unit 3 - macroeconomics
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Unit 3 - Macroeconomics. Standard -. 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. - PowerPoint PPT PresentationTRANSCRIPT
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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:1. Final Output (not the intermediate
phases…think tree – lumber – house)2. Current Year (not used cars or second
hand clothes)3. 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 purchases…anything new that you buy
2 Types:1. Durable Goods – last longer than 1
yearExamples: cars, houses, computers
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C = Personal Consumption Expenditures
2. Nondurable Goods – last less than 1 yearExamples: food, make-up, etc.
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I = Gross Investment
o Total investment in capital goods
o Factories, office space, raw materials
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G = Government Purchases
o Includes federal, state, and local spending…highways, education, national defense, transfer payments
o 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 > Imports) Deficit (Exports < Imports)
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Limitations of GDP:
1. Accuracy and Timeliness of Data Gathering data is slow process
2. Nonmarket Activities Performing activities at no charge…
mowing the lawn
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Limitations Cont.
3. Underground Economy Illegal or unreported legal activity
4. “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
Expansion:•Period of economic growth•GDP
Peak:•Highest Point in an economy•Strong Economy
Contraction:•Period of economic slowdown•GDP (or increasing at a slower rate)
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?
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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
1. Too much money in the economy can cause inflation.
Inflation: rise in the average price level of g/s Money doesn’t “go as far”…it isn’t
worth as much
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2. 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 govt’s
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)
1. Open Market Operations: when the Fed buys or sells U.S. govt.
securities (bonds) Buy securities…more money in
circulation (stimulate economy) Sell securities…less money in
circulation (slow down economy)
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Govt. Bonds/Securities
Essentially…a loan to the US Govt.
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…with a promise of earning interest!
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Tools of Monetary Policy:
2. Changes in Discount Rate: The interest rate the Fed charges on
loans to banks Lower rate…banks are encouraged to
make more loans (money supply increases)
Raise rate…banks are discouraged from making loans (money supply decreases)
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Tools of Monetary Policy:
3. Changes in Reserve Requirement: The minimum percentage of deposits
that banks must keep on reserve to back up checking-type accounts
Lower reserve requirement…banks have more money to lend (increases money supply)
Raise reserve requirement…banks 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:1. Contractionary (slow down)2. Expansionary (stimulate)
Limitations: Slow Political
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Tools of Fiscal Policy
1. Tax: either increase (contractionary) or decrease (expansionary)
Proportional: flat tax…burden on poor Progressive: income tax…burden on
rich Regressive: sales tax…burden on
poor
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2. Spend: either increase (expansionary) or decrease (contractionary)
Purchases –g/s purchased by the govt. Transfer Payments – money payment
sent to individuals (welfare, Social Security)
3. 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 else’s 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?id=110&qid=1287
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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
1. Unemployment (4 types) Seasonal, Frictional, Cyclical, Structural
Unemployed: those who wish to work but cannot find jobs
Issues:
- Doesn’t 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 unemployed…what is the unemployment rate of the students at SCHS?
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100500
X 100 = 20%
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2. Inflation: an increase in the average price level of all products in an economy
Occurs because aggregate demand increases faster than aggregate supply
Also…too 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
D1
D2
P1
P2
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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)$30002007 – 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 1502007 – 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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