that costs $1.
c) VA = $5 - $2 = $3 +
d) VA = $9 - $5 = $4
b) A miller buys the wheat for $1 to turn into flour, which costs $2. $9
c) A baker buys the flour for $2 to turn into bread, which costs $5.
d) A grocer buys the bread for $5 to sell it to consumers for $9.
3) All sales total $17. But GDP is only value added, which is $9. $1 $1 $3 $4

28. GDP: Expenditure Approach
The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories.
Though all three methods of calculating GDP are used, the expenditure approach generally receives the most attention.

29. GDP: Expenditure Approach
The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories.
1) Consumption
Consumer spending on final goods and services is the largest category.
Let students know that we denote consumer spending (consumption) with a “C.” C

30. GDP: Expenditure Approach
The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories.
1) Consumption
Consumer spending on final goods and services is the largest category.
2) Investment
This describes the fact that firms also spend money on final products. It does not mean financial investment.
Let students know that we denote investment spending with an “I.” + C I

31. GDP: Expenditure Approach
The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories.
1) Consumption
3) Government
Consumer spending on final goods and services is the largest category.
The government also spends money on final products.
2) Investment
This describes the fact that firms also spend money on final products. It does not mean financial investment.
Let students know that we denote government spending with a “G.” + + C I G

32. GDP: Expenditure Approach
The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories.
1) Consumption
3) Government
Consumer spending on final goods and services is the largest category.
The government also spends money on final products.
2) Investment
4) Net Exports
This describes the fact that firms also spend money on final products. It does not mean financial investment.
Some products get bought by other countries, but we must subtract products we buy from other countries.
Let students know that we denote exports as an “X” and imports as an “M.” (Many other letters are often used as well.) To find net exports we must subtract the money spent on imports from the money spent on exports. + + + C I G
(X - M)

33. GDP: Income Approach
The third way to calculate GDP is to add up all of the income received by firms from the sale of final goods and services.
The calculations for this method can get complicated. This is a simplified version. Sometimes students have trouble grasping the “income approach” concept. Tell them that all of the money spent on final goods and services must go somewhere, and all of the money spent must be an income for somebody. The four categories listed here are the four (general) ways in which people earn income.

34. GDP: Income Approach 1) Wages W
The third way to calculate GDP is to add up all of the income received by firms from the sale of final goods and services.
1) Wages
Some of the money earned by firms gets paid to workers as wages.
Let students know that we denote wages with a “W.” W

35. GDP: Income Approach + 1) Wages 2) Interest W I
The third way to calculate GDP is to add up all of the income received by firms from the sale of final goods and services.
1) Wages
Some of the money earned by firms gets paid to workers as wages.
2) Interest
Some of the money earned by firms must get paid to the people who have lent the firm money.
Let students know that we denote interest with an “I.” + W I

36. GDP: Income Approach + + 1) Wages 3) Rent 2) Interest W I R
The third way to calculate GDP is to add up all of the income received by firms from the sale of final goods and services.
1) Wages
3) Rent
Some of the money earned by firms gets paid to workers as wages.
Some of the money must be paid to rent the land used for production.
2) Interest
Some of the money earned by firms must get paid to the people who have lent the firm money.
Let students know that we denote rent with an “R.” + + W I R

37. GDP: Income Approach + + + 1) Wages 3) Rent 2) Interest 4) Profit W I
The third way to calculate GDP is to add up all of the income received by firms from the sale of final goods and services.
1) Wages
3) Rent
Some of the money earned by firms gets paid to workers as wages.
Some of the money must be paid to rent the land used for production.
2) Interest
4) Profit
Some of the money earned by firms must get paid to the people who have lent the firm money.
Once wages, interest, and rent have been paid, all of the remaining income is considered profit.
Let students know that we denote profit with a “P.” + + + W I R P

38. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.

39. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.

40. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Year 1
Year 2
Quantity of Apples
Price of Apple
Nominal GDP
Real GDP 50
2) For example: $1
a) Suppose in Year 1, 50 apples are sold for $1 apiece.

41. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Year 1
Year 2
Quantity of Apples
Price of Apple
Nominal GDP
Real GDP 50 60
2) For example: $1 $2
a) Suppose in Year 1, 50 apples are sold for $1 apiece.
b) Suppose in Year 2, 60 apples are sold for $2 apiece.

42. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Year 1
Year 2
Quantity of Apples
Price of Apple
Nominal GDP
Real GDP 50 60
2) For example: $1 $2
a) Suppose in Year 1, 50 apples are sold for $1 apiece.
Calculate
b) Suppose in Year 2, 60 apples are sold for $2 apiece.
c) What is the nominal GDP for Year 1 and for Year 2?
Allow students time to calculate the totals themselves and write them on their note sheets.

43. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Year 1
Year 2
Quantity of Apples
Price of Apple
Nominal GDP
Real GDP 50 60
2) For example: $1 $2
a) Suppose in Year 1, 50 apples are sold for $1 apiece.
$50
$120
b) Suppose in Year 2, 60 apples are sold for $2 apiece.
c) What is the nominal GDP for Year 1 and for Year 2?

44. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Year 1
Year 2
Quantity of Apples
Price of Apple
Nominal GDP
Real GDP 50 60
2) For example: $1 $2
a) Suppose in Year 1, 50 apples are sold for $1 apiece.
$50
$120
b) Suppose in Year 2, 60 apples are sold for $2 apiece.
Calculate
c) What is the nominal GDP for Year 1 and for Year 2?
Allow students time to calculate the totals themselves and write them on their note sheets.
d) What is the GDP for each year if we only use the price from Year 1?

45. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Year 1
Year 2
Quantity of Apples
Price of Apple
Nominal GDP
Real GDP 50 60
2) For example: $1 $2
a) Suppose in Year 1, 50 apples are sold for $1 apiece.
$50
$120
b) Suppose in Year 2, 60 apples are sold for $2 apiece.
$50
$60
c) What is the nominal GDP for Year 1 and for Year 2?
Explain again that real GDP gives us a more accurate measure of GDP because it does not take into account changes in price. The $60 is a much more representative number for Year 2 production when compared to $120.
d) What is the GDP for each year if we only use the price from Year 1?

46. Nominal vs. Real GDP
Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation.
1) Real GDP tells us how much a change in GDP is due to a change in aggregate output.
Nominal GDP
Real GDP
2) For example:
a) Suppose in Year 1, 50 apples are sold for $1 apiece.
b) Suppose in Year 2, 60 apples are sold for $2 apiece.
c) What is the nominal GDP for Year 1 and for Year 2?
Allow students time to write down an answer to this question. Possible answers may include “nominal GDP grows at a faster rate than real GDP”; “nominal GDP has a steady upward trend whereas real GDP seems to decrease sometimes”; “both have grown in the long run”; “nominal and real GDP are the same in the year that we use the prices for calculating the data (2005)”
d) What is the GDP for each year if we only use the price from Year 1?
3) What do you notice about this graph of nominal and real GDP?

47. Real GDP per Capita
Real GDP per capita is the key statistic used for tracking the health and growth of an economy.

48. Real GDP per Capita
Real GDP per capita is the key statistic used for tracking the health and growth of an economy.
1) Divide real GDP by the population of a country to find real GDP per capita.
Real GDP
Population
Real GDP per capita =
See Sample

49. Real GDP per Capita
Real GDP per capita is the key statistic used for tracking the health and growth of an economy.
1) Divide real GDP by the population of a country to find real GDP per capita.
Real GDP
Population
Real GDP per capita =
$15,681,500,000,000
315,439,603
RGDPC of U.S. =
$49,713
RGDPC of U.S. =
This data comes from 2012 using 2012 dollars.

50. Real GDP per Capita
Real GDP per capita is the key statistic used for tracking the health and growth of an economy.
1) Divide real GDP by the population of a country to find real GDP per capita.
2) U.S. real GDP per capita has steadily grown over time.

51. Real GDP per Capita
Real GDP per capita is the key statistic used for tracking the health and growth of an economy.
1) Divide real GDP by the population of a country to find real GDP per capita.
2) U.S. real GDP per capita has steadily grown over time.
3) The U.S. has almost three times as much purchasing power per person as it had in 1960.
Here is a good time to ask students why they think an increasing real GDP per capita helps increase standards of living. Ask for examples of how we lead more comfortable lives than we did in the 1960s or even the 1990s.

52. Real GDP per Capita
Real GDP per capita is the key statistic used for tracking the health and growth of an economy.
1) Divide real GDP by the population of a country to find real GDP per capita.
2) U.S. real GDP per capita has steadily grown over time.
3) The U.S. has almost three times as much purchasing power per person as it had in 1960.
This map is an extremely simplified version of how the world actually looks. Note that there are places in Asia and Africa with high incomes while there are places in Latin America with both high and very low incomes. The map is designed to give students an understanding of how GDP per capita is generally distributed around the globe.
4) Other countries, however, continue to have low real GDP per capita rates.

54. Calculating GDP DIRECTIONS
There are different stations set up around the room. Each station contains a set of cards for calculating GDP. There are cards for the production approach, the expenditure approach, and the income approach. Begin at one station and make sure the cards are shuffled. Place the cards in the four appropriate piles face down. Draw one card from each pile, and calculate the GDP using the data on those four cards. An example of how to calculate each of the different methods is provided under each heading below.
PRODUCTION APPROACH
In order to find GDP using the production approach, add together all of the value added amounts.
EXPENDITURE APPROACH
In order to find GDP using the expenditure approach, add together the values of consumption, investment, government spending, and net exports. To find the value of net exports, subtract imports from exports.
INCOME APPROACH
In order to find GDP using the income approach, add together the values of wages, interest, rent, and profit.

55. “GDP” Targets
Knowledge 3 Understand the various components of Gross Domestic Product (GDP).
Reasoning 1 Explain why sustained growth in GDP per capita is desirable.
Skill 2 Calculate data regarding GDP.

56. Resources
Data regarding Real GDP growth rates and Real GDP
Data on GDP pre Capita provided by the International Monetary Fund (IMF) via wikipedia.
Data regarding real GDP per capita in the U.S.
Data for U.S. population (March 5, 2013)

57. Opener
What might the following events do to overall prices and Real GDP (output) for an economy? Explain your rationale
Government raises taxes
Business investment spending increases
Survey shows consumers are not confident about future
The president increases military spending by 50%

58. The AD Curve is slope
downward because
-The wealth effect
-The income effect
-Foreign purchases effect

59. Changes in GDP factors = Shift of AD Curve

61. Aggregate Supply
Aggregate supply is the total amount of goods and services in the economy available at all possible price levels.
As price levels rise, aggregate supply rises and real GDP increases.

64. Determinants of A.S. What will shift the AS curve:
The prices of inputs (FOP’s)
Productivity
Technology
Government taxes, subsidies, and regulations

67. Aggregate Supply/Aggregate Demand Equilibrium
By combining aggregate supply curves and aggregate demand curves, equilibrium for the macro-economy can be determined.

68. What Is a Business Cycle?
A modern industrial economy experiences cycles of goods times, then bad times, then good times again.
Business cycles are of major interest to macroeconomists, who study their causes and effects.
There are four main phases of the business cycle: expansion, peak, contraction, and trough.
A business cycle is a macroeconomic period of expansion followed by a period of contraction.

69. Phases of the Business Cycle
Expansion
An expansion is a period of economic growth as measured by a rise in real GDP. Economic growth is a steady, long-term rise in real GDP.
Peak
When real GDP stops rising, the economy has reached its peak, the height of its economic expansion.
Contraction
Following its peak, the economy enters a period of contraction, an economic decline marked by a fall in real GDP. A recession is a prolonged economic contraction. An especially long or severe recession may be called a depression.
Trough
The trough is the lowest point of economic decline, when real GDP stops falling.

70. Business Cycle
The Business Cycle is an irregular up-and-down movement of total production and other measures of economic activity.

72. Potential GDP
The level of output that an economy can produce at a constant inflation rate.
Or, Potential GDP.

73. Or, Potential GDP.

74. Phases of the Business Cycle
Expansion (Growth)
Peak (Top)
Contraction (Shrinking)
Trough (Bottom)

75. Expansion High demand for goods More jobs
People are optimistic and spend money
Businesses start
More profits and higher stock value
Higher wages
Lower unemployment

76. Peak Economy stops growing GDP reaches its maximum
Businesses stop hiring
Cycle begins to contract (or shrink)

77. Contraction Businesses cut production and lay off workers
Number of jobs declines
Unemployment increases
People are pessimistic and stop spending money
Banks limit loans

78. Trough The Economy “bottoms-out” (reaching its lowest point)
High unemployment
Stock prices drop
We can only go up
Unless…

79. Recession/Depression
A prolonged contraction is called a recession (contraction for over 6 months)
A recession of more than one year is called a depression

80. What Keeps the Business Cycle Going?
Business cycles are affected by four main economic variables:
Business Investment
When an economy is expanding, firms expect sales and profits to keep rising, and therefore they invest in new plants and equipment. This investment creates new jobs and furthers expansion. In a recession, the opposite occurs.
Interest Rates and Credit
When interest rates are low, companies make new investments, often adding jobs to the economy. When interest rates climb, investment dries up, as does job growth.
Consumer Expectations
Forecasts of a expanding economy often fuel more spending, while fears of recession tighten consumers' spending.
External Shocks
External shocks, such as disruptions of the oil supply, wars, or natural disasters, greatly influence the output of an economy.

81. Forecasting Business Cycles
Economists try to forecast, or predict, changes in the business cycle.
Leading indicators are key economic variables economists use to predict a new phase of a business cycle.
Examples of leading indicators are stock market performance, interest rates, and new home sales.

83. Business Cycle Fluctuations
The Great Depression
The Great Depression was the most severe downturn in the nation’s history.
Between 1929 and 1933, GDP fell by almost one third, and unemployment rose to about 25 percent.
Later Recessions
In the 1970s, an OPEC embargo caused oil prices to quadruple. This led to a recession that lasted through the 1970s into the early 1980s.
U.S. Business Cycles in the 1990s
Following a brief recession in 1991, the U.S. economy grew steadily during the 1990s, with real GDP rising each year.
U.S. Housing Market in the 2000’s
“The Big Short” recession. Massive housing bubble burst! Economy goes into a nose dive.

86. Economic Challenges
Economies (countries) face some challenges that they try to limit or slow.
Unemployment
Inflation

87. Unemployment
Have you ever heard of the unemployment rate? (from….news, parents, aliens)
Why would the % of unemployed be an important statistic to follow?
Why would a politician be very concerned with the unemployment rate?
Who should be considered unemployed?
Credit to thanks to bized.co.uk and Gene Hayward for slides and information in this section

88. Who is unemployed?
Anyone who is at least 16 years of age and is actively seeking employment

89. Who makes up the Labor Force?
All non-institutionalized people 16 years of age and older who are either working or actively looking for work

90. What is the Unemployment rate?
The number of unemployed people expressed as a percentage of the labour force
Unemployment rate = [Unemployed / (Unemployed + Employed)] x 100

94. Survey on Unemployment
BLS (Bureau of Labor Stats) calls 55, ,000 households every month.
They ask three questions:
1. Are you working? If the answer is no,
2. Did you work at all this month-even 1 day?
You are a member of the LF if “yes” on 1 or 2.
3. Did you look for work during the last month?
[agency, resume, interview] A “yes” counts you as
part of the LF. A “no” means you are not counted.
You are a “discouraged worker.” The labor force
consists of the employed and unemployed.

95. What are some of the problems in measuring unemployment?
Discouraged worker problem – just give up (not counted in labor force) – next slide!!
Part time workers – counted as full time workers
Dishonest workers – “under the table” pay

98. What might each represent?
Types of Unemployment
Frictional
Structural
Seasonal
Cyclical
Make some predictions.
What might each represent?
Give an example.

99. “Between Jobs” unemployment. Leaving your current job, before you
Simple Summary:
“Between Jobs” unemployment.
Leaving your current job, before you
Find a new job.

102. Education matters
Human Capital !!

103. Seasonal Unemployment:
Unemployment caused because of the seasonal nature of employment.
What are some other examples of seasonal unemployment?
The demand for lifeguard services tends to exist in the summer but nothing like as much in the winter – an example of seasonal unemployment.

104. CYCLICAL UNEMPLOYMENT:
Caused by a general lack of demand in the economy – this type of unemployment may be widespread across a range of industries and sectors
Think Business Cycle!!!
Full Employment = 0 Cyclical Unemployment
A fall in aggregate demand can lead to a decline in spending forcing businesses across the economy into closing with damaging effects on employment as a result.

105. Unemployment simulation
Let’s calculate the unemployment rate of our class.
First we will read the simulation directions.
Then you will interview each member of class.

106. Inflation
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107. What is Inflation?
The general upward movement in the average level of prices of the goods and services in an economy
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108. What is Deflation?
The general decrease in the average level of prices of the goods and services in an economy
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109. How is Inflation measured? Consumer Price Index (CPI)?
A measure of the cost of a fixed “market basket” of consumer goods and services
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110. Consumer Price Index (CPI)
[CPI measures cost of living relative to a base year[100]
The CPI is a market basket of 364 items at 21,000
establishments in cities that the typical
householder buys. It does not include exports
because we do not buy exports but does include
imports. About 55% of the CPI is services.
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111. Computing Market Basket
Multiply the quantities of goods by their cost and add the totals together (You add the totals of all items in the basket, whether that is 2 or 364)
Items
Quantity
Price
Spoons 10 $5
Q x P = $50
CDs 25
$10
Q x P = $250
Total cost of all market basket goods added together
$300

112. How is the CPI calculated?
Value of the market basket
in the current period
x 100 = PRICE INDEX
Value of the market basket in
the base period
CPI =
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113. Value of the market basket
Reference Base year
Value of the market basket
in the current period
CPI = ___________________________________ x 100 = PRICE INDEX
Value of the market basket in
the base period
What will the CPI of the base year always equal?
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114. Value of the market basket
Reference Base year
Value of the market basket
in the current period
CPI = ___________________________________ x 100 = PRICE INDEX
Value of the market basket in
the base period
The “value of the market basket in the current period” for the base year will always equal the the “value of the market basket in the base period,” therefore the CPI of a Reference Base year is always 100.
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115. Calculating Inflation Rate
Same equation as “percentage change” of anything else…

116. Figuring CPI
Consumers in this economy buy only two goods–hot dogs & hamburgers.
Step 1. Fix the basket. What percent of income is spent on each.
Consumers in this economy buy a basket of:
4 hot dogs and 2 hamburgers
Step 2. Find the prices of each good in each year.
Year Price of Hot Dogs Price of Hamburgers
$1 $2
$ $3
Step 3. Compute the basket cost for each year.
($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8
($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14
Step 4. Choose one year as a base year (2001) and compute the CPI
($8/$8) x 100 = 100
(14/$8) x 100 = 175
Step 5. Use the CPI to compute the inflation rate from previous year
(175/100 x 100 = 175%) or to get actual % ( )/100 x 100 =75%
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117. Figuring CPI For An Individual [2005 MC (42%)]
(42%) 18. Suppose that a typical consumer buys the following quantities of these
three commodities in 2000 and 2001.
Commodity Quantity 2000 per Unit Price 2001 per Unit Price
Food 5 units $ $5.00
Clothing 2 units $ $9.00
Shelter 3 units $ $19.00
Which of the following can be concluded about the CPI for this individual from
2000 to 2001?
a. It remained unchanged. c. it decreased by 20%
b. It decreased by 25%. d. It increased by 20%
e. It increased by 25%.
(Answer)
Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36,
for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)]
Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57,
for value of $100. CPI =125 ($100/$80 x 100 = 125% for 2001)]
So, the CPI increased by 25%.
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118. If the value of the CPI equals 120, what does this mean?
The fixed market basket of goods costs 20% more than in the base period of time
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119. If the value of the CPI equals 340, what does this mean?
The fixed market basket of goods costs 240% more than in the base period of time

120. How to calculate Real Price?
Real Pricez = (Nominal Pricez) x (CPIBase Year/CPIz)

121. Does the makeup of the CPI change?
As people’s tastes and preferences change, what goes into the basket will change
The price of G/S in the base year of How could measuring the CPI be distorted?
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123. Who measures inflation?
The Bureau of Labor Statistics
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124. What are the effects of unexpected inflation?
Inflation redistributes income
some people win – the ones getting the higher prices (think oil/gas companies)
Some people lose – the ones paying the higher prices (think YOU!)
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125. Who wins and who loses from inflation?
Debtors win
Borrowers pay back loans with inflated dollars (dollars that are worth less)
Creditors lose
Lenders are paid back with inflated dollars (dollars that are worth less)
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126. More winners and losers of inflation
Those on fixed incomes lose
Income does not keep up with prices - standard of living goes down.
Exception – if fixed income is INDEXED to inflation (CPI)
Savers often lose
If prices rise faster than the rate of interest they are getting from their savings (investment) then they lose purchasing power
Government sometimes wins
Government wins – Biggest debtor in the World (Debtors WIN!)
Government loses – surplus in savings, increase in salaries and other prices paid
Menu costs of inflation
Individuals and business must allocate resources to keep up with changing prices – increases transaction costs
Inflation and uncertainty
Do I spend today, or save? Prices going up or not? What is happening to my purchasing power? ARRRGGHH!
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127. What is a good rate of growth?
For a developed economy like the United States, a desirable rate of growth is approximately 3 % to 3.5%. The U.S. economy has grown at about a 3% average rate since 1980.
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