Download gross domestic product

Macroeconomics
How do we measure our
economy?
Macroeconomics vs.
Microeconomics

Macroeconomics is the study of our economy as
a whole.
 GPD-
Real vs. Nominal
 Circular Flow of Economic Activity
 Inflation
 Consumer Price Index
 Business Cycle
 Aggregate Demand and Aggregate Supply
 Unemployment
GROSS DOMESTIC
PRODUCT
C + I + G + NX
WHAT IS IT?
 Gross
Domestic Product (GDP)=the final value of all
goods and services made within a country's border
over a give period of time.
 the total output of a nation
 measurement of a national income and output
 all the goods and services produced
 the amount of goods and services produced by the
firms in the product market
HOW IS IT MEASURED?




C +I+G+(X-M)= GDP
the total consumption (C) plus business
investment (I) plus government spending (G)
and the difference between imports and exports
(x-m) [exports - imports]
add all goods and services produced within an
economy over time
the amount of money flowing from the firms to
the households in the factor market
What is excluded from GDP???

financial transactions-no new goods produced, only
ownership transferred (stocks and bonds)
 transfer payment by the government-nothing received
in return
 household production - difficult to place a value on
 black-market activity - no record of transaction


imports – not produced within the country
Second hand sales- only new production is included so buying
used goods does not count.
WHAT DOES IT TELL US?
how the economy is doing/ good vs. bad
 whether production is increasing or
decreasing
 unemployment rates dependent on growth
 efficient use of resources
 standard of living if you determine per
capita GDP/population
 wealth of a nation

Real vs. Nominal GDP
Real GDP is GDP in real dollars. Inflation
is factored out using the GDP deflator.
 Nominal GDP is GDP in today’s current
and inflated dollars.

GDP and Population



As population grows so do the factors of
production.
Population can distort GDP and GNP. If
population grows faster than its output
there could be too many mouths to feed.
Population affects quality of life.
Population in the United States

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Census- official count of all people living in the United
States
Urban Population- people living in towns with more
than 2,500 people
Rural Population- the rest of the population living in
sparsely populated areas.
Historic Growth
Steady decline in population growth over the history of
America
1790-1860- 3% , Civil War- 1900- 2.2%, 2002- .9%
Regional Changes



Population growth is different in different regions
of the country.
South and West are growing, where as the North
and East population growth is slowing and
decreasing in some areas.
Center of Population- Balancing point of the
country based on population. In 1790 it was 23
miles east of Baltimore, Maryland now its 2.8
miles east of Edgar Springs Missouri
Factors affecting Population
Growth




Fertility Rate
Life expectancy
Net Immigration
Race and Ethnic origin
Economic Growth

Real GDP per capita


Importance of Economic Growth




dollar amount of real GDP produced per person
Standard of living
Government Spending, Tax Base
Domestic Problems- poverty, medical care, opportunity
Factors Influencing Economic Growth



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Land- room to grow, renewable resources
Capital- capital-to-labor ratio, high ratio is good for economic
growth
Labor- more labor you have the more you can grow. Labor
Productivity
Entrepreneurs- no new ideas, no or slow economic growth.
Circular Flow of
Economic Activity
Addition of Banks and the
Government
Circular Flow Diagram
Inflation

Inflation is the rise in prices over time.
 Goods
are more expensive
 $’s have less purchasing power
 Wealth Effect

Deflation is the drop in prices over time.
 Goods
are cheaper
 $’s have increased purchasing power
Stagflation
an inflationary period accompanied by
rising unemployment and lack of growth in
consumer demand and business activity.
 An economic condition that is
characterized by slow growth, rapidly
rising consumer prices, and relatively high
unemployment.

Measuring Inflation
Consumer Price Index
 Producer Price Index
 GDP Deflator

Causes of Inflation





Demand-Pull Theory- prices pulled up by high
demand
Deficit Spending- government debt drives down
the value of the dollar
Cost-Push- high cost of producing products push
the price of goods higher and higher
Many not one- combination of factors cause
inflation
Excessive Monetary Growth- money supply
grows faster than real GDP
Consumer Price
Index-CPI
Measuring Inflation and Price
Levels
WHAT IS IT?





Consumer Price Index
a measurement of a current basket of goods
compared to another year (base year) to
determine price changes x 100 to convert to %
measures the amount of goods purchased at
certain price from one year to another
includes food, clothing, housing costs,
entertainment and transportation costs and
others
helps to determine the cost of living
CONSUMER PRICE INDEX
current-year cost
 index number = _-----------------------_ x 100
base-year cost
HOW DO YOU MEASURE IT?
items are weighted in terms of importance
 percentage change is calculated from
base year to current year; difference in
value/ earlier year value X 100


index number = current year/base year
cost X 100
WHAT DOES IT TELL US?
helps to determine the value of money
 determines whether inflation causes the
value of money increases or decrease
 determines the real value of money
 helps to determine unemployment rates;
Phillips Curve

Inflation: Who is Helped? Hurt?

Helped:
 People

paying fixed payments
Hurt:
 People
living on fixed incomes
 Banks receive fixed income payments
The Business Cycle
Real GDP and Price Level
Business Cycle

Phases of the business cycle
 Recession
 Trough
 Peak
 Expansion
 Trend
Line
 Depression
Business Cycles in the United
States
Lowest point was the 1930’s Great
Depression
 Since WWII US economy has reached
new heights.

The Great Depression

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Black Tuesday- Oct 29, 1929
1929-1933 Great Depression
GDP fell from 103 billion to 55 billion
Unemployment rose 800% 1.6 to 12.8 million.
25% unemployment
Avg. manufacturing wages fell from 1928-.55 to
1933-.05 dollars
“Bank Holiday” closed the banks for several
days
Towns begin to print depression scrip
Causes of the Great Depression
The disparity in the distribution of income.
 Easy and plentiful credit.
 International Trade- Private institutions of
US stop loaning money to countries, thus
they can no longer afford US goods.
 High American Tariffs on imports caused
trade to decline

Business Cycle since World War II
Massive government spending during
WWII provided a giant stimulant to the
economy for most of the 1940’s
 Short recession in 1945 (only a few
months)
 After the war consumer spending
increased greatly
 Avg. recession 11 months
 Avg. expansion 43 months

Causes of the Business Cycle


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Capital Expenditures- Consumers buying,
businesses expanding, then they stop investing
which causes layoffs and eventually recession
Inventory Adjustments- high inventory during
expansion, low inventory during economic slow
down
Innovation and Imitation- Expansion of new
investment then slowdown ( internet bubble)
Causes of the Business Cycle
Monetary Factors- Easy Money PoliciesExpansion. Hard Money PoliciesRecession
 External Shocks- Outside forces that can
have an effect on our economy. ( change
in oil prices, wars, natural disasters)

Predicting Business Cycles

Output-expenditure model
 GDP=

C+I+G+(X-M)
Econometric Model
 GDP=
a+.95(DI)+I+G+(F-S)
Aggregate Demand
and Aggregate Supply
Demand for all products
Supply of all products
AGGREGATE DEMAND AND
AGGREGATE SUPPLY CURVES
WHAT IS IT?

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GDP adjusted for inflation (real) at certain price levels
aggregate demand (AD) = C+I+G+NX total spending by the nation;
national income
aggregate supply (AS) = total production within the nation; GDP
short run aggregate supply equals production that continuously
changes with the market (SRAS)
equilibrium - for every transaction there is a seller and a buyer, so
AD=AS
long run aggregate supply (LRAS) indicates where and economy
wants to be, at full employment of resources (similar to the PPC)
whether the economy is below, at or above full employment at
certain price levels
HOW IS IT MEASURED?
calculate GDP, adjust for inflation (price
index) = SRAS
 add C+I+G+NX to determine AD
 add GDP to determine SRAS
 determine maximum full employment of
resources for LRAS

WHAT DOES IT TELL US?

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where an economy is currently producing in relationship
to full employment (where it wants to be)
whether business inventories are building up (AD less
that AS) or if they are selling most goods and services
(AD greater than AS)
if AD/SRAS intersect below LRAS, there is lack of use of
resources (recession)
if AD/SRAS intersect beyond LRAS, there is
overproduction; the economy is overheated = inflation
an intersection of AD/SRAS beyond LRAS will not last;
temporary overproduction i.e. wartime
Unemployment
Unemployment Rates
WHAT IS IT?
percentage of people without jobs, but are
actively looking for one
 those civilians 16 and over who are
without jobs, but want one
 the total of those who can work vs. those
who cannot find work
 percentage of labor involved in production
of goods and services

UNEMPLOYMENT

The unemployment rate (UR) is defined as

number of unemployed
UR = ____________________ x 100
labor force


The labor force participation rate (LFPR) is defined as:
number in labor force
LFPR = ____________________ x 100
adult population
HOW IS IT MEASURED?
divide the number of unemployed by the
total labor force multiplied times 100 for a
percentage
 U.S. census helps determine
unemployment rates
 files for unemployment compensation

Types of Unemployment

Structural Unemployment

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Frictional Unemployment

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Jobs that are only working during certain seasons of the year
Technological Unemployment


When someone is in between jobs. Or going from one job to another, or
holding out for a job they are qualified for.
Seasonal Unemployment


When the structure of the economy changes and your job is no longer
needed.
When your job has been replaced by technology and is no longer
needed
Cyclical Unemployment

Unemployment related to the swings of the business cycle.
WHAT DOES IT TELL US?

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the percentage of unused resources
if the GDP is at its greatest rate
if we are producing at our maximum potential;
inside or outside of PPC/LRAS
helps determine whether inflation is a problem
(Phillips Curve shows inverse relationship
between unemployment and inflation)
crime rates increase with increases in
unemployment
Phillips Curve
Poverty and Distribution of Income

Lorenz Curve- shows how much disparity there is
from actual distribution of income to equal distribution of
income.
Reasons for Income Inequality
Education
 Wealth
 Discrimination
 Ability
 Monopoly Power

Poverty


Poverty Guidelines
People in Poverty
 35
million Americans, 12.4 %
 Why the growing gap??


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Structural change in the economy from good production to
service production.
Income of well educated workers and poorly educated
unskilled workers
Declining Unionism
Shift from two parent families to single parent families.
Antipoverty Programs
Income assistance
 General Assistance- food stamps
 Social Service Programs
 Tax Credits
 Enterprise Zones
 Workfare Programs
 Negative Income Tax
