Download Unit 2 lesson 1 Macroeconomic Tools

Unit Two
Macroeconomic Tools
Circular Flow
See the chart on the board
A little more detail
Functions of Gov’t
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A. Allocation
B. Redistribution of Income
C. International Trade Regulation
D. Stabilization
A. Allocation
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1. Produce public goods, like schools or
roads
2. Encourage merit goods like seat belts
or air bags
3. Discourage the production of
negative external effects like pollution
B. Redistribution of Income
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1. Transfer payments: direct $ from the
government without expecting a
product
2. Indirect policies: Corporate Welfare,
and the purchase of goods and services
C. International Economic
Policy
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1. Trade and Tariff policies
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2. Currency Exchange policies
D. Stabilization
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1. Fiscal Policy: Using taxes, spending
and borrowing to stabilize the economy
2. Monetary Policy: Using the money
supply and interest rates to stabilize the
economy
Macroeconomic goals of
stabilization
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1. Growth
2. Full Employment
3. Stable Prices
Economic Growth
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1. Defined as an increase in real per
capita income. Real means adjusted for
inflation. Per capita means for each
person.
2. Measured by the Gross Domestic
Product or GDP
GDP
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The Gross in GDP means that
depreciation has not been deducted
Domestic means only that which is
produced in the US by US companies
Product refers to goods and services
produced for use in one year
GDP
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The GDP for the US this year is
estimated to be $10,371,000,000,000
There are two ways of measuring the
GDP:
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1. Expenditure
2. Income
GDP by Expenditure
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GDP= C + I + G + (X-M)
C= Consumption or what consumers
spend on goods and service
I = Investment in capital goods
G= Government expenditures on goods
and services
X-M= Exports - Imports
GDP by Income
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National Income
NI = C + S + T
C= Consumption
S = Savings
T = Taxes
Full Employment
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Full employment is measured by the
unemployment rate; the lower
unemployed the closer we are to Full
Employment
Unemployment Rate =
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# of unemployed / Work Force
Workforce
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The work force includes all those
working
It excludes the retired, children 15 and
under, “house-spouses”, students, the
disabled.
Types of Unemployment
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A. Frictional: or natural
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People changing jobs
People graduating from college or high
school
People moving with a spouse for a new job
B. Structural:
Where skills don’t match the jobs available
Unemployment Rate
August 2002
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8,100,000 / 142,000,000 = 5.7%
CPI
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Consumer Price Index
Measures price stability, mostly
measures inflation
Uses a market basket of goods to
compare prices from one month or year
to the next
Can be used to compare or adjust
incomes from one year to another.
Base Year 1984
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Cost of a Market Basket of Goods=
$1,823
$1,823 / 1,823 = 1.00 or an index of
100
August 2002
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Cost of a market basket of goods=
$3294
$3,294 / $1,823 = 1.807 or 180.7
Using the CPI
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When we use the CPI to adjust prices
or wages for inflation, the result is a
“real” price or wage, instead of just the
nominal price or wage.
The Formula
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To compare a price from “back in the day” to
prices today, we use this formula:
Old Price / old CPI x new CPI = Real Price
Examples:
Prices at the end of WWII
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Movie: .60 / .18 x 1.807 =
Eggs: .85 / .18 x 1.807 =