1. MICROECONOMICS
The part of economics concerned with individual decisions made by households and businesses, as well as individual markets

2. MACROECONOMICS
The part of economics that is concerned with the economy as a whole
National Economic measurements
Gross Domestic Product (GDP)
Inflation
Unemployment
Business Cycle

3. GROSS DOMESTIC PRODUCT
The primary measure of the overall output of the U.S. economy
The total market value of all final goods and services produced in a given year within the United States
Includes U.S. and foreign owned firms

4. GROSS DOMESTIC PRODUCT
GDP is a monetary measure
U.S. Department of Commerce
Bureau of Economic Analysis
1929 – $103.6 Billion
$91.2 Billion
$76.5 Billion
$58.7 Billion
$223.1 Billion

5. GROSS DOMESTIC PRODUCT
$414.8 Billion
$719.1 Billion
$1.64 Trillion
$4.22 Trillion
$7.40 Trillion
$9.82 Trillion

6. GROSS DOMESTIC PRODUCT
$10.13 Trillion
$10.47 Trillion
$10.96 Trillion
$11.69 Trillion
$12.42 Trillion
$13.18 Trillion
$13.81 Trillion
$14.26 Trillion
$14.27 Trillion
$14.87 Trillion

7. GROSS DOMESTIC PRODUCT
GDP only measures final goods and services in order to avoid multiple counting (aka – double counting)
In other words, we only count the final value of the Ford automobile, not the tires, brakes, stereo equipment, etc…

8. GROSS DOMESTIC PRODUCT
Once again, GDP is a measure of productive output
The following do NOT count toward GDP because they do not involve the output of final goods and services

9. GROSS DOMESTIC PRODUCT
Purely Financial Transactions
Social Security payments
Welfare payments
Veterans payments

10. GROSS DOMESTIC PRODUCT
Private Transfer Payments
Cash gifts from your parents/relatives
Stock Market Transactions
Buying and selling of securities
***Paying for the service of a stock broker IS counted

11. GROSS DOMESTIC PRODUCT
Secondhand Sales
Used car sales
Garage sales

12. GROSS DOMESTIC PRODUCT
There are two different ways to calculate GDP
We can look at the sum of all money spent in buying the output – Expenditures Approach
Or, we can look at the income derived from producing the output – Income Approach

13. EXPENDITURES APPROACH
C + I + G + Xn
Consumer spending
Business Investment
Government purchases
Exports (Net)

14. + + + + + + Two Approaches to GDP G D P = = Expenditure Approach
Income
Approach
Consumption by
Households
Wages + +
Rents
Investment by
Businesses + G D P + = =
Interest +
Government
Purchases +
Profits
Net Exports
(Exports
Minus
Imports)

15. C - Consumption Consumer purchases of goods and services
Aka – Personal Consumption Expenditures

16. Ig – Gross Private Domestic Investment
All final purchases of machinery, equipment, and tools by businesses
All construction, including household construction
Why? It could be used to provide goods or services
Changes in business inventories
Increases are unused output

17. G – Government Purchases
Government purchases of goods and services
Government spending on infrastructure (roads, schools, etc…)
Does NOT include transfer payments like social security payments or unemployment insurance payments

18. Xn – Net Exports C + Ig + G + Xn Exports – Imports
This tends to be a negative number.
C + Ig + G + Xn
What is the largest component, by far?

19. 2010 GDP C – 10.5 trillion Ig – 1.8 trillion G – 3.0 trillion
Xn – minus .5 trillion
Now complete All About GDP practice

20. World GDP
What are the top 5 countries in Nominal GDP? (2010 numbers – CIA World Factbook)
5 – France 2.6 trillion
4 – Germany 3.3 trillion
3 – Japan 5.4 trillion
2 – China 5.8 trillion
1 – United States – 14.8 trillion

21. World GDP
What are the top 5 countries in Nominal GDP per capita? (2010 numbers - IMF)
5 – Denmark ($55,113)
4 – Switzerland ($67,074)
3 – Qatar ($74,422)
2 – Norway ($84,543)
1 – Luxembourg ($104,390)

23. Selected Growth Rates GLOBAL PERSPECTIVE U.S. France Germany U.K.
Percentage Change (annual rate)
Japan
Italy
1997
1999
2001
2003
2005
Source: Economic Report of the President, 2006

24. REAL GDP
A way of comparing GDP statistics from one year to another (apples to apples)
Economists identify a BASE YEAR, then convert all GDP amounts to what that value would be in the base year’s dollars

25. ECONOMIC GROWTH
Increase in Real GDP
Increase in Real GDP per capita

26. The Business Cycle PEAK Graphic measurement of Real GDP over time
Overall trend is upward (economic growth)
PEAK
Business activity/Real GDP has reached a temporary maximum
The economy is at or near full employment
Price level is likely to rise (inflation) during this phase

27. The Business Cycle

28. The Business Cycle Contraction/Recession Trough
6 months or more decline in Real GDP/Output
Unemployment rises
Trough
The “bottoming out” of the recession

29. The Business Cycle Recovery/Expansion
A rise in Real GDP after a period of contraction
Unemployment declines
May see a rise in prices

30. The Business Cycle

32. MACROECONOMIC PROBLEMS
Two major macroeconomic problems
Unemployment
Inflation

33. UNEMPLOYMENT Calculated by the U.S. Bureau of Labor Statistics
Defining Employment
16 years and older
Worked at least one hour for pay last week
Worked for a family business for at least 15 hours without pay
Have a job but not working because of illness, vacation, strike, bad weather, or personal family obligation

34. UNEMPLOYMENT Defining Unemployment 16 yrs. and older
Actively seeking a job (last 4 weeks) and do not have one
Not working but waiting to be called back after being laid off

35. Unemployment Labor Force, Employment, and Unemployment, 2005 Under 16
And/or
Institutionalized
(70.5 Million)
Not in
Labor Force
(76.8 Million)
Total
Population
(296.6 Million)
Employed
(141.7 Million)
Labor
Force
(149.3 Million)
Unemployed
(7.6 Million)

36. UNEMPLOYMENT Who does not count toward this statistic?
Under 16 (not in the labor force)
Institutionalized (prison, mental, nursing)
In the military

37. UNEMPLOYMENT Discouraged Workers
Not actively seeking work (last 4 weeks)
Believe there is no work for them
Believe they are being discriminated against
Literally discouraged b/c they can’t find a job

38. UNEMPLOYMENT
Elizabeth Lloyd reported to the interviewer that last week she worked 40 hours as a sales manager for the Western Beverage Company.
Employed, Unemployed, or not in the Labor Force?
Elizabeth is employed.

39. UNEMPLOYMENT
Steve Hogan lost his job when the local plant of the Chariot Aircraft Manufacturing Company was closed down. Since then, he has been visiting personnel offices of other businesses in town trying to find a job.
Employed, Unemployed, or not in the Labor Force?
Steve is unemployed.

40. UNEMPLOYMENT
Linda Coleman is a homemaker. Last week, she was occupied with her normal household chores. She neither held a job nor looked for a job. Her 80-year-old father who lives with her has not worked or looked for work because of a disability.
Employed, Unemployed, or not in the Labor Force?
Linda and her father are not in the labor force.

41. TYPES OF UNEMPLOYMENT Frictional Unemployment
There is ALWAYS a level of unemployment in a capitalist economy
Frictional Unemployment
Workers “between jobs”
Temporarily laid off (Seasonal unemployment)
It is inevitable and often desirable (especially if it leads to a more productive job)

42. TYPES OF UNEMPLOYMENT Structural Unemployment
When workers find that their skills are no longer needed
Buggy-whip makers at the advent of automobiles
Workers who sew clothing

43. TYPES OF UNEMPLOYMENT
Frictional plus Structural Unemployment equals the NATURAL RATE OF UNEMPLOYMENT
Most economists place that at about 4-5%
In other words, the Natural Rate of Unemployment is 4-5%
FULL EMPLOYMENT is 4-5% Unemployment

44. TYPES OF UNEMPLOYMENT Cyclical Unemployment
Unemployment that results from a downturn of the business cycle
Consumer demand declines, businesses produce less, lay-off workers
Complete UE worksheet

45. Unemployment GLOBAL PERSPECTIVE
Unemployment Rates in Five Industrial Nations,
France
Italy
Unemployment Rate (percent)
Germany
U.S.
Japan
1995
2000
2005
Source: Bureau of Labor Statistics

46. FULL EMPLOYMENT
Frictional and structural employment are inevitable/natural
Therefore there is a natural rate of unemployment
The Natural Rate of Unemployment is somewhere between 4 and 5% Unemployment

47. FULL EMPLOYMENT
The Natural Rate of Unemployment is the same as Full Employment
Full Employment is the absence of Cyclical Unemployment
Full employment is 4-5% Unemployment

48. Costs of Unemployment
Lost output – Real GDP that is less than what it would be at full employment (aka – The GDP Gap)
Certain groups are more likely to suffer from unemployment
Teenagers
Low-skilled workers
Black Americans and Hispanics
Less educated

49. Costs of Unemployment Psychological depression Political change
Social upheaval

50. INFLATION
A rise in the general level of prices (not necessarily ALL prices)
Each dollar of income buys less goods and services than before
Reduces the purchasing power of the dollar (“The value of the dollar has declined”)
1970’s and early 1980’s

51. INFLATION Compiled by the Bureau of Labor Statistics (BLS)
The main measurement of inflation is the CONSUMER PRICE INDEX (CPI)
CPI – the price of a “market basket” of consumer goods and services

52. Consumer Price Index (CPI)
Price of market basket of goods in a specific year
CPI =
X 100
Price of the same market basket of goods in the base year
This is how you calculate the INDEX NUMBER

53. The year you’re comparing it to
CPI
This formula produces an index number
Base year index – 100
Calculating the rate of inflation (using the index numbers)
Year you’re looking at –Year you’re comparing it to
X 100
The year you’re comparing it to

54. Calculating the Rate of Inflation
Calculate the rate of inflation:
Year 1 to Year 2
Year 2 to Year 3
Year 3 to Year 4
Year 4 to Year 5
Year 1 to Year 5
Year 2 to Year 4
1 – 126
2 – 132
3 – 140
4 – 149
5 – 152

55. Inflation Annual Inflation Rates in the United States, 1960-2005
Inflation Rate (percent)
Source: Bureau of Labor Statistics

56. TYPES OF INFLATION DEMAND-PULL INFLATION
Consumer demand exceeds overall supply, thus driving up prices
“Too much money chasing too few goods”

57. TYPES OF INFLATION COST-PUSH INFLATION
The supply side of the economy experiences increased costs causing prices to rise
Oil Shock of the 1970’s

58. WHO’S HURT BY INFLATION?
People on a fixed income
The elderly
Retirement income no longer adequate
Creditors/Financial Institutions
The value of the money they lent out is worth more than the value of the money that was paid back

59. WHO CAN BENEFIT FROM INFLATION?
Debtors
The money they borrowed is worth more than the money paid back

60. Cost of Living Adjustments (COLAs)
Social Security payments are adjusted for inflation

61. FISCAL POLICY
Government’s manipulation of taxing and spending to bring about desirable macroeconomic results (low UE and low Inflation)

62. FISCAL POLICY Expansionary Fiscal Policy
During a recession/contraction to stimulate Aggregate Demand (C+Ig+G+Xn)
Cut taxes (personal or business)
Increase government spending
Combo of both

63. FISCAL POLICY Contractionary Fiscal Policy
During a period of inflation to slow down demand-pull inflation
Raise taxes
Reduce government spending
Combo of both

64. Limitations of Fiscal Policy
Can run up deficits (expansionary)
Not always politically popular (tax hikes or less government spending)
Time lags
The wheels of democracy turn slow
Between the passage of legislation and the economic impact

65. Limitations of Fiscal Policy
Crowding Out
Government borrowing necessary for an expansionary fiscal policy means less credit available for American businesses and American consumers

66. UNEMPLOYMENT Graphic representations
Production Possibilities Frontier (PPF)
any point inside the curve
AD/AS Framework