Download Unit 2 Notes - Phoenix Union High School District

o “Honey, what did you do in school
today?”
 “I will tell you what I didn’t do Mom/Dad.
I didn’t write my name on the ‘Earning a
Living in Econoland’ paper, and I didn’t
lose/steal/bend Mr. Danskin’s paperclip.”
o “Oh sweetie pie, you’re the bestest little
precious child an adult caregiver could
ask for. Do you want to go for ice
cream?”
 “Hooray! Ice Cream! Ice Cream! Ice
Cream! Ice Cream!”
Unit 2
Macroeconomic
Measuring
The Circular Flow Model
• The circular flow of economic activity is a
model of an economy showing the
interactions among households, firms, and
government as the exchange products
and resources in markets.
• Households sell their resources to
businesses in the Resource Market.
• Households use their income gained in the
Resource Market to buy goods and
services from businesses in the Product
Market.
Homework:
• Copy the diagram on page76 in your book
as it shows the government’s involvement
in the circular flow model. Be sure to
include an explanation similar to the one
found in Figure 4.6
Macro Goals
Macroeconomic Goals
• A steady flow of dollars and goods must
keep circulating through the economy or
commerce ceases. Macro issues involve
how to keep the flow going.
• Main macro goals include increasing
national production, full employment and
stable prices.
Valuing Production
• It’s important to find the value of goods produced
not just the amount. We need to know the prices of
goods.
• The following table shows the amount produced at a
coffee shop. The two months produced the same
sum of goods, but the mix is different.
January
February
# of
Coffees
# of Café
Lattes
# of
Scones
# of
Coffees
# of Café
Lattes
# of
Scones
25
25
50
30
30
40
Cont.
• To more accurately reflect the coffee shop’s production,
we need to add values.
January
Quantity
Prices
Value of
Production
Coffee
25
$3.00
$75
Café Lattes
25
$2.50
$62.50
Scones
50
$1.50
$75
Totals
100
February
Quantity
Prices
Value of
Production
Coffee
30
$3.00
$90
Café Lattes
30
$2.50
$75
Scones
40
$1.50
$60
Totals
100
$212.50
$225
Aggregate
• To move from the value of one firm to the
entire US economy, we need to aggregate.
We need to value all production of all firms and
then add them up.
• This aggregated measure of the total value of
domestic production allows us to calculate
GDP.
• GDP – the market value of all final goods and
services produced annually within the borders
of a country.
Gross Domestic Product
Aggregate Spending
• Since GDP is measured by adding up the value
of the final goods and services produced in a
given year, we just need to figure out from where
this spending is coming. Spending on output is
done by four sectors of the macroeconomy.
• Consumer Spending (C): Largest component of
GDP. Durable goods are expected to last a year
or more (cars). Nondurable goods are
consumed in under a year (food). Services (tax
preparation).
• Investment Spending (I): Current spending in
order to increase output and productivity later. 3
types of Investment:
▫ New capital machinery purchased by firms:
Delivery trucks for UPS or an AC unit for the
Holiday Inn
▫ New construction for firms or consumers: New
store built for the Gap, Residential housing like
homes or apartments.
▫ Market value of unsold inventory: Goods
unsold on December 31st would be added to
(I) and changed back to (C) when sold the
next year.
• Government Spending (G):All levels of
government purchasing final goods and
services and investing in infrastructure: Police
cars, computers for the Pentagon, Fighter
jets. Infrastructure includes highways,
airports, jails. (Does not include transfer
payments)
• Net Exports (X-M): We add any domestically
produced goods consumed by foreigners
(exports = X) and subtract foreign goods
purchased domestically (imports=M)
Table 4.2 Real gross domestic product by major demand category, 1992, 2002, 2012, and projected 2022
Contribution to percent
Billions of chained 2005 dollars
Annual rate of change
change in real GDP
1992—
2002— 2012— 1992—
Category
1992
2002
2012
2022
2002
12
22
2002 2002—12 2012—22
Gross domestic
$11,543.
$8,280.0
$13,593.3
$17,584.2
3.4
1.6
2.6
3.4
1.6
2.6
product
2
Personal
consumption
expenditures
5,503.2
8,018.3
9,603.3
12,380.1
3.8
1.8
2.6
2.5
1.3
1.8
983.1
1,800.4
1,914.4
3,038.2
6.2
0.6
4.7
1.0
0.1
0.7
683.5
718.7
1,098.4
1,646.8
1,837.4
2,238.1
3,117.7
3,296.8
4.9
8.6
5.3
3.1
5.4
3.9
0.5
-1.0
0.5
-0.5
0.8
-0.7
1,893.2
2,279.7
2,481.1
2,487.0
1.9
0.9
0.0
0.3
0.2
0.0
549.8
505.3
677.2
560.0
-0.8
3.0
-1.9
-0.1
0.2
-0.1
233.3
274.0
347.1
302.1
1.6
2.4
-1.4
0.0
0.1
0.0
State and local 1,107.6 1,500.7
Residual2
-61.8
-6.9
Addendum:
GDP per
capita,
chained
32,226.7 40,090.9
2005
dollars
1,461.7
-9.7
1,615.1
-132.1
3.1
-
-0.3
-
1.0
-
0.3
-
0.0
-
0.1
-
0.7
1.9
-
-
-
Gross private
domestic
investment
Exports
Imports1
Government
consumption
expenditures
and gross
investment
Federal
defense
Federal
nondefense
43,152.3
51,834.7
2.2
GDP: What’s Not Counted
• Intermediate goods are those that require further
processing. ( Tomatoes in ketchup, windshield
wipers for new cars.)
• This avoids double counting as a tomato may be
sold several times before it ends up in the
ketchup bottle.
• Second-hand sales are not counted.
• Nonmarket transactions do not count. Fixing
your broken sink does not count towards
GDP.
• Underground economy – Sorry drug dealers,
prostitutes, and baby-sitters who accept
cash; none of your low life actions count in
GDP.
Homework:
• Read pages 106 – 113 and answer
questions 1, 2, 3, and 4 on page 122
Real and Nominal GDP
• When calculating GDP we must take into
account price changes.
• Reporting a rise or fall in GDP doesn’t mean a
lot if prices have changed from year to year.
• Nominal GDP – The value of current production
at current P
• Real GDP – The value of current production
using P at a fixed point in time
Price Index
• To calculate GDP we need a price index. This index
is a measure of the P of a good when compared to
the P of that good in a base year.
• In this table the base year is 2000. The Price index
is the percentage change from the Price ($2) in that
year
Year
# of Lattes
Price per
Cup
Nominal
GDP
Price
Index
Real GDP
2000
1000
$2
$2000
100
$2000
2001
1200
$3
$3600
150
$2400
2002
1800
$4
$7200
200
$3600
2003
1600
$5
$8000
250
$3200
Deflating Nominal GDP
• To deflate nominal value or adjust for inflation, you do
simple division:
▫ Real GDP = 100 × (Nominal GDP)/(Price Index)
• In the table above, while nominal GDP appears to be
rising rapidly, in real terms the value of latte
production is more modest from 2000-2002 and fell in
2003.
• Another way to see the relationship between a
price index, real GDP and nominal GDP:
%Δ Real GDP = %Δ Nominal GDP - %Δ Price Index
• Example: If nominal GDP increased by 5% and the
Price Index increased by 1%, real GDP increased
by 4%
The GDP Deflator
• GDP is found by aggregating the consumption of
1000’s of goods and services
• The prices of these goods are used to construct
a price index informally called the GDP price
deflator.
• Nominal GDP is deflated to create real GDP
which economists use to look for signs of
economic growth and recession.
Classwork: Real vs. Nominal GDP
• Read pages 116-119 in your book and
answer questions 11,12 and 13 on page
122.
Inflation and the Consumer Price
Index
Consumer Price Index (CPI)
• The GDP price deflator measures the increase
in the price level of items that compose GDP.
• Not all goods in GDP are goods that the
everyday household shops for. A Boeing 747
comprises GDP but does not fall within
consumer spending.
• We need a statistic that focuses on consumer
prices.
• The Bureau of Labor Statistics (BLS) selects a
base year and a market basket of approx. 400
consumer goods and services bought in that year.
A monthly survey is conducted in urban areas
around the country to find average prices.
2000 (Base Period)
Items in
Quantity
the Basket Purchased
2001 (Current Period)
Price
Spending
Price
Spending on
2000 Quantities
Chocolate
Bars
12
$1.50
$18
$1.75
$21
Concert
Tickets
4
$45
$180
$60
$240
Compact
Disks
18
$16
$288
$15
$270
Total
Spending
= $486
= $531
Inflation
• Price Index Current Year = 100 × (Spending Current Year)
(Spending Base Year)
• 2001 Price Index = 100 × (531)/(486) = 109.26
• In the above example the price index increased from 100
to 109.26, or the average price level increased 9.26%.
• The annual inflation rate is the % change in the CPI from
one year to the next.
GDP Deflator vs. CPI
• GDP deflator includes more than just consumer
goods, it is a broader measure of inflation, while
the CPI is a measure of inflation of only
consumer goods.
Homework:
• Read pages 134 – 137 (up to and including
Quick Review7.3), answer questions 10,11,
and 12 on page 144 in the notes section of
your notebook.
Effects of Inflation
Nominal vs Real Income
• Rising prices are bad for consumers when they
cause a decrease in purchasing power.
• When nominal income h slower than P, there is
a i in real income, when incomes h faster, there
is an h in real incomes.
• Real Income = 100 × (Nominal Income)/(CPI)
Expected Inflation
• Many employees have a cost of living adjustment
that is built into their salary negotiations.
Government increases minimum wages to reflect
expected inflation.
• Banks acknowledge inflation by factoring
expected inflation into interest rates.
Unexpected Inflation
• Employees and employers – If real income is i
because of rapid inflation, firms are benefitting
at the expense of workers. They gain by high
prices and low wages.
• Fixed income recipients – A retiree receiving a
pension will see it slowly eroded by inflation, A
landlord locked into a long term lease receives
payments that decline in purchasing power.
• Savers and Borrowers - If I put money in a bank
for a year, when I take it out, purchasing power
has diminished. If I borrow from a bank and pay
back at an inflated rate, I am giving back dollars
that are worth less than when I borrowed.
• Fixed payments hurt lenders and benefit
borrowers with unexpected inflation.
Unemployment
How is Unemployment Measured?
•
Unemployment is measured by the Bureau of
Labor Statistics (BLS).
 It
surveys 60,000 randomly selected households
every month.
 The survey is called the Current Population
Survey.
The BLS considers a person an adult if he or she
is over 16 years old.
A person is considered employed if he or she
has spent most of the previous week working at a
paid job.
A person is unemployed if he or she is on
temporary layoff, is looking for a job, or is
waiting for the start date of a new job.
A person who fits neither of these categories,
such as a full-time student, homemaker, or
retiree, is not in the labor force.
The BLS defines the labor force as the sum of
the employed and the unemployed.
• The unemployment rate is calculated as the
percentage of the labor force that is unemployed.
Number unemployed
Unemployme nt rate =
 100
Labor force
Homework/Classwork
• Read pages 129 – 134 and answer questions 5, 6,
7 and 8 on page 144. Include this in your notes.
Types of Unemployment
Does the Unemployment Rate Measure
What We Want It To??
•
•
•
It is difficult to distinguish between a person
who is unemployed and a person who is not in
the labor force.
Discouraged workers – Those who give up
looking for a job
Other people may claim to be unemployed in
order to receive financial assistance, even
though they aren’t looking for work.
Categories of Unemployment
The problem of unemployment is usually
divided into two categories.
• The long-run problem and the short-run
problem:
•
 The
natural rate of unemployment
 The cyclical rate of unemployment
Types of Unemployment
• Frictional unemployment – Occurs when people
take time to find a job.
• Structural unemployment – Occurs when
workers skills do not match the jobs available.
• Cyclical unemployment – Occurs during
economic downturns and is absent when the
economy improves.
Business Cycles
•Classwork: Read pages 125128 and answer questions 1, 2,
and 4 on page 144
Business Cycles
• Business cycle – Rising and falling of output in
relation to potential output
• Recession – Two consecutive quarters of
negative growth in real GDP
• 4 phases of the
business cycle –
Expansion, Peak,
Contraction,
Trough
• Inflation typically
comes with
expansion,
unemployment
with contraction.
• There is no consistent length of time for each
phase.
• Business cycles are unpredictable.
• Economists can identify causes after the fact, but
often have trouble identifying beforehand
Notebook Check
1.
2.
3.
4.
5.
6.
7.
Circular Flow Chart pg. 76
Demand - # 1-2 pg. 63
Supply - # 4-6 pg. 63
GDP - # 1-4 pg. 122
Real vs. Nominal - # 11-13 pg. 122
Unemployment # 5-8 pg. 144
Business Cycles # 1,2, 4 pg. 144
Unit 2 Notebook Check
•
•
•
•
Real vs. Nominal GDP
Inflation and CPI
Types of Unemployment
Unit 2 Notes
Unit 2 Quiz
1. What types of transactions are counted in GDP?
2. What types of transactions are not counted in GDP?
3. List the formula that is given for finding nominal GDP
4. Give the formula for finding Real GDP.
5. List the groups of people who are hurt by unexpected
inflation.
6. Give the reasons we need the Consumer Price Index.
7. Explain how real income is based on nominal income and
price level.
8. Explain how the labor force is found.
9. Give the formula for the unemployment rate.
10. Describe the three types of unemployment.
11. Describe the need for finding Real GDP.
12. Explain the relationship between Real GDP and Nominal
GDP.