Unit 3 - Macroeconomics

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Unit 3 - Macroeconomics
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Standard -
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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

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How do economists measure an economy?

• There are several macroeconomic indicators.
• Most Common GDP

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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 phasesthink
  tree lumber house)
• Current Year (not used cars or second hand
  clothes)
• Output Produced Within National Borders (not
  international factories)

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How is GDP Calculated?

• Output-Expenditure Model
• GDP C I G (X-M)

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C Personal Consumption Expenditures

• Consumer purchasesanything new that you buy
• 2 Types
• Durable Goods last longer than 1 year
• Examples cars, houses, computers

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C Personal Consumption Expenditures

• Nondurable Goods last less than 1 year
• Examples food, make-up, etc.

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I Gross Investment

• Total investment in capital goods
• Factories, office space, raw materials

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G Government Purchases

• Includes federal, state, and local
  spendinghighways, education, national defense,
  transfer payments
• Transfer Payments govt taxes transferred to
  others

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(X M) Net Exports (Exports Imports)

• May have a trade surplus or trade deficit
• Surplus (Exports gt Imports)
• Deficit (Exports lt Imports)

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Limitations of GDP

• Accuracy and Timeliness of Data
• Gathering data is slow process
• Nonmarket Activities
• Performing activities at no chargemowing the
  lawn

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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

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GDP

• Nominal GDP current dollar amount of GDP
• Real GDP dollar amount adjusted for inflation

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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

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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

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Types of Unemployment (p.331)

• Seasonal
• Frictional
• Cyclical
• Structural

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• Seasonal

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• Frictional

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• Cyclical

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• Structural

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• Is there anything we can do to maintain a stable
  economy?

YES!!!
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How do we do it?

1. Monetary Policy (The Fed)
2. Fiscal Policy (Congress)

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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.

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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 doesnt go as farit isnt worth as much

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• 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

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Money Supply Continued

• The Federal Reserve controls the money supply
  through monetary policy.
• Monetary Policy works by increasing or decreasing
  the money supply.

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The Federal Reserve System

• The Fed
• The bankers bank and the govts 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

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The Fed

• Current Chair Ben Bernanke

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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)

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Tools of Monetary Policy

• Stimulate Economy Increase Money Supply
• Control Inflation Decrease Money Supply

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Tools of Monetary Policy (3)

• Open Market Operations
• when the Fed buys or sells U.S. govt. securities
  (bonds)
• Buy securitiesmore money in circulation
  (stimulate economy)
• Sell securitiesless money in circulation (slow
  down economy)

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Govt. Bonds/Securities

• Essentiallya loan to the US Govt.

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with a promise of earning interest!
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Tools of Monetary Policy

• Changes in Discount Rate
• The interest rate the Fed charges on loans to
  banks
• Lower ratebanks are encouraged to make more
  loans (money supply increases)
• Raise ratebanks are discouraged from making
  loans (money supply decreases)

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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 requirementbanks have more money
  to lend (increases money supply)
• Raise reserve requirementbanks have less to lend
  (decreases money supply)

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Fiscal Policy

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

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Tools of Fiscal Policy

• Tax either increase (contractionary) or decrease
  (expansionary)
• Proportional flat taxburden on poor
• Progressive income taxburden on rich
• Regressive sales taxburden on poor

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• 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

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Multiplier Effect

• The idea that increased spending by consumers,
  businesses, or govt. becomes income for someone
  else. (then their spending becomes someone elses
  income, etc.)
• A chain reaction

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Supply Side Economics

• Voodoo Economics
• Tax cuts for big business
• http//www.killerclips.com/clip.php?id110qid128
  7

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• 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

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Other Economic Challenges

• Unemployment (4 types)
• Seasonal, Frictional, Cyclical, Structural
• Unemployed those who wish to work but cannot
  find jobs
• Issues
• - Doesnt 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

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Unemployment Rate

• of Unemployed
• in Workforce

X 100 ___
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Practice

• If there are 500 students at SCHS who are counted
  in the workforce and 100 are unemployedwhat is
  the unemployment rate of the students at SCHS?

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• 100
• 500

X 100 20
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• Inflation an increase in the average price level
  of all products in an economy
• Occurs because aggregate demand increases faster
  than aggregate supply
• Alsotoo 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

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S1
S2
P2
P1
D2
D1
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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

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• 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.

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Inflation Rate Formula

• B-A
• A

X 100 ___
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• CPI 1979 163 (A)
• CPI 2007 187 (B)
• 187-163
• 163

X100 14.72 inflation
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Example - Have prices increased since 1987?

• 1987 Base Year (100)
• 3000
• 2007 Current Year
• 5000
• 5000/3000 x 100 166
• 1987 (100) 2007 (166)
• (Prices are 66 higher)

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Now calculate inflation rate

• 1987 CPI 150
• 2007 CPI 166
• 166-150
• 150
• 10.7 inflation rate

X 100
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CPI The Easy Way

• http//www.bls.gov/data/home.htm

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Why should I care about Inflation?

• Think about this
• You get a 5 pay raise (yippee!)
• But inflation is 7 (oh no!)
• Did you really get a pay raise or a pay cut?
• What about people living on fixed incomes?

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Zimbabwe Currency
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Zimbabwe Currency- A 10 million dollar bill!
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