1. MACRO ECONOMICS

2. What is Macroeconomics? Why study the whole economy?
Macroeconomics is the study of the large economy as a whole. It is the study of the big picture.
Why study the whole economy?
The field of macroeconomics was born during the Great Depression.
Government didn’t understand how to fix a depressed economy with 25% unemployment.
Macro was created to:
Measure the health of the whole economy.
Guide government policies to fix problems.

3. The Simple Circular-Flow Diagram
Note: One approach to teaching this model is to draw it once. Begin with the households who buy “stuff” from retailers of stuff. Dollars flow to the retailers, and stuff flows to the households. Once you have told a simple story and drawn a simple circular flow, you might have a prepared (and polished) visual ready to project for the students.
Note: I suggest that the instructor spend more time on the Simple Circular Flow Model. Then show the Expanded Model side-by-side to show how the flow of money gets more complicated.
Stress to the students that this diagram is a simplified representation of the macroeconomy.
It shows the flows of money, goods and services, and factors of production through the economy.
The underlying principle is that the flow of money into each market or sector is equal to the flow of money coming out of that market or sector.
The Simple Circular Flow Model
There are two groups of decision-makers in private economy (no government or foreign sector yet): only households and businesses.
Let’s begin with the product markets. A product market is where goods and services (cars, computers, and corn) are bought and sold.
a. Households are on the demand side of these markets, purchasing goods and services.
b. Businesses are on the supply side of these markets, offering products for sale.
c. Interaction of this demand and supply determines the price of each product.
d. Flow of consumer expenditures constitutes sales receipts for businesses.
Let’s turn to the resource markets. A resource market is where resources (labor, capital, land) are offered for hire and employed.
a. Households supply resources directly (workers) or indirectly (through ownership of corporations).
b. Businesses demand resources in order to produce goods and services.
c. Interaction of this supply and demand determines the price of each resource, which in turn is income for the owner of that resource.
d. Flow of payments from businesses for resources constitutes business costs and resource owners’ incomes.

4. The Expanded Circular-Flow Diagram
Note: If you are projecting the expanded model, the instructor can just point out a few of the interesting differences in the additions, and subtractions, of money from the macroeconomy compared to the earlier slide.

5. Macro Measures of Economic Performance
Unit 2:
Macro Measures of Economic Performance 5

6. For all countries there are three major economic goals:
Promote Economic Growth
Limit Unemployment
Keep Prices Stable (Limit Inflation)
In this unit we will analyze how each of these are measured.

7. Promote Economic Growth How does a country measure
Goal #1
Promote Economic Growth
How does a country measure
economic growth?

8. How do we know how well the economy is doing?
Economists collect statistics on production, income, investment, and savings.
This is called national income accounting.
The most important measure of growth is GDP.
Gross Domestic Product (GDP) is the dollar value of all final goods and services produced within a country’s borders in one year.
Dollar value- GDP is measured in dollars.
Final Goods-GDP does not include the value of intermediate goods. Intermediate goods are goods used in the production of final goods and services.
One Year-GDP measures annual economic performance.

9. What does GDP tell us? How do you use GDP?
Just like calculating your own income, GDP measures how well the U.S. is doing financially.
How do you use GDP?
Compare to previous years (Is there growth?)
Compare policy changes (Did a new policy work?)
Compare to other countries (Are we better off?)
*CIA Factbook 2010 Estimate

10. World GDP Distribution

11. World GDP Distribution
2010 Nominal GDP 11

12. 12

13. How can you measure growth from year to year?
% Change
in GDP =
Year 2 - Year 1
Year 1
X 100
Mordor’s GDP in 2007 was $4000
Mordor’s GDP in 2008 was $5000
What is the % Change in GDP?
Transylvania’s GDP in 2007 was $2,000
Transylvania’s GDP in 2008 was $2,100 13

14. What is NOT included in GDP?
Intermediate Goods
No Multiple Counting, Only Final Goods
EX: Price of finished car, not the radio, tire, etc.
2. Nonproduction Transactions
Financial Transactions (nothing produced)
Ex: Stocks, bonds, Real estate
Used Goods
Ex: Old cars, used clothes
3. Non-Market (Illegal) Activities
Ex: Illegal drugs, unpaid work

15. Calculating GDP Two Ways of calculating GDP:
1. Expenditures Approach-Add up all the spending on final goods and services produced in a given year.
2. Income Approach-Add up all the income that resulted from selling all final goods and services produced in a given year.
Both ways generate the same amount since every dollar spent is a dollar of income.

17. Expenditures Approach
Four components of GDP:
Consumer Spending
Ex: $5 Little Caesar's Pizza
Investments -When businesses put money back into their own business.
Ex: Machinery or tools
Government Spending
Ex: Bombs or tanks, NOT social security
Net Exports -Exports (X) – Imports (M)
Ex: Value of 3 Ford Focuses minus 2 Hondas
GDP = C + I + G + Xn

18. Calculating GDP

19. Included or not Included in GDP?
For each situation, identify if it is included in GDP the identify the category C, I, G, or Xn
$10.00 for movie tickets
$5M Increase in defense expenditures
$45 for used economics textbook
Ford makes new $2M factory
$20K Toyota made in Mexico
$10K Profit from selling stocks
$15K car made in US, sold in Canada
$10K Tuition to attend college
$120 Social Security payment to Bob
Farmer purchases new $100K tractor

20. Included or not Included in GDP?
$10.00 for movie tickets
$5M Increase in defense expenditures
X $45 for used economics textbook
Ford makes new $2M factory
X $20K Toyota made in Mexico
X $10K Profit from selling stocks
$15K car made in US, sold in Canada
$10K Tuition to attend college
X $120 Social Security payment to Bob
Farmer purchases new $100K tractor

21. 2007 FRQ

22. What are some problems with using GDP to measure the nation’s standard of living?22

23. Current events and GDP Preview of tonight’s speech
Mid East Policy and Republicans
What are the economic implications of potential conflict?

24. 200 Years of the Business Cycle
Why is the business cycle like a roller coaster?
How do wars affect the economy?

25. Robert Kennedy GDP Speech
Video:
Robert Kennedy GDP Speech
This speech by Robert F. Kennedy argues that GDP is a fatally flawed measure of the health of the economy because of what it includes and also because of what it does not measure.  This is one of the most eloquent short speeches about economics ever delivered by a politician. - See more at: 25

26. Nominal GDP vs. Real GDP

27. What is the problem with this method?
How can you figure out which is the most popular movie of all time?
What is the problem with this method?
Nominal Box Office Receipts

28. How can you figure out which is the most popular movie of all time?
Real Box Office Receipts (adjusted for inflation)

29. GDP is rising, but country is worse off!
The Problem with GDP
If a country’s GDP increased from $4 Billion to $5 Billion in one year, is the country experiencing economic growth?
Did the country definitely produce 25% more products?
What is Inflation?
A rising general level of prices
EX: If apples are the only thing being produced
Year 1: 10 apples at $1 each; GDP = $10
Year 2: 10 apples x $1.25; GDP = $12.50
GDP is rising, but country is worse off!

30. Real vs. Nominal GDP
Nominal GDP is GDP measured in current prices. It does not account for inflation from year to year.
Real GDP is GDP expressed in constant, or unchanging, dollars.
Real GDP adjusts for inflation.
REAL GDP IS THE BEST MEASURE OF ECONOMIC GROWTH!

31. Real vs. Nominal GDP Example
2008
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each = $200,000
Nominal GDP = $350,000
The GDP in year 2008 shows the dollar value of all final goods produced.
The nominal GDP in year 2009 is higher which suggests that the economy is improving.
But how much is the REAL GDP? How do you get it?
2009
10 cars at $16,000 each = $160,000
10 trucks at $21,000 each= $210,000
Nominal GDP = $370,000
Use 2008 Prices.
The Real GDP for 2009 is the same as 2008 after we adjust for inflation.
2009
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each= $200,000
REAL GDP = $350,000

32. Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices.

33. Does GDP accurately measure standard of living?
Standard of living (or quality of life) can be measured, in part, by how well the economy is doing…
But it needs to be adjusted to reflect the size of the nation’s population.
Real GDP per capita (per person)
Real GDP per capita is real GDP divided by the total population. It identifies on average how many products each person makes.
Real GDP per capita is the best measure of a nation’s standard of living.

34. List the top 5 most populated countries

35. GDP Per Capita

36. What is Economic Growth?
An increase in real GDP over time
An increase in real GDP per capita over time (usually used to determine standard of living)
Why is economic growth the goal of every society?
Provides better goods and services
Increases wages and standard of living
Allows more leisure time
Economy can better meet wants

37. Why do some countries have higher GDPs than others?
Productivity
What raises productivity?
1. Economic System
2. Property Rights
3. Capital
4. Human Capital (Knowledge)
5. Natural Resources

38. Connection to PPC The shifters of the PPC affect GDP
The same information shown on the business cycle can be shown on a production possibilities curve.
Full employment
Unemployment
Inflation
The shifters of the PPC affect GDP
Change in quantity/quality of resources
Changes in technology
Changes in trade

39. What does Economic growth look like?

40. The national economy fluctuates resulting in periods of boom and bust.
THE BUSINESS CYCLE
The national economy fluctuates resulting in periods of boom and bust.
Inflation
Unemployment
Full employment
Expansion is when REAL GDP is GROWING

41. 200 Years of the Business Cycle
Why is the business cycle like a roller coaster?
How do wars affect the economy?

42. The Business Cycle Why does the economy fluctuate?
Retailer and Producers send misleading information about consumer demand.
Advances in tech, productivity, or resources.
Outside influences (wars, supply shocks, panic).
Who cares?
Macroeconomics measures these fluctuations and guides policies to keep the economy stable.
The government has the responsibility to:
Promote long-term growth.
Prevent unemployment (resulting from a bust).
Prevent inflation (resulting form a boom).

44. 2010 GDP Growth Rate= 2.8%