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Macroeconomics
Macroeconomics is the study of
entire economies
Review: Scarcity
Economics is complicated because people have unlimited wants, but limited
resources
This is scarcity, the condition that results from limited resources and
unlimited wants.
Economists study the production of
goods and services using scarce
resources. They are looking to see
efficiency, or whether we are best
using our scarce resources.
Macroeconomics
Macroeconomics studies whole economies including national, regional and global
economics.
Macroeconomics is also often referred to as the study of economies at the aggregate
level. Aggregate is the whole formed by combining several elements such as
unemployment, national income, rate of growth, inflation and price levels. In
Macroeconomics we are looking at the interaction between businesses, consumers,
sellers, governments and nations.
Macroeconomics GDP
Macroeconomics studies whole economies. This means the United
States, England or even the World Economy.
It is estimated that the United States
To measure these
economies
we use
Domestic Product).
GDP
is made
upGDP
of(Gross
approximately
GDP measures the dollar total of all final goods and services produced
70%
consumer
spending
in a country during one
calendar
year.
GDP is measured using only the FINAL output, this helps avoid
counting products more than once.
A higher GDP means a higher standard of living, while a low GDP
indicates a lower standard of living.
GDP: Final output
GDP is calculated using ONLY the final product.
The raw materials and other supplies are not
calculated towards GDP.
Example:
A lumberjack cuts down a tree and sells it to a
saw mill. The saw mill cuts the tree into lumber
and sells it to a furniture maker. The lumber is
used to build a dining table. Only the table
would be counted towards GDP.
The lumber would be seen as an intermediate
good, or a good used to make other products.
Only the dining table is
counted towards GDP
Economic Growth
Macroeconomists spend a lot of time examining ways to stimulate the economy. There
are several factors that can contribute to growth:
1) Natural resources
2) Human Resources
3) Capital Resources
4) Entrepreneurship
Natural Resources
The more natural resources a nation has the better.
Without natural resources they must import
resources, making them dependent on the
international markets.
Economic growth is hindered
because the nation is dependent
on another nation for the
resources needed to expand.
Lucky USA
The United States has access to most of our necessary natural resources. Many
Island nations like Japan must depend on foreign trade for many resources. In
the US we have natural resources, as well as several climatic regions that
support agriculture, industry and even tourism.
Human Resources
In order to grow the economy, a nation must have enough workers. To determine
the labor input economists multiple the employed workforce by the average number
of worker hours.
For your Macroeconomics Business Projects,
Example:
some groups were wary of investing in
The US has 245,552,000 workers who work an average of 34.5 hours:
countries
with8,471,544,000.
high unemployment,
butforother
245,552,000x34.5=
This is the labor input
the United
States. were willing to expand into areas with
groups
low unemployment. However, with low
unemployment your new business would
have no workers!!
Statistics from:
http://www.bls.gov/news.release/pdf/empsit.pdf
May 2014
Capital Resources
In order to improve the economy, businesses must also
be improving. This means the more modern, efficient
and quality a company uses, the more growth that can
be achieved. Better facilities tend to lead to more
economic growth
**Please note, this does not mean more employment,
just more economic GDP growth**
Infrastructure
Research indicates that investments in infrastructure
return 3x the investment in economic growth. Many
major corporations and Americans are pushing for a
Infrastructure refers to the roads, bridges, communication systems and other
high speed
rail business
systemtoinbethe
US. Business
Insider
daily necessities
that allow
completed.
Many times,
businesses
the following
push governmentsproposes
to improve infrastructure,
but locations.
with declining economies
many governments are unable to invest needed money to new transportation
systems.
For instance, the US still uses outdated and slow moving trains. Countries like
Japan, on the other hand, have increased funding for developments such as the
Bullet Train.
Entrepreneurship
For an economy to continue growing there must be entrepreneurs willing to take on the
risks of starting a new business. These entrepreneurs are essential because they
develop new ideas which constantly stimulate output and demand.
Entrepreneur’s also
challenge the BIG
businesses to create new
products, technologies
and methods!
Challenges to the Economy
There are many challenges to macroeconomics that can stall or
directly hurt the economy:
-Unemployment
-Inflation
-Poverty and Income Distribution
Expansion and Recession
When the economy is expanding and doing well we call it expansion.
When the economy is doing poorly and shrinking we call it recession.
If the economy has crashed we refer to it as a depression. The last depression
was in the 1930s.
Unemployment
Unemployment hurts the economy in many ways. First, the national GDP decreases
because the unemployed are not making any goods or services.
Secondly, the business lose sales because the unemployed cannot buy goods and
services
Finally, the government may decide to intervene and help the unemployed. This
takes government resources, costs money and can lead to unforeseen problems.
Employment defined
Many people are familiar with the word unemployment, especially with the current
recession. However, few people truly understand what unemployment means and
who economists count for the unemployment rate.
To understand who is unemployed, first we must determine who counts as
employed. When the Bureau of Labor Statistics wants to know who is employed,
they look at several criteria:
-16 years old or older and:
-worked for pay 1 or more hours in the last week
-worked without pay for the family business for 15 or more hours
-have jobs but are not working due to illness, weather, vacation or labor
disputes (strikes)
If a person is 16 years old or older and
matches any of the criteria they are
considered employed.
Unemployment defined
A person is considered unemployed if they are 16 years or older and
do NOT meet any of the employed criteria. However, to meet the
standard of unemployment, the individual must be actively looking
for employment.
If a person is neither employed or unemployed then they are
“not in the labor force”.
The unemployment rate refers to the percentage of people in the
civilian labor force who are unemployed. To find this number
economists divide the number of employed by the total work force:
Unemployed/ labor force= unemployment rate.
Currently the United States unemployment rate is approximately 5.5%.
During the Great Depression it was nearly 22%
Problems with employment
Remember, employment refers to people who have worked for pay at least ONE hour
in the last week. However, most of us would agree that one hour of work a week is not
enough to support oneself or a family. This leads to the idea of underemployment.
A person is underemployed when they are working jobs beneath their skill level, or
who work part time but want full time work. Example: An engineer with a masters
degree is working at subway. He would be underemployed because his skills are much
higher than crafting delicious sandwiches.
Another problem with the employment
numbers are the marginally attached workers.
These are people who once held jobs but
have given up looking for work. For example,
a TV repair man would no longer be useful
in today’s electronics business.
Types of Unemployment
We already know that unemployment can negatively impact
the economy, but there is ALWAYS some unemployment
expected. To help understand why some unemployment is a
good thing you must understand the four types of
unemployment:
1) Frictional
2) Structural
3) Seasonal
4) Cyclical
Remember the goal
is around 2%
Frictional
Structural
When a person is moving from
one job to another
Changes in technology or
economic structure make a job
obsolete
For example a TV repair man is
no longer needed as LED TVs
become more popular.
For example a receptionist is
moving from Aspen dental to
Dr. Michelson's office.
Seasonal
Cyclical
Employment affected by seasons Resulting from a recession or
economic downturn.
For example teachers,
construction workers, agriculture For example current
workers
unemployment has decreased
from around 9% to 5.5%. This
can change at anytime.
Inflation
The second major challenge to economic growth is inflation. Inflation is an increase in the
average price level of all products in the economy. We measure inflation using the
Consumer Price Index, which shows the change in price for items a typical family buys
Inflation reduces the purchasing power of the dollar. In other words, you can not
purchase as much with a single dollar.
Often inflation is caused by a greater increase in demand than the increase in supply
because the consumers compete for goods by paying more.
Want a soda with that?
Inflation occurs nearly every year, and is sometimes referred to as cost of living
increases, because the cost of everyday products increases. For example, in 2005 a
soda at Stewarts cost $1.00. Today, that same product costs $2.00 or more. The
product is the same, but the cost has inflated.
Hyperinflation
Hyperinflation is the worst degree of inflation, causing money to be nearly
worthless. Think back to Germany after WWI when they kept printing money.
The money had nearly no value, with the cost of bread in the Billions of dollars.
Inflation Categories
There are two categories of inflation, and are determined by cause:
Demand-pull inflation- this is the more common form of inflation and is caused by
the demand increasing faster than the supply. Because there is less supply
than demanded, the prices increase. (Scarcity Supply and Demand)
Cost-push inflation- this occurs when the cost of resources increase. As a result the
producers set their prices to cover their costs and to earn a profit, resulting
in producers pushing prices higher. (Gas prices went up so food prices
increased as well)
Video
Watch the following video to understand why having too much money is a
bad thing.
https://www.youtube.com/watch?v=Vg4-gMW89E0
Effects of Inflation
There are five main effects of inflation:
Decreased Purchasing Power- as costs rise those on fixed incomes can’t buy as much.
Real Wages- Wages will rise but typically at the same rate as inflation (called Cost of
Living adjustments) so people are not getting ahead
Interest Rates- Price of borrowing money increases, sometimes doubling or tripling
Decreased savings/ investing- the interest rate on savings accounts decreases so
people are not interested in saving.
Production costs- The cost to produce
increases so businesses raise prices.
However, if the consumers refuse to
pay the higher cost then the business
may collapse.
Poverty and Income Distribution
Another challenge to growing the
economy is poverty and unequal income
distribution.
Economists pay close attention to
poverty rates, because higher rates
indicate a troubled economy.
Graph  
You will notice that in 2007 over 85% of
all American wealth was in the hands of
a mere 20% of the population.
Poverty
The Poverty rate refers to the percentage of families in the total population
living below the poverty threshold. The Threshold is the lowest income that a
family household needs to maintain a basic standard of living. For a family of 4
that means an annual combined income of $24,250.
High poverty rates
are often combated
with government
programs such as
welfare and HEAP
(utility assistance)
>30 Means Greater than 30
Income distribution
The income distribution was first examined by Jakob Reis. He noticed a widening gap
between the rich and the poor. Later, the Lorenz curve was developed to illustrate the
income gap and how it differs from a normal distribution of income
The problem with an
abnormal distribution of
wealth is that the majority of
wealth is held by a small
percentage of the people.
Government Assistance
To combat the issues with of poverty, the American Government offers several
ways to help:
-Subsidies
-Trickle Down tax rebates
-Tax Rebate
-Welfare and Assistance programs
Practice for College
lectures: Fill in notes on
the 4 Government
assistance programs as
we discuss them
Trickle Down Effect
Many Americans don’t believe in the
Trickle Down Effect. The goal of Trickle
Down effect is that providing tax cuts
and subsidies to the businesses may
allow the business to increase
employment.
More employees will stimulate the
economy by purchasing goods and
creating more demand, resulting in
more supply. Thus the cycle continues.
Task
1) Classify each of the following individuals as employed, unemployed or completely out of
the labor force:
a. Charles Renaud- bartender and owner of the cityscape bar and grill
b. May Lau- a high school student hired to work at buds burger barn for the summer,
who starts in three weeks
c. Jared Turner- full time college student who works about 20 hours for his parents at
their business
d. Jill Scott- an on call substitute teacher who did not receive any work this week
e. Rick Roller- a game enthusiast who has not looked for work for 3 months.
2) Explain why the unemployment rate increases during a recession and decreases during an
expansion.
3) Give an example of a person who is underemployed and explain why.
4) Who is negatively affected most by inflation and why?
5) Refer to slide 18. What kind of inflation is my soda example?
6) How can governments help heal uneven income distribution?