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Economics 9/25/14
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• OBJECTIVE: Macroeconomic issues: Unemployment,
inflation, and growth AP Macro-I.E
•
Language objective: SWBAT define essential vocabulary on macroeconomic
issues that associated with unemployment, inflation, and growth. In addition,
swbat write notes on issues and read and write answers to questions
regarding the objective.
• I. Journal#13
-Do now: What is GDP and how is it used to measure the
health of the economy?
• II. Homework
-Questions #1 and 2 on page 483 and Problem #1 on
page 484.
Introduction to Macroeonomics
• With all of the economic activity going on it a
country, it would be an infinite amount of data
that would have to be analyzed to make decisions
about the economy.
• Macroeconomists focus on just a few statistics
when analyzing the economy.
• The three main ones are:
1. Real GDP
2. Unemployment
3. Inflation
Real GDP
• Real Gross Domestic Product (GDP) measures the
value of final goods and services produced within
the borders of a country over the course of a
year.
• If real GDP is larger this year than the previous
year, output increased.
• Greater output creates greater consumption
possibilities. Greater consumptions means more
goods and services produced and consumed.
• A large and growing real GDP is a good thing.
Unemployment
• When you don’t have a job but you are willing
to work and looking for work.
• High rates of unemployment is not a good
thing because it indicates that the country is
not using a large portion of a very important
resource: US! Our talents and skills as workers.
• This is a big waste because we count as a loss
all of the goods and services that unemployed
workers could have produced.
Inflation
• Inflation is an increase in the overall level of
prices.
• If inflation is high, it will cost more to purchase
goods and services in the current year than the
previous year.
• This is not a good thing because if one’s income is
not rising as fast as the prices of goods and
services it is consuming, they will not be able to
purchase as much and their standard of living will
fall.
Overall
• These three statistics are the standards by
which economists keep track of long-run
growth and short-run fluctuations.
• We will use these to build economic models of
both long-run and short-run to further
understand how we try to maximize growth
and minimize unemployment and inflation.
Economic Growth
• Prior to the Industrial Revolution, there was virtually
no economic growth. A peasant from Rome in 500 BCE
was really no better off than his ancestor was 1000
years later.
• The Industrial Revolution brought about mass
production, automation, and increases in research and
development that enhanced technology. This triggered
modern economic growth.
• This allowed countries who became industrialized to
not only have output growth, but more importantly,
output per person growth.
Savings and Investment
• Savings occurs when consumption is less than
current output (or when current spending is less
than current income).
• Investment happens when resources are devoted
to increasing future output. An example of
investment is building a new R&D facility so
scientists can invent more fuel efficient cars.
• The term investment in economics differs from
common usage. See Consider This… on page 476.
Homework Tonight
• Questions #1 and 2 on
page 483 and Problem
#1 on page 484.
Economics 9/26/14
http://mrmilewski.com
• OBJECTIVE: Macroeconomic issues: Uncertainty,
expectations, and Shocks. AP Macro-I.E
•
Language objective: SWBAT define essential vocabulary on macroeconomic issues
that associated with uncertainty, expectations and growth. In addition, swbat write
notes on issues and read and write answers to questions and problems regarding
the objective.
• I. Journal#14
-Do now: The Global Perspective chart on page 475 lists
countries in order by GDP per person. Describe the three
adjustments to each country’s GDP that is done so the chart is
valid.
• II. Homework
-Questions #3-8 and problems #2-5 on page 483-484.
Uncertainty
• The future in uncertain and knowing what to
save and where to invest is difficult. Firms try
to make good decisions on investment
projects, but they can produce disappointing
results or even fail.
• This means that macroeconomics has to take
into account expectations about the future.
Expectations
• Expectations are extremely important for two
major reasons:
– The effect that changing expectations have on current
behavior. If firms grow pessimistic about future
returns on investments, they will invest less. This will
lead to less production and more importantly, less
consumption.
– The second reason is what happens when
expectations are not met. Firms often have to deal
with shocks, or situations when they are expecting
one outcome and another outcome occurs.
Shocks
• Demand shocks are unexpected changes in the
demand for goods and services.
• Supply shocks are unexpected changes in the
supply for goods and services.
• Shocks can be both positive and negative. A
positive one is where demand is higher than
expected and a negative is the opposite.
• Most economists believe that short-run
fluctuations in the economy are the result of
demand shocks.
Why are Demand Shocks a Problem?
• Demand shocks are a problems because the
price of many goods and services are
inflexible, or slow to change. These are known
in economics as “sticky prices”.
• When prices are sticky, the economy is forced
to respond to shocks in the short-run through
changes in output and employment rather
than through prices.
Demand Shocks and Flexible Pricing
• Referring to the previous graph, if prices are
flexible, any shock to demand can be quickly
adjusted to by raising or lowering prices.
• This would keep production constant and
employment levels would not change. Firms
would always need the same number of
workers and they would always produce the
same amount of output.
Demand Shocks and Sticky Prices
• If prices are sticky, or inflexible, demand shocks
will result in short-term changes in production
and employment.
• If demand drops below the optimum level,
production would have to drop to match
demand. If it rises above optimal level,
production would have to increase to match
demand. This is very costly to a firm to have keep
raising or lowering production levels and hiring
or laying off workers.
• Generally, firms will keep their production levels
at the optimum, and build an inventory.
• This can be a problem because the cars piling up
in inventory are not paid for. The company has
paid for the costs to build it, but received no
revenues for selling it.
• This will eventually lead to a cut in production
and lay offs of employees. Which will then lead to
the economy receding, GDP falling and
unemployment rising.
Homework Tonight
• Questions #3-8 and
problems #2-5 on page 483484.