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Macroeconomics

Macroeconomics. the Big Picture. Production. Unemployment. Inflation. 3. Production. the creation of goods and services. measuring serves as a basis for setting reaching macro goals. 2. Inflation. a general rise in the price level. Some prices may even be going down!!.

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Macroeconomics

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  1. Macroeconomics the Big Picture Production Unemployment Inflation

  2. 3. Production the creation of goods and services measuring serves as a basis for setting reaching macro goals

  3. 2. Inflation a general rise in the price level Some prices may even be going down!!

  4. 1. Unemployment a resource (factor of production) is not being used our focus is on people

  5. Consequences of Unemployment • Loss of goods and services 2. Individual loss of spending ability and social issues

  6. Types of Unemployment • Frictional between jobs 2. Structural job replaced 3. Cyclical less business 4. Seasonal temporary job

  7. Measuring Unemployment 1. population everyone over 16, working or looking 2. labor force not working, but looking 3. unemployed 4. discouraged labor not looking

  8. Calculating Unemployment unemployed labor force

  9. Calculate the Unemployment Rate Population = 260 million laborforce = 160 million Unemployed = 32 million Unemployed /labor force = 32 million/160 million = .20 = 20%

  10. Full Employment Deals with which type? • Frictional? 2. Structural? 3. Cyclical?

  11. The Natural Rate of Unemployment At full employment there will still be some: • Frictional 2. Structural but no Cyclical

  12. The Natural Rate of Unemployment actual unemployment may only get as low as 4 – 5 %

  13. Jobless rates by group Jobless changes by sector Numbers in percent Number of jobs added/lost

  14. Which type? a. Frictional b. Structural 1. A student who decides at mid-semester to devote the rest of the term to studying quits her part-time job 2. A graphic artist who is out of work because a computer now does her job. 3. A waiter who quits his job and is applying for the same type of work in a restaurant where morale is better. d. Not Unemployed c. Cyclical

  15. Which type? a. Frictional b. Structural 4. The son of a local farmer who works 20-hour weeks without pay on the farm while waiting for a job at a nearby factory. 5. A travel agent who is laid off because the economy is in a slump and vacation travel is at a minimum. 6. A plumber who works 5 hours per week for his church (on a paid basis) until he can get a full-time job d. Not Unemployed c. Cyclical

  16. 2. Inflation a general rise in the price level Some prices may even be going down!!

  17. Consequences of Inflation • Hyperinflation 2002 Argentina 1920s Germany 1990s Russia 2. Money loses value

  18. Real Interest rate decreases =Interest rate - inflation rate • Savings Lose value 2. Loans Are easier to repay 3. Wealth May increase

  19. Types of Inflation • Demand-Pull 2. Cost-Push

  20. Orig. price and output New price and output D2(increase in demand) • Demand-Pull Price S1 P2 P1 D1 Quantity Q1 Q2 buyers demands greater than producers supply

  21. S2(new equilibrium) 2. Cost Push Price S1(initial equilibrium) P2 P1 D Quantity/time Q1 Q2 sellers’ costs are passed on to buyers

  22. Who loses? Who loses? 1. Nellie borrows $5,000 for her college expenses at an interest rate of 4 percent to be paid off over 5 years, during which time the inflation rate averages 6 percent. 1. Nellie borrows $5,000 for her college expenses at an interest rate of 4 percent to be paid off over 5 years, during which time the inflation rate averages 6 percent. 2. Oscar invests $3,000 in securities that pay 5.3 % annually for 10 years, and the inflation rate during that time averages 6.4 percent. 2. Oscar invests $3,000 in securities that pay 5.3 % annually for 10 years, and the inflation rate during that time averages 6.4 percent.

  23. Who loses? 3. The Lynchburg National Bank commits to $4 million in 15-year mortgages at an average mortgage rate of 7.75 percent. The inflation rate averages 8 percent over this 15-year period. 4. Barney bought a house in 1991 for $100,000 that he now plans to sell for $200,000. during this time the inflation rate has averaged 3 percent.

  24. The Price Index 1. Measures price changes by % 2. calculations

  25. Calculating an Index amount in 2nd year Amount in 1st (or base) year X 100 For Example: 2002 Price = $260 2003 Price = $300

  26. Actual Calculation $300 $260 = 1.1538 X 100 = 115.4 year 1 year 1 Base year = X 100 Base year = 100 (always)

  27. Calculating a Price Index!! Calculate a Price Index, and assume that year 3 is the base year

  28. Calculating a Price Index!!

  29. Consumer Price Index measures a “shopping basket” of consumer goods checked regularly then an index is created

  30. Other Indices 1. PPI 2. WPI 3. MPI 4. GDP Price Index

  31. Disinflation a slowing of the inflation rate the aim of policies usually phrased as “slowing inflation” http://abcnews.go.com/Video/playerIndex?id=6484348

  32. 3. Production the creation of goods and services measuring serves as a basis for setting reaching macro goals

  33. Full Production producing at maximum capacity on the PPC

  34. Economic Growth the full-production full-employment capacity grows over time the PPC shifts out

  35. Measuring Production • GDP production in a country 2. Nominal GDP current $$ 3. Real GDP adjusted $$ 4. GNP production of a country

  36. $.30 $.30 Sales Receipts Value added to the product $.65 $.35 (equals income created) Stage of production (at each stage of production) $.90 $.25 by farmer $.10 $1 by miller Stage 3:baker’s bread by baker (wholesale) Stage 4:grocer’s bread by grocer (retail) Total value added = $1 Total consumer expenditure = $1 A Measure of Output Only final goods and services count • What Does Not Count Toward GDP? • Sales at intermediate stages of production. Their value is already counted in the final-user good. Including them would result in double counting. Stage 1: farmer’s wheat Stage 2:miller’s flour

  37. A Measure of Output • What Else? • Financial transactions and income transfers. They do not reflect production. • Production outside the geographicborders of the country is not counted. • Goods not produced during the current period are not counted. • Stocks 1955 Chevy

  38. Which are included in this year's GDP? : 1. Interest on an AT&T bond - 2. Social Security payments to retirees - 3. Services of a painter in painting a house - 4. Income of a dentist - 5. Money received from the sale of a 1990 model car- 6. Monthly allowance of a college student - 7. Rent for a 2 bedroom apartment - 8. Money received for selling this year's model car - 9. Interest on a government bond - YES NO YES YES NO NO YES YES NO

  39. Which? 10. A two hour decline in the work week - 11. Purchase of the AT&T bond - 12. A $ 2 billion increase in business investments - 13. Purchasing 100 shares of GM common stock - 14. Purchase of an insurance policy - 15. Wages paid to your butler - 16. Market value of a homemaker's services - 17. Purchase of the Mona Lisa - NO NO YES NO YES YES NO NO

  40. Calculating Real GDP nominal GDP for a year price index number for that year X 100 For Example: 2000 GDP = $9.873 trillion 2000 GDP Index = 107.04

  41. Actual Calculation $9.873 107.04 = .0092238 X 100 = 9.224 calculation works for “deflating” or “inflating”any dollar amount nominal price target year index X 100

  42. Gross Domestic Product Complete the following table assuming that Year 1 is the base year.

  43. Gross Domestic Product Complete the following table assuming that Year 1 is the base year.

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