Download Economics - B-K

Economics - 3
Evaluating Economic
Performance
1-1
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
National Output
● Gross domestic product (GDP) —the sum
of all goods and services produced within a
nation’s boundaries each year.
● Productivity—relationship between the
goods and services produced in a nation
each year and the inputs needed to produce
them.
Productivity =
1-2
Output (goods and services produced)
Input (human/natural resources, capital)
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
● Four Stages of the Business Cycle
GDP
1-3
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Evaluating Economic Performance
● Recession—cyclical economic contraction
that lasts for six months or longer (two
quarters).
– Measure using GDP
– Must be real GDP
1-4
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Inflation
● Stranded on an island exercise
1-5
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Price - Level Changes
● Inflation—rising prices caused by a
combination of excess consumer demand
and increases in the costs of raw materials,
human resources, and other factors of
production.
– Hyperinflation—economic situation
characterized by soaring prices
– What would you do if you faced
hyperinflation?
1-6
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Price-Level Changes
● Demand-pull inflation
Excess consumer demand
● Cost-push inflation
Generated by rises in costs of factors of
production
1-7
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Measuring Price Level Changes
● Consumer Price Index (CPI)—measures the
monthly average change in prices of goods
and services
– Market Basket—compilation of the goods
and services most commonly purchased by
urban consumers
● Producer Price Index (PPI)
– For Finished Goods
– For Intermediate Goods
1-8
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
● Contents of the CPI Market Basket
1-9
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Factoring Out Inflation
● “Real” is an adjective to describe a measure
with inflation subtracted out
● Examples
– Real raise
– Real home prices
– Real gasoline prices
– Real GDP
1-10
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Employment Levels
● Unemployment rate— an indicator of a
nation’s economic health
● Types of unemployment
– Frictional
– Seasonal
– Structural
– Cyclical
1-11
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Managing the Economy’s
Performance
● Monetary Policy—government actions to
increase or decrease the money supply and
change banking requirements and interest
rates to influence banker’s willingness to
make loans.
1-12
Interest Rates
Economy
Inflation
If goes up
Goes down
Goes down
If goes down
Goes up
Goes up
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Managing the Economy’s
Performance
● Fiscal Policy—government spending and
taxation decisions designed to control
inflations, reduce unemployment, improve
the general welfare of citizens, and
encourage economic growth.
● Examples
– Bush tax rebate
– Obama stimulus
1-13
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Macroeconomics
● What are the effects of:
1. increasing business taxes
2. a tax rebate?
3. high unemployment?
● What is the effect of inflation on GDP?
● What is the effect of increased productivity
on GDP?
● Should the government own businesses? If
so, which ones and why?
1-14
Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved.