unit 3 macroeconomics academic

Unit 3

Macroeconomics - Academic

I. Measuring the Economy

A. GDP

1. Defined – $ value of products made within a country’s borders.

2. Used by economists & leaders to analyze domestic and foreign economic policy.

3. Calculates foreign and domestic production within a nation-state.

B. Ways of Calculating GDP

1. Expenditure Approach - Add together

a. Add together all goods and services.

b. Net exports or imports of goods and services.

2. Income Approach

a. Add together all incomes in the economy.

b. Much more accurate

C. Downsides of using GDP

It does not take into account..1. Types of items produced – Higher quality of

work2. Health – ailments cost money, lower standard

of living3. Black Market – large in some nations4. Households – Services provided without value5. Amount produced per person – efficiency of

production6. How goods are distributed – Income Gap7. Over adjustment for inflation – Fixed by real

GDP

D. A Wealthy Nation has the following…

1. Amounts of natural resources (including productive labor) within a nation.a. USA has oil, water, timber, arable soil, freshwater, natural gas,

etcb. Russia has oil and natural gasc. China has labor

2. Technology and equipment available to a nation – USA has high level of use, production, and skill

3. Skill and educational level of workforce – USA guarantees education of all

4. Price levels – Price levels in USA mostly stable5. Capital deepening – more spent on capital with each worker.6. Savings invested in the economy help spur growth – China and India

have large amount of savings7. Population increase means more workers for more production –

Declining population is bad8. Government investing in public goods – Infrastructure especially9. Foreign trade increases growth if we export goods or import

investments – USA world’s leading importer and exporter

E. Other Measurements

1. Real GDP – adjusted for inflation2. Purchasing Power Parity – How much can be

bought with money3. Unemployment – amount unemployed4. Inflation – rate of rising prices5. Average life expectancy6. Infant Mortality Rate7. Gross National Product – value of everything

produced within a country’s borders.8. Literacy Rate.

F. Ups & Downs

1. Phases – Business cycle

a. Expansion – Period of economic growth

b. Peak – height of economic expansion.

c. Contraction – period of economic decline

d. Trough – Lowest point in an economic contraction.

e. Not all cycles are shaped the same

2. Negative Parts of the Cycle

a. Recession – ½ year of declining GDP.

b. Depression – Recession that is especially long and severe, longer than 1 year

c. Stagflation – Decline in real GDP combined with a rise in the price level.

F. What can impact GDP?

1. Business investment – increased investment will lead to employment

2. Interest rates and credit – Rates must remain low for easy access to cash

3. Consumer expectations – Must remain high, economics is a game of emotion

4. External shocks (bad weather & war) good for foreign victor, but for domestic victor, worse for lose.

G. Historical Examples

1. Great depression –a. GDP falls over 10%

b. unemployment rate - over 20%.

c. Leads to political radicalism in world

d. FDR and Democrats win control of DC

2. 1970’sa. Greatest example of stagflation.

b. OPEC reduces supply, prices rise

c. Increased government spending

d. Production slows due to end of Vietnam

H. World’s GDP (PPP)

1. USA – 14.2 trillion2. China – 7.9 trillion3. Japan – 4.3 trillion4. India – 3.2 trillion5. Germany 3.6 trillion11. Mexico – 1.5 trillion135.Haiti – 11.5 billion151.Sierra Leone – 4.2 billion

II. Unemployment

A. Types

1. Frictional – When people take time off to find a job.

2. Seasonal – Industries slow or shut down for the season

3. Structural – Workers’ skills do not match the jobs that are unavailable.

4. Cyclical – unemployment that increases with economic hard times

B. Measuring

1. Unemployment rate = number of people unemployed divided by the labor force

2. National unemployment is for USA as a whole. Different from state to state.

3. Unemployment is usually short.

4. Noticeable unemployment is long-term.

5. Few workers make up jobless rate for extensive periods of time.

C. Problems

1. Its difficult to distinguish a person who is unemployed from a person who isn’t in labor force.

2. Discouraged workers, those who like to work but give up searching for jobs after unsuccessful attempts, aren’t in statistics.

3. Some people may claim to be jobless to receive assistance, even if they aren’t searching for work.

C. Full Employment

1. No cyclical unemployment.

2. Few people left for employers to hire.

3. Companies raise pay, pass on costs to customers = inflation.

III. Inflation

A. Defined

1. General increase in prices. 2. Creeping – Slow inflation rate between

1 -3% annually.3. Chronic – Accelerated and hard on the

economy. Hard to predict.4. Hyperinflation – Inflation that rises

rapidly as high as 100-500% per month. Hyperinflation is equivalent with total economic collapse.

B. Measuring

1. Price index – measured amount of price increases for a standard group of goods over a period of time.

2. Consumer price index is computed by the Bureau of Labor Statistics.

3. CPI = updated costs x 100

Base period cost

C. Causes

1. Quantity – too much money in the economy causes prices to rise.

2. Demand-pull – When demands for goods and services exceeds supplies.

3. Cost-push – producers raise prices in order to pay increased costs.

D. Trends

1. Last 60 years, prices have gone up about 5 percent per year.

2. Deflation, occurred during the 1800’s in the USA.

3. Hyperinflation has occurred in Confederate States of America, Weimar Germany, and Zimbabwe

4. During 1970s Costs went up 7 percent annually.

5. In 1990s, prices went up 2 percent per year.

D. Effects

1. Purchasing power – as prices increase, your purchasing power decreases.

2. Fixed income recipients like those on social security, have less purchasing power when prices rise.

3. The amount of interest you receive from investments will be of less value.

4. When the Fed increases the money supply and creates inflation, it erodes the real value of the unit of account.

5. Inflation causes dollars at different times to have different real values.

6. Therefore, with rising prices, it is more difficult to

compare real revenues, costs, and profits over time.

IV. Poverty

A. Measured1. Poverty Threshold – income below which is sufficient to

support a family or household.

2. varies among size of the household.

3. Poverty is higher for

a. African-Americans

b. Hispanics

c. Single mothers

d. Children

e. Inner cities

f. Isolated rural regions

Figure 1 The Poverty Rate

Copyright©2003 Southwestern/Thomson Learning

Percent of thePopulation

below PovertyLine

1960 1965 1970 1975 1980 1985 1990 1995 2000

Poverty rate

5

10

15

20

25

B. Causes1. Lack of Education – as you increase a person’s

education, the average level of income also increases.

2. Location – Inner city residents –less likely to own automobiles. Rural residents distant from everything.

3. Discrimination –

a. European descent earn more than racial minority groups

b. Men earn more than women.

c. Discrimination is diminishing.

d. Programs like affirmative-action don’t close the gap.

4. Economic Shifts –bad times hurt poor worse.

5. Family Structure - Two incomes are better than one..

C. Income

1. Average income in the USA $37,000.2. Income inequality is decided by…

a. Ranking the nation’s household incomesb. Dividing them into quintilesc. Average each quintile’s income]d. Then calculate their share of total income.

3. Uneven distribution is caused by lack of skills, education, and inheritances.

4. From 1935-1970, the distribution of income gradually became more equal.

5. In more recent years, this trend has reversed itself.6. The following have tended to reduce the demand for unskilled labor

and raise the demand for skilled labor:a. Increases in international trade with low-wage countriesb. Changes in technology

7. Therefore, the wages of unskilled workers have fallen relative to the wages of skilled workers.

8. This has resulted in increased inequality in family incomes.

Table 1 The Distribution of Income in the United States: 2000

Copyright©2004 South-Western

D. Antipoverty

1. Enterprise zones – area of underdevelopment that businesses are lured to by tax breaks.

2. Government employment assistance: training, unemployment, and minimum wage.

3. Welfare: Begun by President Johnson, reformed by President Clinton.

a. Food Stamps

b. WIC

c. Cash assistance’

d. Heating.

e. Housing.

f. Welfare to work.

4. Negative income tax gets revenue from wealthy households, transfers to poor.

a. Rich pay a tax based earnings.

b. Poor receive a assistance—a “negative tax.”

c. Poor families receive aid with no demonstration of need.

5. In-kind transfers are to poor = goods and services (Food stamps and Medicaid)