1. Economics and Business
Chapter 2 – 3
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2. Review
Explain the effects of changes affecting the supply and demand curves.
What are the different types of competition?

3. Learning Objectives Describe capitalism and socialism
Discuss private property rights and economic development
Discuss the concept of GDP (gross domestic product).
Explain fiscal and monetary policy
Discuss the concept of the unemployment rate
Discuss the concepts of inflation and deflation.
Explain other key terms including: supply; demand; equilibrium price; monopoly; recession; depression.
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4. Measuring the Economy Gross Domestic Product, GDP
Value of all goods and services produced for consumer
Prosperity
Prosperity
Recovery/ Growth
Recovery/ Growth
Change
In GDP
Recession
Time
The Business Cycle

5. Recession Negative GDP change Lasts 6 months or longer (two quarters)
Must be real GDP
Lasts 6 months or longer (two quarters)

6. Measuring the Economy Unemployment
Unemployment rate
Percent unemployed and actively seeking work U3
Full employment
Everyone who wants a job can get one
~4% unemployment considered “full” employment
U6 unemployment
Broader measure
Includes part-time workers wanting full-time and those not actively seeking work

7. Types of Unemployment
Frictional
Seasonal
Structural
Cyclical

8. Historical Unemployment
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9. Exercise
Desert island thought experiment

10. Measuring the Economy Inflation
Consumer Price Index, CPI
Measure of inflation
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11. Measuring Price Level Changes
Consumer Price Index (CPI)—measures the monthly average change in prices of goods and services
Market Basket—compilation of the goods and services most commonly purchased by urban consumers
Producer Price Index (PPI)
For Finished Goods
For Intermediate Goods
The Governmental Bureau of Labor Standards (BLS) tracks price levels with two indices:
The Consumer Price Index (CPI)
1. measures monthly average changes in prices that consumers pay for certain goods and services
2. not a perfect measure of inflation - might actually overstate inflation by not fully accounting for changes in the goods and services that people buy
The Producer Price Index (PPI)
1. tracks the differences in goods and services prices from the sellers perspective
2. Uses three measurements – finished goods, intermediate goods, and crude goods

12. Contents of the CPI Market Basket

13. Factoring out Inflation
Need to compare costs over time
“Nominal” is the quoted amount
E.g. The nominal price of a gallon of gas in 1970 was $.36
“Real” is an adjective to describe a measure with inflation subtracted out
Real = Nominal – Inflation
E.g. Real gas prices, real home prices, real GDP

14. Historical Inflation Inflation is not a modern phenomenon 14th Century
Post-plague
16th – 17th Century Spain
Caused by gold and silver from America
Hyperinflation
Zimbabwe 2007 – 11,000%
Greece 1944 – 13,800%
Germany 1923 – 29,525%
Hungary 1940 – 14 quintillion %
Prices doubled every 15 hours
Venezuela 2018 – 1 million % IMF prediction

15. Measuring the Economy Economic Forecasting
Economic indicators
Statistics about the economy
Lagging economic indicators
Look at past data
E.g. average length of unemployment
Leading economic indicators
Try to predict the economy
E.g. new home sales
E.g. consumer confidence index

16. Government’s Role in Economy Monetary Policy
Managed by a country’s central bank
Federal Reserve Board, “The Fed”
Responsible for money supply of the U.S.
Primary tool is control of short-term interest rates

17. Government’s Role in Economy Fed Actions
May increase money supply
By lowering short-term interest rates
“Easing” money supply
Stimulates economy
Stimulates inflation
May decrease money supply
By raising short-term interest rates
“Tightens” money supply
Slows economy
Lowers inflation

18. Government’s Role in Economy Fiscal Policy
Managed by Congress
Primary tools
Taxes
Est. $3.3 Trillion in 2018*
Spending
Est. $4.1 Trillion in 2018*
When economy is in a recession
Want to stimulate growth
When inflation is high
May want to contract *

19. Government’s Role in Economy Fiscal Policy Actions
Stimulate economy
By lowering taxes
By increased spending
Effect is to increase money in economy
Increases inflation
Contract the economy
By increasing taxes
By reducing spending
Reduces money in the economy
Lowers inflation

20. National Debt Budget surplus Budget deficit National debt
If take in more than spend
Budget deficit
If spend more than take in
National debt
Amount government owes
>$21 Trillion as of 5/18
>$174,000 per tax payer