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January 26, 2015
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Begin AP
Macroeconomics
Intro Notes: Macro
AP Micro Final and
Qtr 2 Grades
Unit 1:
Measuring Economic
Performance
Vocab: Ch. 23, 24, 26
Unit 1 Exam: 2/9 & 2/10
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Macroeconomics Intro
• Macroeconomics is the study of the large
economy as a whole (the “Big picture”)
• Macroeconomics was born during the Great
Depression (Government didn’t really know
how to fix a depressed economy with 25%
unemployment.)
• Macroeconomics used to:
1. Measure the health of the economy.
2. Guide government policies to fix economic
problems.
The Business Cycle
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The study and control of business cycles are
the heart of macroeconomics.
 The economy experiences ups and downs
over time.
 The business cycle represents these
economic fluctuations.
 The current state of the economy reflects the
phase of the business cycle the economy is
in.

Real
GDP
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Macroeconomic Indicators
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
Macroeconomic Indicators: Statistics that measure the health of the economy.

Business cycles are defined in terms of output.

Other variables follow this movement of output.
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
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Contractionary/Recession: Two consecutive quarters (6 months) of negative
growth in Real GDP.
Contractionary/Recession: Output decreasing, unemployment rising,
inflation decreasing.
Inflation: General increase in prices in goods & services (dollar has less
purchasing power.)

Severe recession is called a depression.

Unemployment Rate rises during recessions.

Trough: Point at which output starts to increase (GDP at lowest point)


After trough, economy goes into recovery/expansion: Output increasing,
Unemployment decreasing, inflation increasing.
Peak: Point at which output starts to decline (GDP at highest point.)
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The Business Cycle:
Macroeconomic Indicators

Employment Act of 1946 established 3 major goals for economy:
1.
Full Employment (when most of labor force is working)
2.
Price Stability (A situation in which prices in an economy don't change much over time)
3.
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Economic Growth (When economy produces increasing amounts of goods/services over
time)
How does the government measure these?
Macroeconomic Indicators: Statistics that indicate the current status of the
economy
Measuring Employment: Unemployment Rate
Measuring Price Changes: Price Index (CPI- Consumer Price Index) measures
changes in price of goods and services.
Measuring Short-Run Economic Growth: Measure fluctuations in output by measuring
increases/decreases in quantity of goods and services produced using GDP (Gross
Domestic Product: The dollar value at market prices of all FINAL goods and services
produced during specific period.

Real GDP is the GDP adjusted for changes in prices of goods.

The business cycle refers to the ups and downs as measured by the indicators.
January 29, 2015
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Review Lesson 1-1 and the Circular Flow
Model.
Lesson 1-2: Gross Domestic Product
HW: Activities 2-1 and 2-2
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Gross Domestic Product

GDP is the dollar value of all final goods and services produced in an economy
during a given period.

It only includes output exchanged in markets (i.e.. No illegal goods/services)

GDP only includes FINAL goods and services.
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GDP measure production, so financial transactions hat do not represent
production are not counted.
Expenditures Approach-Add up all the spending on final goods and services
produced in a given time period.
Income Approach-Add up all the income that resulted from selling all final
goods and services produced in a given time period.
Both ways generate the same amount since every dollar spent is a dollar of
income.
Also, there are leakages from and injections into the flow which happen
through government, financial institutions, and international trade.

Leakages: Savings, imports, taxes.

Injections: Investments, exports, government spending.
GDP
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
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
GDP is sum of the
purchases of goods and
services from all buyers
(households, firms,
government,
consumers in other
countries) in an
economy.
Expenditures
Equation:
GDP= C + I + G + Xn
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C: Consumer Spending:
Largest component at about 2/3
I: Investments -When
businesses invest in their own
business OR output produced and
not sold (Unplanned Inventory)
G: Government Spending
Xn: Net Exports -Exports (X) –
Imports (M)
January 29, 2015
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Review HW: Activities 2-1 and 2-2
Lesson 1-3: Inflation
HW: Activity 2-3
A Little More GDP…
USA: $16.8 Trillion
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Calculate the GDP of Tannerville
1. $10.00 for movie tickets
2. $5M Increase in defense expenditures
3. $45 for used economics textbook
4. Ford builds new $2M factory
5. $20K Toyota made in Mexico
6. $10K Profit from selling stocks
7. $15K car made in US, sold in Canada
8. $10K Tuition to attend college
9. $120 Social Security payment to Bob
10.Farmer purchases new $100K tractor
GDP=$7,125,010
1. $10.00 for movie tickets
2. $5M Increase in defense expenditures
X $45 for used economics textbook
4. Ford makes new $2M factory
X $20K Toyota made in Mexico
X $10K Profit from selling stocks
7. $15K car made in US, sold in Canada
8. $10K Tuition to attend college
X $120 Social Security payment to Bob
10.Farmer purchases new $100K tractor
How can you measure GDP growth
from year to year?
% Change
in GDP
•
•
•
•
•
•
•
•
=
Year 2 - Year 1
Year 1
Country X’s GDP in 2007 was $4000
Country X’s GDP in 2008 was $5000
What is the % Change in GDP?
25%
Country Y’s GDP in 2007 was $2,000
Country Y’s GDP in 2008 was $2,100
What is the % Change in GDP?
5%
X 100
Nominal vs. Real GDP
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Nominal GDP: Economic value expressed
in monetary terms
 Real GDP: Nominal value adjusted to
remove effects of price level changes
(inflation or deflation) over time.
 Real GDP takes out effects of price changes
and allows focus to be ONLY on changes in
output.

February 4, 2015
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Lesson 2-4: Continue Inflation and
Price Index
Unit 1 Macro Exam now Tuesday, Feb.
10 and Wednesday, Feb. 11
Inflation
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
What’s a dollar worth?

Inflation: A rise in the overall level of price level.

Deflation: The opposite 

Not all goods increase in price during periods of inflation.

Anticipated Inflation: Level of price increase is expected by consumers.

Unanticipated Inflation: Level of price increase is unexpected by consumers.

Remember, GDP is a measure of economic performance based on OUTPUT!

SINCE GDP IS A DOLLAR VALUE, WE NEED TO CONVERT NOMINAL GDP TO
REAL GDP TO REALLY MEASURE ECONOMIC GROWTH BASED ON OUTPUT!

1st step in converting nominal values to real values is to create a PRICE INDEX.

Price Index: Compares total cost of fixed goods (market basket) in different years.

Price changes over time are measured by comparing prices of a market basket of goods each
year to the prices of same market basket in a selected year call the base year.

A price index is used to measure price changes in an economy (measures inflation )

Price Index Formula:
CPI
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Consumer Price Index (CPI): A statistical estimate of the level of prices of goods
and services (market basket: list of roughly 300 items) bought for consumption
purposes by households.
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full
service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom
furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle
insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services,
eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment,
admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone
services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and
other personal services, funeral expenses).
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Converting Nominal GDP to Real
GDP
Real GDP = Nominal GDP/(Price
Index/100)
 Output Growth Formula: See Board
 Real GDP per capita: See Board

GDP Deflator
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A measure of the level of prices of all
domestically produced, final
goods and services in an economy.
 The GDP deflator is another measure of
price inflation.
 It is calculated by dividing nominal GDP
by real GDP and multiplying by 100.

The Costs of Inflation
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3 Types of costs on society that result from
inflation:
1.
Show Leather Costs: The cost, in time
and energy of efforts intended to
counteract the effects of inflation.
2. Menu Costs: Costs incurred by firms to
change their prices
3. Unit of account costs: Purchasing power
of dollar has changed on consumer.

Real vs. Nominal GDP Example
2008
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10 cars at $15,000 each = $150,000
10 trucks at $20,000 each = $200,000
The GDP in year 2008 shows
the dollar value of all final
goods produced.
Nominal GDP = $350,000
2009
10 cars at $16,000 each = $160,000
10 trucks at $21,000 each= $210,000
Nominal GDP = $370,000
2009
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each= $200,000
REAL GDP = $350,000
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?
Use 2008 Prices.
The Real GDP for 2009 is the
same as 2008 after we adjust
for inflation.
Real GDP “deflates” nominal GDP by adjusting for
inflation in terms of a base year prices.
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Does GDP accurately
measure standard of living?
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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.

Measuring Unemployment
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
How well are we achieving the goal of full employment?

60,000 household survey.

3 categories: Employed, Unemployed, Not in Labor Force.

LF = E + U

Official Population Categorization

Labor Force Participation Rate (LFPR)- measures % of total population
available to produce.

Unemployment Rate (UR)- Proportion of the labor force that is unemployed.

UR differs by age, race, ethnicity, duration, etc.

Discouraged Workers

UR is underestimated when there are discouraged workers.

Underemployed workers: People working part time but would like full time OR
people who hold a job that they are over-qualified for (Could be more productive
elsewhere.)
Types of Unemployment
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
UR does not provide information about why people are unemployed…
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4 types:
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Structural: Mismatches between job seekers and job providers
(Unemployed lack certain new skills as technology advances- new structure
of economy changes demand for labor)
Frictional: People temporarily between jobs or searching for first job.
Seasonal: Agriculture, Winter and Summer resort jobs, etc. (DOES NOT
AFFECT UR)
Cyclical: Downturn in economy = less demand for labor (natural phase of
business cycle)
THERE WILL ALWAYS BE FRICTIONAL AND STRUCTURAL
UNEMPLOYMENT!
CYCLICAL EXISTS DURING CONTRACTIONARY PERIOD OF
BUSINESS CYCLE- THIS IS THE PRIMARY TYPE OF
UNEMPLOYMENT MACRO POLICY MAKERS ADDRESS
February 12, 2014
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Wrap-Up Unemployment? NRU
Review yesterday’s practice FRQ’s
Time for: Macro Unit 1 Practice Exam or
Unit I Study Guide
Survey
Unit 1 Vocabulary Due Tomorrow
Unit 1 Exam (MC) Tomorrow
Unit 1 Exam (FRQ) Friday
Unemployment Wrap-Up
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Full Employment: Something less than 100
percent employment of the labor force.
It occurs when there is no cyclical
unemployment.
Frictional and Structural unemployment still exist.
Natural Rate of Unemployment (NRU): When
the economy is producing its greatest potential
output.
The NRU occurs when the number of skilled job
seekers equals the number of job vacancies requiring
those skills: This is full employment!