Economic Goals and how we Economic Goals and how we measure them Chapter 13-1measure them Chapter 13-1

Growth—measured in GDPGrowth—measured in GDP

Gross Domestic ProductGross Domestic Product • GDP is the monetary measure of the GDP is the monetary measure of the

total total market value market value of all of all final final goods and goods and services services produced within a country produced within a country in in one year. one year.

Allows economists to compare the Allows economists to compare the productivity from one year to the productivity from one year to the nextnext

GDP includes only final products and GDP includes only final products and services services • it avoids double or multiple counting by it avoids double or multiple counting by

eliminating any intermediate goods eliminating any intermediate goods GDP is the value of what has been GDP is the value of what has been

produced, not what was actually soldproduced, not what was actually sold

What does GDP exclude?What does GDP exclude?

Purely financial transactions are Purely financial transactions are excluded.excluded.• stocks or money transfers (they are not stocks or money transfers (they are not

producing anything)producing anything) Intermediate productsIntermediate products Secondhand sales are excluded Secondhand sales are excluded Non-market transactions—mowing Non-market transactions—mowing

your lawn, the work of a homemaker your lawn, the work of a homemaker or other home repairor other home repair

Underground economyUnderground economy

GDP = C + I + G + Xn GDP = C + I + G + Xn

GDP is divided into the categories of GDP is divided into the categories of buyers in the market buyers in the market • Personal Consumption—(C) Personal Consumption—(C) • Gross Private Domestic Investment—(I)Gross Private Domestic Investment—(I)• Government Purchases– (G) Government Purchases– (G) • Net Exports—(Xn) Net Exports—(Xn)

If it is not made here it is not part of GDPIf it is not made here it is not part of GDP if it is a factory owned by the U.S. but is if it is a factory owned by the U.S. but is

outside the boarders, it does not count. outside the boarders, it does not count.

CPI Chapter 13-2CPI Chapter 13-2

Consumer Price Index, measures Consumer Price Index, measures inflationinflation• Select a base year to compare price Select a base year to compare price

changeschanges• Market basket of goods (aprox. 80,000 Market basket of goods (aprox. 80,000

goods in 364 categories)goods in 364 categories)• Changes occasionally in order to Changes occasionally in order to

modernize the market basketmodernize the market basket Real Vs. Current GDPReal Vs. Current GDP

• Real GDP is what GDP would be if prices Real GDP is what GDP would be if prices had not changed from the base year.had not changed from the base year.

Chapter 14-1Chapter 14-1 The business cycle:The business cycle:

• Recession—period when GDP is declining two Recession—period when GDP is declining two quarters in a row (on average they last 9 quarters in a row (on average they last 9 months)months)

• Peak—the point where GDP stops going upPeak—the point where GDP stops going up• Trough—the turnaround point where GDP stops Trough—the turnaround point where GDP stops

going downgoing down• Expansion—period of recovery from a Expansion—period of recovery from a

recessionrecession• Trend lineTrend line• Depression—A severe recession (play track 9 Depression—A severe recession (play track 9

of Mac)of Mac)

Ch. 14-1 cont.Ch. 14-1 cont.

Causes of the business cycle:Causes of the business cycle:• There is no one cause, but…..There is no one cause, but…..• New technology or innovation can have New technology or innovation can have

a big impact (internet)a big impact (internet)• Political instabilityPolitical instability

Prediction of the cycle:Prediction of the cycle:• GDP and other indicators (index of GDP and other indicators (index of

leading indicators)leading indicators)

UnemploymentUnemploymentCh. 14-2Ch. 14-2

People aged 16 and over who have People aged 16 and over who have looked for a job in the last 4 weeks, looked for a job in the last 4 weeks, but can’t get a job.but can’t get a job.

Overstated employment:Overstated employment:• Part time workers are includedPart time workers are included• ““discouraged workers” are not includeddiscouraged workers” are not included

Unemployment cont.Unemployment cont.

Kinds of unemployment:Kinds of unemployment:• Frictional UnemploymentFrictional Unemployment (always there) (always there)

—workers who are between jobs due to —workers who are between jobs due to leaving, newly entering the labor force, leaving, newly entering the labor force, or being laid offor being laid off

• Structural UnemploymentStructural Unemployment—due to a —due to a fundamental change in the economy (8 fundamental change in the economy (8 track manufacturer or defense industry track manufacturer or defense industry after the fall of USSR)after the fall of USSR)

• Cyclical UnemploymentCyclical Unemployment—caused by the —caused by the business cyclebusiness cycle

Unemployment cont.Unemployment cont.

Types of Unemployment Cont.:Types of Unemployment Cont.:• Seasonal UnemploymentSeasonal Unemployment—results from —results from

changes in weather or demand for changes in weather or demand for certain products (ski resort in the certain products (ski resort in the summer)summer)

• Technological UnemploymentTechnological Unemployment—When —When machines replace people (glass blowers machines replace people (glass blowers or automated tellers)or automated tellers)

Full employment—about 4 to 5%Full employment—about 4 to 5%

The Federal Reserve and Monetary The Federal Reserve and Monetary Policy Ch. 15-1Policy Ch. 15-1

Made up of 12 district banksMade up of 12 district banks• Each district bank is “owned” by its Each district bank is “owned” by its

member banks member banks Quasi-public/private organizationQuasi-public/private organization

• Owned by the banks, but decisions are Owned by the banks, but decisions are made by The Board of Governorsmade by The Board of Governors

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

““Monetary Policy”, Control of the Monetary Policy”, Control of the economy through the manipulation economy through the manipulation of the money supply of the money supply

““Easy Money Policy” Easy Money Policy” ““Tight Money Policy” Tight Money Policy”

How does The Fed control the How does The Fed control the supply of money? supply of money?

Answer: Black Magic! Answer: Black Magic! • (AKA Fractional Reserve System)(AKA Fractional Reserve System)• History of the fractional banking systemHistory of the fractional banking system

How many Twinkies can you buy with How many Twinkies can you buy with $1000, at one dollar each?$1000, at one dollar each?

One person’s spending becomes One person’s spending becomes another’s income another’s income

Tools of Monetary PolicyTools of Monetary Policy

Reserve Requirement changeReserve Requirement change• Rarely used because it causes big changesRarely used because it causes big changes

Discount RateDiscount Rate• The interest rate The Fed charges for banks to The interest rate The Fed charges for banks to

borrow moneyborrow money• Rarely used, “bank of last resort”Rarely used, “bank of last resort”

Federal Funds RateFederal Funds Rate• The interest rate that banks charge one The interest rate that banks charge one

another for loansanother for loans• Changes every dayChanges every day

Tools of Monetary PolicyTools of Monetary Policy(cont.)(cont.)

Federal Open Market OperationsFederal Open Market Operations• Buying and selling of bondsBuying and selling of bonds• This is the most common tool of This is the most common tool of

Monetary PolicyMonetary Policy• Used every dayUsed every day