1. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Economics - 3 Evaluating Economic Performance

2. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-2 National Output ●Gross domestic product (GDP) —the sum of all goods and services produced within a nation’s boundaries each year. ●Productivity—relationship between the goods and services produced in a nation each year and the inputs needed to produce them. Output (goods and services produced) Input (human/natural resources, capital) Productivity =

3. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-3 ●Four Stages of the Business Cycle GDP

4. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-4 Evaluating Economic Performance ●Recession—cyclical economic contraction that lasts for six months or longer (two quarters). –Measure using GDP –Must be real GDP

5. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Inflation ●Stranded on an island exercise 1-5

6. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-6 Price - Level Changes ●Inflation—rising prices caused by a combination of excess consumer demand and increases in the costs of raw materials, human resources, and other factors of production. –Hyperinflation—economic situation characterized by soaring prices –What would you do if you faced hyperinflation?

7. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-7 Price-Level Changes ●Demand-pull inflation Excess consumer demand ●Cost-push inflation Generated by rises in costs of factors of production

8. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-8 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

9. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-9 ●Contents of the CPI Market Basket

10. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Factoring Out Inflation ●“Real” is an adjective to describe a measure with inflation subtracted out ●Examples –Real raise –Real home prices –Real gasoline prices –Real GDP 1-10

11. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-11 Employment Levels ●Unemployment rate— an indicator of a nation’s economic health ●Types of unemployment –Frictional –Seasonal –Structural –Cyclical

12. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-12 Managing the Economy’s Performance ●Monetary Policy—government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans. Interest RatesEconomyInflation If goes upGoes down If goes downGoes up

13. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-13 Managing the Economy’s Performance ●Fiscal Policy—government spending and taxation decisions designed to control inflations, reduce unemployment, improve the general welfare of citizens, and encourage economic growth. ●Examples –Bush tax rebate –Obama stimulus

14. Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-14 Macroeconomics ●What are the effects of: 1.increasing business taxes 2.a tax rebate? 3.high unemployment? ●What is the effect of inflation on GDP? ●What is the effect of increased productivity on GDP? ●Should the government own businesses? If so, which ones and why?