Unit 3 - Macroeconomics

1. Unit 3 - Macroeconomics

2. Standard -

3. What is Macroeconomics? • Macroeconomics is the study of large scale economies. • Macro – examines entire economies • Ex. Unemployment in the US Productivity in China • Micro – examines a single household or business

4. How do economists measure an economy? • There are several macroeconomic indicators. • Most Common: GDP

5. Gross Domestic Product (GDP): • The total dollar value of all final goods and service produced within a country in one calendar year • Must consider: • Final Output (not the intermediate phases…think tree – lumber – house) • Current Year (not used cars or second hand clothes) • Output Produced Within National Borders (not international factories)

6. How is GDP Calculated? • Output-Expenditure Model • GDP= C + I + G + (X-M)

7. C = Personal Consumption Expenditures • Consumer purchases…anything new that you buy • 2 Types: • Durable Goods – last longer than 1 year Examples: cars, houses, computers

8. C = Personal Consumption Expenditures • Nondurable Goods – last less than 1 year Examples: food, make-up, etc.

9. I = Gross Investment • Total investment in capital goods • Factories, office space, raw materials

10. G = Government Purchases • Includes federal, state, and local spending…highways, education, national defense, transfer payments • Transfer Payments: govt taxes “transferred” to others

11. (X – M) = Net Exports (Exports – Imports) • May have a trade surplus or trade deficit • Surplus (Exports > Imports) • Deficit (Exports < Imports)

12. Limitations of GDP: • Accuracy and Timeliness of Data • Gathering data is slow process • Nonmarket Activities • Performing activities at no charge…mowing the lawn

13. Limitations Cont. • Underground Economy • Illegal or unreported legal activity • “Goods” and “Bads” • Things that are beneficial are sometimes not reported and things that are detrimental are reported

14. GDP • Nominal GDP – current dollar amount of GDP • Real GDP – dollar amount adjusted for inflation

15. The Business Cycle: the regular ups and downs in an economy • Peak: • Highest Point in an economy • Strong Economy • Contraction: • Period of economic slowdown • GDP • (or increasing at a slower rate) • Expansion: • Period of economic growth • GDP • Trough: • Lowest Point in an economy

16. Business Cycle Continued… • Recession: a decline in the rate of national economic activity • Usually measured by a decline in real GDP for at least 2 consecutive quarters (6 months) • Depression: a severe, prolonged economic contraction

17. Types of Unemployment (p.331) • Seasonal • Frictional • Cyclical • Structural

18. Seasonal:

19. Frictional:

20. Cyclical:

21. Structural:

22. Is there anything we can do to maintain a stable economy? YES!!!

23. How do we do it? • Monetary Policy (The Fed) • Fiscal Policy (Congress)

24. Money and the Money Supply • Money: anything that is generally accepted as final payment for g/s • Money Supply: Currency (coins and paper $) in the hands of the public plus checking-type accounts • The supply of money in the economy is important for price stability and economic growth.

25. Key Points about the Money Supply • Too much money in the economy can cause inflation. • Inflation: rise in the average price level of g/s • Money doesn’t “go as far”…it isn’t worth as much

26. Too little money in the economy can lead to falling prices and falling production. • Deflation: a decrease in the avg. price level of g/s

27. Money Supply Continued… • The Federal Reserve controls the money supply through monetary policy. • Monetary Policy works by increasing or decreasing the money supply.

28. The Federal Reserve System • “The Fed” • The bankers’ bank and the govt’s bank • Created in 1914 after a series of bank failures. • The Fed Board of Governors: • 7 members appointed by the President, confirmed by the Senate • President appoints chairperson to a 4 year term

29. Current Chair: Ben Bernanke The Fed

30. The Fed – 12 Regional Banks • Located in major cities around the country • Each bank has president chosen by board of directors (local business/banking community)

31. Tools of Monetary Policy • Stimulate Economy – Increase Money Supply • Control Inflation – Decrease Money Supply

32. Tools of Monetary Policy (3) • Open Market Operations: • when the Fed buys or sells U.S. govt. securities (bonds) • Buy securities…more money in circulation (stimulate economy) • Sell securities…less money in circulation (slow down economy)

33. Govt. Bonds/Securities Essentially…a loan to the US Govt.

34. …with a promise of earning interest!

35. Tools of Monetary Policy: • Changes in Discount Rate: • The interest rate the Fed charges on loans to banks • Lower rate…banks are encouraged to make more loans (money supply increases) • Raise rate…banks are discouraged from making loans (money supply decreases)

36. Tools of Monetary Policy: • Changes in Reserve Requirement: • The minimum percentage of deposits that banks must keep on reserve to back up checking-type accounts • Lower reserve requirement…banks have more money to lend (increases money supply) • Raise reserve requirement…banks have less to lend (decreases money supply)

37. Fiscal Policy • Is what the government (Congress) can do to influence the economy • 2 Types: • Contractionary (slow down) • Expansionary (stimulate) • Limitations: • Slow • Political

38. Tools of Fiscal Policy • Tax: either increase (contractionary) or decrease (expansionary) • Proportional: flat tax…burden on poor • Progressive: income tax…burden on rich • Regressive: sales tax…burden on poor

39. Spend: either increase (expansionary) or decrease (contractionary) • Purchases –g/s purchased by the govt. • Transfer Payments – money payment sent to individuals (welfare, Social Security) • Borrow

40. Multiplier Effect • The idea that increased spending by consumers, businesses, or govt. becomes income for someone else. (then their spending becomes someone else’s income, etc.) • “A chain reaction”

41. Supply Side Economics • “Voodoo Economics” • Tax cuts for big business http://www.killerclips.com/clip.php?id=110&qid=1287

42. National Debt – all the $ the federal government owes to bondholders • Government Deficits – spending more than you take in during a fiscal year • Also referred to as deficit spending

43. Other Economic Challenges • Unemployment (4 types) • Seasonal, Frictional, Cyclical, Structural • Unemployed: those who wish to work but cannot find jobs Issues: - Doesn’t include those who have given up looking for work (discouraged workers) - Part-time workers are counted as fully employed - Unemployed seeking PT counted same as those seeking FT

44. Unemployment Rate # of Unemployed # in Workforce X 100 =___%

45. Practice • If there are 500 students at SCHS who are counted in the workforce and 100 are unemployed…what is the unemployment rate of the students at SCHS?

46. 100 500 X 100 = 20%

47. Inflation: an increase in the average price level of all products in an economy • Occurs because aggregate demand increases faster than aggregate supply • Also…too much money chasing too few goods • Aggregate Demand: total demand for all final g/s at a range of price levels of an entire economy • Aggregate Supply: total production of all final g/s at a range of price levels of an entire economy

48. S1 S2 P2 P1 D2 D1

49. How is Inflation Measured? • Changes in the Consumer Price Index reflects inflation of prices. • Consumer Price Index (CPI): a measure of the average change over time in the price of a fixed group of products • Market Basket: a representative sample of commonly purchased items

50. Prices of g/s in a market basket are compared to the same g/s in a market basket from another year. • If prices go up = inflation.