MACROECONOMICS UNIT 5

1. MACROECONOMICSUNIT 5

2. Macroeconomics looks at the big picture, the performance of our economy as a whole. It measures various symptoms of how healthy or sick the national economy is. The measurements are called economic indicators. The main indicators are the gross domestic product (GDP), the consumer price index (CPI), and the unemployment rate. Macroeconomics

3. Gross Domestic Product is the total market value of all goods and services produced in a nation over a specific time period, usually a year. GDP is equal to the total number of all consumer spending, business investment, government spending, and net exports. GDP= C + I + G + Xn Gross Domestic Product

4. Xn = exports – imports Why do we subtract our imports from our exports? The money other countries spend on our economy adds value to our economy, while the money we spend on goods imported from other countries takes money out of our economy. Gross Domestic Product

5. If a nation’s GDP increases, you can tell that the economy is growing unless the increase is due to inflation, or an increase in prices. To get an accurate measurement of how much an economy is growing, you need to find the real GDP by using a price index to adjust for inflation. A nation’s rate of economic growth is the percentage change in its real GDP from one year to the next. Gross Domestic Product

6. United States GDP GROWTH RATE

7. United States GDP

8. Inflation refers to an increase in the average price of goods and services bought by the average consumer. When prices go up, we get less for our money, so that we may be spending more without actually buying more than we did before. Economists need to know how much of an increase in GDP is caused by rising prices, and how much is caused by a real increase in how much we produce and consume. Inflation and the Consumer Price Index

9. A measure of inflation is the consumer price index (CPI) To calculate, economists add up the total price of a “market basket” of typical items bought by an average family in a month. They compare this total price to the total price of the same items during a base period, usually a year before. They divide the current total cost by the previous total cost and multiply the result by 100 to get a percentage. Inflation and the Consumer Price Index

10. CPI = cost of today’s market basket x 100 cost of market basket in previous year - For example, if the market basket cost $960 in 2009 and $1,000 in the year 2011, the inflationrate would be calculated: 1000 X 100 = 1.04 X 100 = 104 960 Consumer Price Index

11. If you give the base year CPI a standard value, or index, of 100, then the increase from 100 to 104 represents a 4% increase in the CPI. If the GDP increased 4% in the same period, then we know that the increase was due only to inflation and that the real GDP, after adjusting inflation, remained the same. If, on the other hand, the GDP increased 6%, with an inflation rate of 4%, then the real GDP rose 2%. Consumer Price Index

12. Inflation occurs when the money supply in an economy increases too quickly. Governments often increase the money supply in order to encourage consumer spending and promote economic growth. Inflation and the Consumer Price Index

13. Another key indicator of an economy’s health is its unemployment rate. An economy with a low unemployment rate is usually healthy and growing. More workers means more production and more consumption. Only those people actively looking for jobs and are able to work are counted. Economists classify four different types of unemployment. Unemployment

14. Structural unemployment Frictional unemployment Seasonal unemployment Cyclical unemployment Types of Unemployment

15. Occurs when skills of the labor force do not match employer’s needs. Some skills become obsolete. Advances in technology have replaced workers in some sectors of our economy. Today, many workers have gone back to school to learn new skills needed in the marketplace. Structural Unemployment

16. Some people are unemployed because they are waiting on a job that better suits their specific skills or education level. People in the work force that are in between jobs. Frictional Unemployment

17. Occurs because of a downturn in the economy- the business cycle. Economies go through cycles of good times and bad times, growth and recession. During times of growth, companies hire workers and production increases. If consumer demand goes down, however, companies cut production, which results in the loss of many jobs. Cyclical Unemployment

18. Affects mainly people whose jobs depend on the weather. Some people do seasonal jobs and are unemployed part of the year. Other may have two seasonal jobs to avoid career burnout. Seasonal Unemployment

19. Aggregate demand (AD) is the total amount of goods and services that all people in an economy are willing to buy. When prices are low, people will buy more, increasing the nation’s real GDP. When prices are high, people will buy less, decreasing the nation’s real GDP. Aggregate supply is the total amount of goods and services that all producers are willing and able to produce. Individual markets can adjust quickly to changes in demand by lowering prices. It takes longer for the average price of all goods and services in an economy to change. Aggregate Supply & Demand

20. Graphic Organizer Activity Using either EOCT book, draw and label the stages of the business cycle on a full size sheet of blank paper. Label the following- expansion, peak, recovery, trough, and contraction. Place an “X” on your business cycle where you think we are today The Business Cycle

21. The Business Cycle

22. Economic downturns have always been a part of the history of our country. During downturns, the aggregate demand curve shifts to the left. When demand falls for ALL goods and services, it is not so easy for ALL producers to lower their prices. Firms will lower production and will need fewer workers. This leads to an increase in the unemploymentrate and real GDP declines. Recessions & Depressions

23. When real GDP declines for 6 months or more, an economy is considered to be in a recession. Typically, recessions will continue until prices across the economy start to fall, Eventually, demand and production will begin increasing again. This is called a recovery. If the recession lasts for an extended period of time or if the decrease in real GDP is severe, the economy is considered to be in a depression. Recessions & DEpressions

24. Recessions & Depressions Are we in a recession now?

25. The federal government creates a budget for each fiscal year. It also collect taxes in many forms to pay for all the programs and services provided. The President collaborates with Congress to create our nation’s fiscal policy- tax and spend. If the government spends more money than it collects in tax revenues, it will have a budgetdeficit. With budget deficits, the government must borrow money to cover expenses. This adds to the national debt. Budget DefIcits & The National Debt

26. Just like a private citizen who borrows money from a bank, the government must pay interest in its loans as well. Today, an ever growing amount of tax dollars must be spent toward simply paying the interest on the national debt. These large interest payments (debt service) hinder the amount of GDP growth we can achieve. Budget Deficits and the National Debt