Download Economic Goals and how do we measure them

Economic Goals and how we
measure them Chapter 13-1
Growth—measured in GDP

Gross Domestic Product
• GDP is the monetary measure of the
total market value of all final goods and
services produced within a country in
one year.

Allows economists to compare the
productivity from one year to the
next

GDP includes only final products and
services
• it avoids double or multiple counting by
eliminating any intermediate goods

GDP is the value of what has been
produced, not what was actually sold
What does GDP exclude?

Purely financial transactions are
excluded.
• stocks or money transfers (they are not
producing anything)

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
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Intermediate products
Secondhand sales are excluded
Non-market transactions—mowing
your lawn, the work of a homemaker
or other home repair
Underground economy
GDP = C + I + G + Xn

GDP is divided into the categories of
buyers in the market
• Personal Consumption—(C)
• Gross Private Domestic Investment—(I)
• Government Purchases– (G)
• Net Exports—(Xn)


If it is not made here it is not part of GDP
if it is a factory owned by the U.S. but is
outside the boarders, it does not count.
CPI Chapter 13-2

Consumer Price Index, measures
inflation
• Select a base year to compare price
changes
• Market basket of goods (aprox. 80,000
goods in 364 categories)
• Changes occasionally in order to
modernize the market basket

Real Vs. Current GDP
• Real GDP is what GDP would be if prices
had not changed from the base year.
Chapter 14-1

The business cycle:
• Recession—period when GDP is declining two
quarters in a row (on average they last 9
months)
• Peak—the point where GDP stops going up
• Trough—the turnaround point where GDP stops
going down
• Expansion—period of recovery from a
recession
• Trend line
• Depression—A severe recession (play track 9
of Mac)
Ch. 14-1 cont.

Causes of the business cycle:
• There is no one cause, but…..
• New technology or innovation can have
a big impact (internet)
• Political instability

Prediction of the cycle:
• GDP and other indicators (index of
leading indicators)
Unemployment
Ch. 14-2


People aged 16 and over who have
looked for a job in the last 4 weeks,
but can’t get a job.
Overstated employment:
• Part time workers are included
• “discouraged workers” are not included
Unemployment cont.

Kinds of unemployment:
• Frictional Unemployment (always
there)—workers who are between jobs
due to leaving, newly entering the labor
force, or being laid off
• Structural Unemployment—due to a
fundamental change in the economy (8
track manufacturer or defense industry
after the fall of USSR)
• Cyclical Unemployment—caused by the
business cycle
Unemployment cont.

Types of Unemployment Cont.:
• Seasonal Unemployment—results from
changes in weather or demand for
certain products (ski resort in the
summer)
• Technological Unemployment—When
machines replace people (glass blowers
or automated tellers)

Full employment—about 4 to 5%
The Federal Reserve and Monetary
Policy Ch. 15-1

Made up of 12 district banks
• Each district bank is “owned” by its
member banks

Quasi-public/private organization
• Owned by the banks, but decisions are
made by The Board of Governors
What is the purpose of The Fed.?
Ch. 15-2


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“Monetary Policy”, Control of the
economy through the manipulation
of the money supply
“Easy Money Policy”
“Tight Money Policy”
How does The Fed control the
supply of money?

Answer: Black Magic!
• (AKA Fractional Reserve System)
• History of the fractional banking system


How many Twinkies can you buy with
$1000, at one dollar each?
One person’s spending becomes
another’s income
Tools of Monetary Policy

Reserve Requirement change
• Rarely used because it causes big changes

Discount Rate
• The interest rate The Fed charges for banks to
borrow money
• Rarely used, “bank of last resort”

Federal Funds Rate
• The interest rate that banks charge one
another for loans
• Changes every day
Tools of Monetary Policy
(cont.)

Federal Open Market Operations
• Buying and selling of bonds
• This is the most common tool of
Monetary Policy
• Used every day