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Transcript
Unit IV – Measurement of Economic Performance (8%-12% of AP Macroeconomics exam) and National Income, Price Determination and Economic Growth (15-20% of AP Macroeconomics exam) Objectives: NCEE Content Standard 3 – Different methods can be used to allocate goods and services. People acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services. NCEE Content Standard 7 – Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services. NCEE Content Standard 8 – Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives. NCEE Content Standard 18 – A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and production decision made by all households, firms, government agencies, and others in the economy. NCEE Content Standard 19 – Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices. Vocabulary: Big Topics in Bold GDP categories and formula Per capita GDP Expenditure Approach Problems with CPI Producer Price Index Types of Inflation and Formula Anticipated and Unanticipated Unit of Account Costs Labor Force Natural Rate of Unemployment Structural Unemployment Discouraged Workers Wealth Effect Short Run/Long Run AS Misperceptions Theory Marginal Propensity to Consume Average Propensity to Consume Economic Growth Catch Up Effect GDP vs GNP Real vs Nominal GDP GDP Deflator Income Approach Consumer Price Index and Formula Dollar figures from different times Indexation Nominal versus Real Interest Rate Cost Push Inflation Demand Pull Inflation Shoeleather Costs Menu Costs Types of Unemployment and formula Labor Force Participation formula Full Employment Cyclical Unemployment Frictional Unemployment Underemployment Hidden Unemployment Aggregate Demand Aggregate Supply Interest Rate Effect Net Export Effect Sticky Wage Theory Sticky Price Theory Marginal Propensity to Save Average Propensity to Save Spending Multiplier Tax Multiplier Determinants of Economic Growth Human Capital Foreign Direct Investment Foreign Portfolio Investment Numbers: GDP Formula GDP Deflator CPI Formula Inflation Rate Formula Labor Force and Participation Rate Formula Unemployment Rate Formula Spending Multiplier Tax Multiplier Visuals: Circular Flow Diagram including government and Production Possibilities Frontier Aggregate Demand and Supply Model AP Multiple Choice Answers: (Answers to Macroeconomics Unit 1, 2, 3 and 6 M/C Sample Questions) Unit 1: Unit 3: Unit 6: 9. C 27. D 28. D 1. E 9. A 17. E 1. E 8. A 15. D 2. C 10. B 18. A 2. D 9. E 16. D Unit 2: 3. C 11. B 19. D 3. B 10. E 17. D 1. D 6. A 11. B 16. A 4. A 12. C 20. D 4. D 11. D 18. B 2. C 7. E 12. D 17. A 5. E 13. A 21. A 5. D 12. B 19. D 3. C 8. B 13. C 18. A 6. A 14. B 22. E 6. E 13. C 20. C 4. D 9. A 14. A 19. A 7. B 15. D 23. A 7. E 14. E 5. B 10. C 15. B 20. A 8. A 16. C 24. C 25. D Unit IV Calendar: Monday 28 Tuesday 29 Macro Overview GDP Hwk: Read Modules 2, 10-11 Hwk: Read Module 15 and AP Macro Activities 2-1, 2-2 5 Inflation Wednesday 6 Inflation Thursday Friday 30 December 1 Consumer CPI cont. Price Index Hwk: Unit 4 RP due Monday, 12/14 7 Unemployment Hwk: Read Module 19 and AP Macro Activities 3-3, 3-4 Hwk: Read Modules 12 and 13 Hwk: AP Macro Activities 3-5, 3-6, 3-7, 3-8, 3-9 Hwk: Read Modules 37-40 Hwk: Read Module 14 and AP Macro Activity 2-4 8 Aggregate Demand Multipliers Hwk: Read Module Hwk: Read Module 16 and AP Macro 17 and AP Macro Activity 3-1 Activity 2-6 12 13 14 15 Aggregate Supply Short Run Model Long Run Model Economic Growth Hwk: AP Macro Activity 2-3, 2-5 2 9 Hwk: Read Module 18 and AP Macro Activity 3-2 16 Unit 4 Test Hwk: AP Macro Activities 6-1, 6-2, 6-3 and Review for Test What you should know at the end of this unit? Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. GDP measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. GDP = C+I+G+NX Nominal GDP uses current prices and Real GDP uses constant base-year prices to value the economy’s production of goods and services. The GDP Deflator measures the level of prices in the economy. CPI shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The percentage change in the consumer price index measures the inflation rate. The consumer price index is an imperfect measure of the cost of living for three reasons: Substitution Bias, Introduction of new goods and Unmeasured Quality change. Various laws and private contracts use price indexes to correct for the effects of inflation. The tax laws, however, are only partially indexed for inflation. The real interest rate equals the nominal interest rate minus the rate of inflation. The unemployment rate is the percentage of those who would like to work but do not have jobs. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left labor force after an unsuccessful search and therefore are not counted as employed. One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers’ incomes. All societies experience short-run economic fluctuations around long-run trends. These fluctuations are irregular and largely unpredictable. When recessions do occur, real GDP and other measures of income, spending, and production fall, and unemployment rises. Economists analyze short-run economic fluctuations using the model of aggregate demand and aggregate supply. According to this model, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggregate supply. The aggregate-demand curve slopes downward for three reasons: Wealth Effect, Interest rate Effect and Exchange Rate Effect. Any event or policy that increases or decreases the components of gross domestic product will increase or decrease aggregate demand. The long run aggregate supply curve is vertical. In the long run, the quantity of goods and services supplied depends on the economy’s labor, capital, natural resources, and technology, but not on the overall level of prices. The three theories explaining why the short run aggregate supply curve is upward sloping: Sticky Wage Theory, Sticky Price Theory, and Misperceptions Theory. Events that alter the economy’s ability to produce output, such as changes in labor, capital, natural resources, or technology, shift the short run aggregate supply curve (and may shift the long run aggregate supply curve as well.) When the aggregate demand curve shifts to the left, output and prices fall in the short run. Over time, as a change in the expected price level causes perceptions, wages, and prices to adjust, the short run aggregate supply curve shifts to the right. This shift returns the economy to its natural rate of output at a new, lower price level. When the short run aggregate supply curve shifts to the left, the short run effect is falling output and rising prices – a combination called stagflation. Overtime, as perceptions, wages, and prices adjust, the short run aggregate supply curve shifts back to the right, returning the price level and output back to their original levels. Economic prosperity, as measured by GDP per person, varies substantially around the world. The average income in the world’s richest countries is more than 10 times that in the world’s poorest countries. Because growth rates of real GDP also vary substantially, the relative positions of countries can change dramatically over time. The standard of living in an economy depends on the economy’s ability to produce goods and services. Productivity, in turn, depends on the amounts of physical capital, human capital, natural resources and technological knowledge available to workers. Government policies can try to influence the economy’s growth rate in many ways: encouraging saving and investment, encouraging investment from abroad fostering education, promoting good health, maintaining property rights and political stability, allowing free trade, and promoting the research and development of new technologies. The accumulation of capital is subject to diminishing returns: the more capital an economy has, the less additional output the economy gets from an extra unit of capital. As a result, although higher saving leads to higher growth for a period of time, growth eventually slows down as the economy approaches a higher level of capital, productivity, and income. Also because of diminishing returns, the return to capital is especially high in poor countries. Other things being equal, these countries can grow faster because of catch up effect. Population growth has a variety of effects on economic growth. On the one hand, more rapid population growth may lower productivity by stretching the supply of natural resources and by reducing the amount of capital available for each worker. On the other hand, a larger population may enhance the rate of technological progress because there are more scientists and engineers.