Economic Goals and how we measure them Chapter 13-1

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Economic Goals and how we measure them Chapter
13-1
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Growthmeasured in GDP

• Gross Domestic Product
• GDP is the monetary measure of the total market
  value of all final goods and services produced
  within a country in one year.
• Allows economists to compare the productivity
  from one year to the next

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• GDP includes only final products and services
• it avoids double or multiple counting by
  eliminating any intermediate goods
• GDP is the value of what has been produced, not
  what was actually sold

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What does GDP exclude?

• Purely financial transactions are excluded.
• stocks or money transfers (they are not producing
  anything)
• Intermediate products
• Secondhand sales are excluded
• Non-market transactionsmowing your lawn, the
  work of a homemaker or other home repair
• Underground economy

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GDP C I G Xn

• GDP is divided into the categories of buyers in
  the market
• Personal Consumption(C)
• Gross Private Domestic Investment(I)
• Government Purchases (G)
• Net Exports(Xn)
• If it is not made here it is not part of GDP
• if it is a factory owned by the U.S. but is
  outside the boarders, it does not count.

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CPI Chapter 13-2

• Consumer Price Index, measures inflation
• Select a base year to compare price changes
• Market basket of goods (aprox. 80,000 goods in
  364 categories)
• Changes occasionally in order to modernize the
  market basket
• Real Vs. Current GDP
• Real GDP is what GDP would be if prices had not
  changed from the base year.

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Chapter 14-1

• The business cycle
• Recessionperiod when GDP is declining two
  quarters in a row (on average they last 9 months)
• Peakthe point where GDP stops going up
• Troughthe turnaround point where GDP stops going
  down
• Expansionperiod of recovery from a recession
• Trend line
• DepressionA severe recession (play track 9 of
  Mac)

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Ch. 14-1 cont.

• Causes of the business cycle
• There is no one cause, but..
• New technology or innovation can have a big
  impact (internet)
• Political instability
• Prediction of the cycle
• GDP and other indicators (index of leading
  indicators)

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UnemploymentCh. 14-2

• People aged 16 and over who have looked for a job
  in the last 4 weeks, but cant get a job.
• Overstated employment
• Part time workers are included
• discouraged workers are not included

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Unemployment cont.

• Kinds of unemployment
• Frictional Unemployment (always there)workers
  who are between jobs due to leaving, newly
  entering the labor force, or being laid off
• Structural Unemploymentdue to a fundamental
  change in the economy (8 track manufacturer or
  defense industry after the fall of USSR)
• Cyclical Unemploymentcaused by the business cycle

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Unemployment cont.

• Types of Unemployment Cont.
• Seasonal Unemploymentresults from changes in
  weather or demand for certain products (ski
  resort in the summer)
• Technological UnemploymentWhen machines replace
  people (glass blowers or automated tellers)
• Full employmentabout 4 to 5

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The Federal Reserve and Monetary Policy Ch. 15-1

• Made up of 12 district banks
• Each district bank is owned by its member banks
  
• Quasi-public/private organization
• Owned by the banks, but decisions are made by The
  Board of Governors

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What is the purpose of The Fed.?Ch. 15-2

• Monetary Policy, Control of the economy through
  the manipulation of the money supply
• Easy Money Policy
• Tight Money Policy

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How does The Fed control the supply of money?

• Answer Black Magic!
• (AKA Fractional Reserve System)
• History of the fractional banking system
• How many Twinkies can you buy with 1000, at one
  dollar each?
• One persons spending becomes anothers income

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Tools of Monetary Policy

• Reserve Requirement change
• Rarely used because it causes big changes
• Discount Rate
• The interest rate The Fed charges for banks to
  borrow money
• Rarely used, bank of last resort
• Federal Funds Rate
• The interest rate that banks charge one another
  for loans
• Changes every day

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Tools of Monetary Policy(cont.)

• Federal Open Market Operations
• Buying and selling of bonds
• This is the most common tool of Monetary Policy
• Used every day