Download I. GDP - Effingham County Schools

AP Macroeconomics
Unit 2
Lesson 1
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Business Types/Mergers (not in text)
I. Sole Proprietorships
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Run by 1 person
Most numerous & profitable of the biz types
I. Sole Proprietorships Continued
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Advantages:
Easy to start-up/manage
Owner gets all profits
Biz pays no income tax
Easy to close
I. Sole Proprietorships Continued
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Disadvantages:
Owner has unlimited liability
Hard to raise capital
Less efficient
Hard to attract qualified employees
II. Partnerships
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Owned by 2 or more people
Articles of partnership spell out how
partners divide profits/losses.
Types:
General- all partners involved in
management/finances
Limited- at least 1 partner isn’t involved in
management. This partner probably just
put up $.
II. Partnerships - Continued
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Compared to SP’s, Easier tostart-up/manage
raise capital
increase efficiency
attract employees
II. Partnerships - Continued
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Disadvantages:
Partners responsible for other partners’
actions
Unlimited liability
Partner conflicts
III. Corporations
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A separate legal entity with rights of an
individual
Must receive gov’t charter
Investors who buy stock are owners
III. Corporations - Continued
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Advantages:
Easy to raise financial capital
Owners don’t manage
Limited liability****
Easy to transfer ownership
III. Corporations - Continued
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Disadvantages:
Charter is expensive
Owners don’t manage
Income taxed twice***
Gov’t regulation
III. Corporations - Continued
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Impact On Society
a corporation:
has rights of a person
has access to large amounts of $$
never has to die
doesn’t have a conscience
exists solely to accumulate power
IV. Limited Liability
Partnerships
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Partnerships in which at least 1 partner has
limited liability.
At least 1 general partner must have
unlimited liability.
Cross between corporation/partnership
Business Type Activity
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SOLE P
Employees
Management
Lawsuits
Liability
$$ to start
Trnsfr. Ownrshp.
Profits/Tax
PRTNR
CORP
V. Growth Through Mergers
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2 firms join into 1
Companies merge to:
grow faster
become more efficient
acquire a better product
eliminate a rival
change their image
VI. Horizontal Mergers
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firms make same/similar product
Wachovia/Wells Fargo
Advantages
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Larger market share
Less competition
VII. Vertical Mergers
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firms @ different stages of manufacturing
Louisville Slugger/ lumber company
Advantages
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Lower input costs
More efficient
VIII. Conglomerate
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4 or more businesses making unrelated
products
If 1 branch not doing well, other branches can
pick up slack.
It’s a Horizontal Merger
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If:
Wachovia merges with Wells Fargo
It’s a Vertical Merger
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If:
A lumber mill
&
A baseball bat maker
&
A sporting goods store
Merge together
It’s a conglomerate if:
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An airplane company, television network,
bank, & electricity company merged together.
IX. Labor Unions
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Use Collective Bargaining
Merger Activity
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Rules
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Each person is a business (see your card).
Merge with other businesses.
Stop at five businesses (5 people max).
You have fifteen minutes.
Members of most efficient final business
(teacher’s discretion) will receive 2 Puntos
Positivos each.
Unit 2
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Lesson 2: Market Structures, Circular Flow
Redux (not in text)
I. Perfect Competition
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Supply/demand determine P.
Firms are price-takers.
Must have:
1) large # buyers & sellers
2) identical products
Buyers & sellers are:
3) independent
4) well-informed
5) free to enter/leave market
II. Monopolistic Competition
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like perfect comp BUT products not identical.
Product differentiation
Nonprice competition
Narrow P range, goal is to raise P within that
range.
II. Monopolistic Competition Listen, Don’t Write
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Product Differentiation:
Hardee’s uses angus beef.
Hardee’s delivers to your
table.
Burgers are more expensive,
within the narrow P range of
fast food.
III. Oligopoly
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A few (big) sellers dominate.
If price leader lowers P, other firms follow.
Price wars can occur
P usually higher than monopolistic or
perfect
nonP comp
interdependence
Example: American movie studios
III. Oligopoly - Continued
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Though illegal, firms may use collusion. 2
types:
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price fixing: firms agree to set their P
dividing up the market
III. Oligopoly - Listen, Don’t Write
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Hi-Def Video Oligopoly & the Format
Wars
Nonprice Competition: Sony’s
decision to add Blu-ray capability to
the PS3. Also, both formats were
heavily advertised.
A small price war brought Blu-ray &
HD-DVD player prices down (in a last
ditch effort, HD-DVD players dropped
to $150)
Toshiba gave up on HD-DVD after
movie studios began to side with Bluray
III. Oligopoly - Listen, Don’t Write
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Other examples of oligopolies
Movie studiosTime Warner, Viacom, Disney, Sony, GE, & Fox
Music companiesSony, EMI, Universal, Warner
Television industryDisney/ABC, CBS, NBC Universal, Time Warner,
Fox
Food processingKraft, Pepsi, Nestle
III. Oligopoly - Listen, Don’t Write
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OPEC, the Organization of Petroleum Exporting
Countries
The 12 member countries: Algeria, Angola, Ecuador, Iran,
Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, & Venezuela
IV. Monopoly
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Only 1 seller
price-makers
Natural- results in lower overall costs
(railroads, public utilities).
Geographic- location can only support 1
(small town drug store).
Technological M - producer has patents or
copyrights.
Government M - gov’t makes something
private industry can’t/shouldn’t (uranium
IV. Monopoly - Listen, Don’t
Write
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De Beers had a nearmonopoly over the
diamond trade until a
few years ago.
Major League Baseball
has a monopoly in the
U.S. over professional
baseball.
GameStop has a nearmonopoly over the
used-game market.
V. Circular Flow
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Illustrates the flow of resources, goods/services &
dollars between businesses and households.
Later we will add the gov’t and trade.
Markets = institution/mechanism that brings
buyers/sellers together (local, national, global,
internet).
Markets allow producers and consumers to decide
how to answer the 3 Q’s.
Factor Market: where people earn incomes and
provide FOP
Product Market: where consumers buy
goods/services from producers
V. Circular Flow
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In the factor market,
payments for…
are called…
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land
rent
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labor
wages
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capital
interest
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entrepreneurship profit
VI. Circular Flow
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A more realistic
circular flow
diagram includes
gov’t and the
foreign sector:
Where do profits fit
in?
VI. Circular Flow
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Households
Personal Taxes
Savings: for security/speculation; correlated
to income
Consumption:
A) Durable Goods (+3 yrs)
B) Non-durable Goods (-3 yrs)
C) Services
Dissave: spend savings or borrow
VI. Circular Flow
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Businesses
Plant: performs specific functions in the fabrication/ distribution
of goods/services
Firm: runs/operates plant
Industry: Group of firms making same/similar products
Types of mergersHorizontal – firms make same product
Vertical – firms @ different stages of manufacturing
Conglomerate: 4+ businesses make unrelated products
VI. Circular Flow
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Foreign Sector
Trade: exports (X) minus imports (M)
If X-M > 0, trade surplus
If X-M < 0, trade deficit
Investment
Foreign Aid, Gifts, Etc.
VI. Circular Flow
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Gov’t
Taxes Households, Businesses
Provides Goods, Services
Consumes Goods, Services
Homework
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Read ch 10
Unit 2
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Lesson 3: GDP
I. Gross Domestic Product
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Gross=Total
Domestic=This Country
Product=What We Produce
Q of all final goods & services sold in 12 mo.s
multiplied by their Ps.
GDP is a dollar amount.
I. GDP–Continued
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Not included in GDP:
Nonmarket transactions in the underground
economy
Intermediate products
Secondhand sales
Barter
Transfer Payments / Gifts
Buying/Selling Securities on the Secondary
Market
What is counted? What is not?
Only the value of the final
sale is counted.
So they are not counted when
the manufacturer buys them.
The cost of the parts
is included in the
final sale price
This is confusing!
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The tires that come
with the car is not
counted as a final
good
However if you get a
flat and buy the
same tire it is
counted as a final
good
I. GDP - Continued
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The most important measure of economic
performance.
Measures voluntary transactions.
Indicates Recessions/ Depressions/Booms.
I. GDP – Continued
Limitations of GDP
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Doesn’t tell us
composition of output.
We may be producing
more, but what are we
producing more of?
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GDP is a number, and
can’t indicate quality of
life.
 One
way to calculate GDP
involves adding up all
expenditures in the country over
the course of a year.
II. GDP - Expenditures Model
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GDP = C + I + G + (X-M)
C = Consumption
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I = Gross Private Domestic Investment (3
components)
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Purchases by households of goods/services (largest
component of GDP)
Purchase of capital by firms
New home purchases by firms or households
Additions to inventory by firms
G = Gov’t Spending
X = Exports
M = Imports
II. GDP - Expenditures Model
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I---Effect of changing inventories on gdp, net
inventory, eventual consumption
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increase in inventories make I go up, GDP go up
when inventories go down, I goes down, but C
goes up. GDP is unchanged.
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G---transfer payments (1/3 of budget) not
included; gov’t employee salaries are
included
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Gross investment vs net investment
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net I = I - depreciation
 Another
way to determine
GDP is to calculate the dollar
value added to goods at each
stage of their production.
 This is called the “valueadded” method.
Yet another way (the next-to-last!) to
calculate GDP involves adding up the
total income of the nation.
 Income must equal expenditures
because one person’s income is
another person’s expenditure.
 Or, every transaction has both a
buyer and a seller.
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IV. GDP - Income Approach
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Wages (compensation to employees)
Rent
Interest
Profits (proprietor’s income)
Consumption of Fixed Capital (depreciation)
Indirect Business Taxes
+Undistributed Corporate Profits
Gross National Product
- Net American Income Earned Abroad
Gross Domestic Product
IV. GDP - Income Approach
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GDP vs GNP
GDP = total value of goods/services
produced within U.S. boundaries.
GNP = total value of goods/services
produced by U.S. owned resources.
So, production by a Ford plant in Mexico
would count towards Mexico’s GDP & our
GNP, but not our GDP.
V. GDP - Tear Down Approach
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Gross Domestic Product
- Consumption of fixed capital (aka depreciation)
Net Domestic Product
+ Net American income earned abroad
- Indirect business taxes (sales taxes)
National Income (Income Earned)
- Social Security Contributions
- Corporate Income Taxes
- Undistributed corporate profits
+ Transfer payments
Personal Income (Income Received)
- Personal Taxes
Disposable Income
V. GDP - Tear Down Approach
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Corporate profits included in PI are called
dividends
Homework
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Read ch11
Unit 2
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Lesson 4: Inflation
I. Constructing a Price Index
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Inflation can distort GDP from year to year.
A price index measures P changes over time.
I. Constructing a Price IndexContinued
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Steps:
Select a base year & items for a
market basket.
Record P of each item in the basket.
Total is the base-year market basket
price.
Record Ps each year.
PI = Market Basket P in a given yr
Base-Year Market Basket P
X 100
I. Constructing a Price IndexContinued
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Determining inflation rate using CPI from year
to year:
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use percent increase in CPI
[(new-old)/old] X 100
I. Constructing a Price IndexContinued
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Problems with the CPI
overstates inflation b/c
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substitution bias
introduction of new goods
unmeasured quality change
II. Major Price Indexes
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Consumer Price Index (CPI)-80,000 items in 364
categories.
Producer Price Index (PPI)-goods/services bought
by firms
Implicit GDP Price Deflator (aka GDP Deflator)- all
goods/services in the economy. Base year 1996.
The Rule of 70
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Rule of 70: a method for determining how
long it will take the price level to double,
given the current price level.
To calculate this you divide the % annual rate
of increase into 70.
III. Real GDP
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GDP adjusted for inflation.
It allows us to see how much more stuff we
really made.
One way to determine RGDP:
Pick a “base year”, and multiply the prices
from that year with the quantities purchased
in other years.
III. Real GDP
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GDP deflator = Nominal GDP
Real GDP
Real GDP = Nominal GDP
GDP deflator
X 100
X 100
Nominal GDP = RGDP X GDP deflator
100
III. Real GDP
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If GDP in 2003 was $10.6 trillion, and the
GDP deflator was 111.9, what was the Real
GDP?
[$10.6 trillion/111.9]X100= $9.5 trillion
$9.5 trillion is 2003 GDP measured in 1996
prices.
IV. Inflation
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Inflation: increase in prices
Deflation: decrease in prices
Stagflation: recession & inflation at the same
time (rare).
Inflation is measured as the percent change in
a price index from year to year.
The U.S. has had inflation for 50+ years, at an
avg. rate of 4% a yr.
IV. Inflation
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If U.S. inflation (a decrease in the value of the
dollar) if higher than inflation in countries we
trade with, how will NX be affected?
The cause of deflation during the Great
Depression was the decrease in demand for
goods.
Price
Level
A
A
A
RGDP
IV. Inflation
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Causes
Demand-pull inflation - demand increases, “pulling
up” price levels
Cost-push inflation - input costs increase, causing
supply to decrease & “pushing up” price levels
The wage-price spiral - higher Ps cause workers
to demand higher wages, forcing producers to
raise their Ps even more, etc.
Deflationary spiral - lower Ps force producers to
cut wages, forcing producers to lower Ps...
Excessive monetary growth
IV. Inflation
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Costs of Anticipated Inflation
shoeleather costs- high inflation = high interest
= you want to hold less cash
menu costs
infrequent price changes
tax code
inflation restricts money’s use as an accurate
unit of measure
IV. Inflation
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Costs of Unanticipated Inflation
hurts lenders (helps borrowers)
Real Interest Rate = Interest Rate - Inflation
r=i-π
hurts people on fixed incomes
Homework
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Read Ch 12
V. Economic Growth
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Economic growth & standard of living are
best measured by Real GDP per capita
Per capita means per person.
Real GDP per capita has grown slower than
real GDP
V. Economic Growth
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Economic growth increases:
standard of living
tax base
U.S. demand for imports
incentive for other countries to become
market economies
VI. Factors Influencing Economic Growth
Amount & quality of the FOP:
 Natural resources
 higher capital-to-labor ratio = higher
productivity
 Skilled/growing labor force, education***
 Entrepreneurs
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Homework
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Read Ch 15 Unemployment
Unit 2
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Lesson 5: The Business Cycle &
Unemployment
I. The Business Cycle
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Business cycle = systematic ups and downs of
real GDP
Business fluctuations = nonsystematic
2 phases of biz. cycle:
Recession begins at peak and ends at
trough—peak/trough at least 6 mo’s apart
Expansion is the recovery from a recession
Severe recessions can become depressions.
I. The Business Cycle
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Causes
External shocks (oil prices, international
conflicts) can cause business cycles.
Businesses cut:
inventories at 1st sign of economic slowdown,
&
investment after an innovation takes hold
I. The Business Cycle
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Causes
Tight money policy by the Fed:
1) Gov’t sells bonds (borrows $)
2) Money supply in economy shrinks.
3) Interest rates rise.
4) Less investment & fewer purchases result.
I. The Business Cycle
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Prediction
Econometric models use algebra
The Index of Leading Indicators is a monthly
statistical series
II. Unemployment
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The unemployment rate shows:
# unemployed / civilian labor
force
This understates unemployment
b/c:
it doesn’t include discouraged
workers,
or people who are working parttime b/c they can’t find full-time
work
II. Unemployment
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Types
Frictional: workers are between jobs
Structural: changes in consumer tastes or
industry operations
Cyclical: changes in the business cycle
Seasonal: changes in the weather or seasons
II. Unemployment
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The labor force doesn’t include people who
are working in the underground economy.
If Real GDP falls, the unemployment rate
________. If RGDP rises, the unemployment
rate ________.
GDP Gap: The amount of GDP lost because
not enough jobs are supplied in the economy.
Also; the difference between GDP and
Potential GDP
III. Full Employment
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Also called the natural rate of unemployment.
A condition where there is zero cyclical
unemployment.
Because structural & frictional unemployment
will always exist, the unemployment rate will
always be > 0.