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Macroeconomics Gross Domestic Product (GDP)Chapter 12-Page 301 GDP=C+I+G+X • $value of all final goods and services produced within a country’s borders in a given year • Real GDP-adjusted for inflation; most important way to measure economic health & used to form fiscal and monetary policy • Nominal GDP-gives info on current production & prices; not adjusted for inflation C+I+G+X • C=consumer sector-household, individual, & family purchases, i.e. groceries, rent, books, anything you buy • I=investment sector by business; capital goods such as factories & tools (which factor of production?) • G=government sector-local, state, federal; goods & services such as national defense, hospital care, etc. • X=net exports; exports minus imports, aka foreign sector-goods sent & received from abroad Economic Indicators • GDP • CPI=consumer price index; used to measure inflation over time thru market basket (commonly purchased items-400 random items consumers buy) • Unemployment Rate=# of people looking for work over number of people in labor force Inflation/ Deflation • Inflation=increase in average price of goods and services bought by average consumer (when prices go up we get less for our money) Economists use this so they can figure out if increase in GDP is caused by rising prices or how much is caused by real increase in how much we produce and consume • Deflation=decrease in average price of goods and services; if prices go down we get more for our money Stagflation • Stagflation=increases in prices but economy isn’t growing • High inflation hurts wage earners unless their contracts include a costof-living adjustment Fiscal and Monetary Policy • Fiscal policy=government use of spending and taxes to achieve a strong, stable economy • Monetary policy=decisions the Federal Reserve makes about money and banking (1-open-market operations 2-adjusting reserve requirements 3-raising or lowering discount rate to banks) 4 Types Unemployment • Structural=skills of labor force do not match what employers need or new technology enters market • Frictional=people in between jobs; looking for a better job • Cyclical=downturns in economy due to changes in business cycle • Seasonal=jobs during specific seasons of year or dependent on the weather AD and AS • Aggregate demand= total amount of goods & services that all people in economy are willing to buy (curve slopes downward) • When prices are low, people will buy more, increasing nation’s real GDP and when prices are high, people will buy less, decreasing the nation’s real GDP • Aggregate supply-total amount of goods & services that all producers in an economy are willing & able to make Recession • Recession=real GDP declines for 6 months or more • Economic downturns=some kind of shock to economic system such as natural disaster, war, or sudden rise in taxes or interest rates (AD curve shifts to left in these times) Business Cycles • Business cycles=up and down stages of economy • 12/08-our GDP has been decreasing for 2 consecutive quarters (we have been in a recession since last December according to economists; over 10 million jobs have been lost) • Expansion • Peak • Contraction (recession) • Trough National Debt/Government Deficits • National debt=amount of money owed by federal government; this occurs when government borrows money • Government deficit occurs when we spend more than what we take in from taxes; deficit comes from budget needed for government which comes from tax revenues Federal Reserve • Federal Reserve=bank’s bank established in 1913 • FOMC=federal open market committee; regulates money supply by buying & selling government securities aka bonds-this process is known as open-market operations Fed • A bond is a document issued by gov’t for which you pay a certain price now in exchange for higher fixed amount, called face value, later • Bond usually “matures” or pays its face value in 5, 10, or 20 years. (How many of you have grandparents that have bought you a savings bond? They give you a $100 savings bond for your birthday that they paid $50 for. Eventually you can cash it in for $100, but you have to be patient and make sure it has matured!) Bonds • • • • • Bonds do not pay a fixed interest rate, so the less you pay for a bond right now, the higher the interest rate you will earn when bond matures to its face value in 10-20 years When economy is in a recession, the Fed will buy bonds or securities itself; the money it pays for the bonds goes into banking system, so it increases money supply When banks have more money to lend, they lower the interest rates; consumers will borrow more money to buy cars, houses, & businesses enabling them to borrow more money to make capital investments These increases in consumer spending & business investment increase the GDP, promoting economic growth If economy is growing too fast, Fed will sell bonds; this money paid to the Fed for bonds it taken out of circulation; Fed has decreased money supply Absolute and Comparative Advantage • Absolute advantage=ability to produce a good or service with greater efficiency than its partner in trade • Comparative advantage=ability to produce a good or service with greater efficiency and at a lower opportunity cost than other nations Specialization • Specialization-nations ability to produce good or service most efficiently and then trade for those items they are not able to produce easily or can’t produce at all • Trade barriers=government actions designed to protect domestic industries and jobs from foreign competition More on Trade • Tariff=any tax on imports-this is a trade barrier • Embargoes=laws that cut off imports/exports to specific countries • Balance of trade=difference between value of its imports & value of exports (trade surplus/trade deficit) • NAFTA=North American Free Trade Associationeliminated trade barriers between Canada, U.S., and Mexico International Trade • Free trade=international trade that is not subject to government regulation • Protectionism=use of protective tariffs or other trade barriers b/t nations to favor domestic industries • Trade barriers protect national security, infant industries (new businesses), protection of jobs, standard of living, specialization, fairness EU/ASEAN-Chapter 17section 2 • European Union=27 nations in Europe who share currency (Euro)-helps member nations in Europe with trade • ASEAN=Association of Southeast Asian Nations-10 nations (Brunei, Indonesia, Malaysia, Phillipines, Singapore, Thailand, Cambodia, Laos, Myanmar (Burma), & Vietnam-this has helped eliminate most tariffs in this trading region WTO/GATT-Chapter 17page 453 • GATT (General Agreement on Tariffs and Trade)=international trade agreement to reduce tariffs & expand world trade • WTO (World Trade Organization)= 1995 to ensure compliance with GATT & to negotiate new trade agreements & to resolve trade disputes Exchange Rates-Chapter 17-Section 3 • Exchange rates=value of a foreign nation’s currency in relation to your own currency • When $ is strong (appreciates)-imports increase (cheaper to buy), travel abroad is cheaper for American tourists, U.S. exports decline, & U.S. trade deficit increase • When $ is weak (depreciates)-U.S. exports increase & price of exports go up, travel abroad is more expensive for tourists (example-Euro=$.70), U.S. imports decline, price of imports increases, foreign investment in U.S. businesses increases Money-Chapter 10-Page 243 (page 258-M1, M2) • Money=medium of exchange or store of value (back in the day people used to barter before there was $$$$) • Currency=coins & paper bills • Money has 6 characteristics-durability, portability, divisibility, uniformity, limited supply, acceptability • ATM/debit cards • FDIC=Federal Deposit Insurance Corporationinsures your money in a bank up to $100,000 per account (the amount has recently changed) More about $$$$$ • Banks will happily loan you $$$$ to buy a home; this loan is called a mortgage (house note) the principal, but you must pay back more than you borrowed • This is called interest & there are 2 types-simple & compound Compound Interest-page 261-Chapter 10-Section 3 • Look at chart-page 261 • Credit cards allow you to buy with a little piece of plastic that you are responsible to pay back later (If you don’t pay entire balance you will pay them higher rates of interest for convenience of using their piece of plastic) Types of Savings• Savings account at your bank • CD (certificates of deposit) pays a higher interest rate than a savings account at your bank • Stocks=a piece of paper that allows you to “own” a part of a corporation • Bonds=IOU issued by corporation or by government-you buy bond & you buy right to receive fixed amount of money at a future date (think back to that savings bond grandpa or grandma gave you for your birthday) Labor Unions • • • • • Collective bargaining Arbitration Mediation Craft unions unions