The National Economy

Economic Performance

Economic Growth

Economic Challenges

Macro-Economics

• Macro means BIG• In economics this term refers to topics

that deal with an individual nation or international topics and events

• GDP is one of the main indicators used in macro-economic studies

• Word to know= Aggregate (TOTAL or SUM)

Aggregates

• Aggregate simply means TOTAL

• Aggregate expenditure= the sum or total of all consumption (C), Investment (I), Government purchases (G), and net exports (X) minus (-) the value of imports (M)

• C+I+G+(X-M)=GDP

Aggregate Income

• Adds up the average income earned during the year by those that produce the output

• Calculated by adding the value added to a product at each stage of production or by just the final selling price of a product

• Value added= firm’s selling price minus the cost of intermediate products (say wood and screws for a shelf)

GDP vs GNP

GDPGross Domestic Product

Total amount of goods or services produced IN a nation during a given period- usually a year

GNPGross National Product

The total market value of all the goods and services produced BY a nation during a specified period.

GDP vs GNP

Double Counting

?- with all this adding and subtracting, how do we avoid counting something twice--- or more?

A- that is where value added comes in and using final vs intermediate goods.

Intermediate vs. Final Goods

Final Goods• Manicure• Bread• Cruise Missiles• New Factory• Dresses

Intermediate Goods• Window glass for

new automobiles• Wood for a new

house• Screws, metal for

missiles• Cloth for a new

dress

GDP= C+I+G+(X-M)

• C= Consumer is the final buyer• I= Investments (purchase of capital goods by

businesses)• G= Government purchases• X = Exports (items sent out of the USA)• M = Imports (items brought into USA)

Calculating the GDP

Your Turn…• In the USA the…

– Consumer spending was - $3 billion – The government spending was – $1.5 billion– Business Investments totaled $1 billion– Imports totaled – $2 billion– Exports – $1.5 billion– WHATS THE GDP?

$5 BILLION

Why is this bad (importing

more than you export)?

Real vs. Nominal GDP

• Nominal GDP - Inflation (CPI) is not factored in…– Why is this a bad thing???– What if GDP increased 4.5% - YIPEE – what a

great economy we have…– BUT – at the same time inflation went up by

4.5%– This means…NO ECONOMIC GROWTH

Real vs. Nominal GDP

• Which of these is the most accurate?

REAL GDP

• To find Real GDP you take the Nominal GDP and subtract the CPI this gives you Real GDP.

NGDP – CPI = RGDP

How does the government calculate the CPI

• “Market Basket”• Includes these things…

– Housing – 40%– Food / Beverages – 6%– Transportation – 17%– Medical Care – 6%– Apparel – 5%– Recreation – 5%– Education / Communication – 5%– Other – 16%

Current Year /

Base Year

-1

= CPI

CPI Calculation

• Pack of Hot Dogs in 1999 – $1.50

• Pack of Hot Dogs in 2006 – $2.20

2.20 / 1.50 - 1 = ________%

Economic Indicators

• GDP

• CPI

What does all of this mean????

It goes back to the Business Cycle…

Business Cycle

How does this cycle relate to unemployment rates? A peak means that the economy is doing very well and the unemployment rate is at its LOWEST level A trough means that the economy is doing poorly and the unemployment rate is at its HIGHEST level

Remember the stages of the business cycle:

Growth, Peak, Recession, Trough, Recovery, Growth

Calculating it all together• In 2003 the

Nominal GDP was 2,200,000,000

• In 2006 the Nominal GDP WAS 2,800,000,000

• Divide and subtract 1 to get the Nominal Growth Rate (NGR)

• In 2003 the CPI was $2,000

• In 2006 the CPI was $2,200

• Divide and subtract 1 to get Inflation

NGR – Inflation = REAL GDP

One more time…

• What is GDP?

–The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time.

What does the GDP not not include?

• So glad you asked…– The GDP does not take into account:

• Items produced in households– Examples: Childcare, meal preparation, house cleaning, and

home repair

• Underground Economy (Black Market)– Drug Lords do not report their earnings, neither do 15 yr old

babysitters

– Officials guess that its about 7.5 % of the GDP ($750 billion)

• Depreciation– The value of capital resources that are used up, or become

obsolete

Consumption• Consists of the purchase of final goods

and services by households during the year.

• What do you consume?– Durable Goods

• Goods that last at least 3 years• TV, Chair, Bike, etc.

– Nondurable Goods• Things that will be consumed in the near future• Soap, Milk, Hair Gel, etc.

InflationInflation• Inflation Inflation – sustained levels in the increase

of the average price level

• HyperinflationHyperinflation – Extremely high inflation

• Deflation Deflation – average price levels are declining

• StagflationStagflation – inflation combined with high unemployment

Sources of Inflation• Demand-Pull Inflation (PRICE GOES UP)Demand-Pull Inflation (PRICE GOES UP)

– Prices are going up because demand is up– Think about the determinants of demand (increased

income, consumer tastes, etc.)

• Cost-Push Inflation (SUPPLY GOES DOWN)Cost-Push Inflation (SUPPLY GOES DOWN)– Prices are going up because there is a decrease in

aggregate supply (total supply)– Think about it - when there is less of something,

the price is higher…this could eventually lead to what ______________________?

WHICH IS THE LESSER OF THE TWO EVILS?

UnemploymentUnemployment

•Do you know anyone who has lost their job? Not quit, but actually lost their job.

UnemploymentUnemployment• Review: What is considered a “healthy”

unemployment rate?– 4% - 5%

• Review: Is it possible to have full employment? (0% unemployment)– NO!

• Review: When GDP goes up, what will happen to unemployment?– Go Down

UnemploymentUnemployment• Types of Unemployment

– Frictional Unemployment• Definition: the time required to bring together

the worker and the job opening• Example: When a college student graduates

and takes a summer to look for the “perfect” job, they would be considered frictionally unemployeed

UnemploymentUnemployment• Types of Unemployment

– Structural Unemployment• Definition: Job-seekers do not have skills to

demanded for a job• Example: I want to be a bus-driver, however

the opening requires a CDL, I have a class C driver’s license.

• Note: this is more serious because the unemployed individual may have to get additional retraining – BEFORE – the get hired.

UnemploymentUnemployment• Types of Unemployment

– Seasonal Unemployment• Definition: Unemployment is dictated by the

time (season) of the year.• Example: An individual who is a ski-instructor in

Virginia will look for work in the summer.

UnemploymentUnemployment• Types of Unemployment

– Cyclical Unemployment• Definition: Unemployment is increased due to a

recession.• Example: USA enters a recession and Ford

closes a factory, 780 people would experience cyclical unemployment

• Note: Cyclical Unemployment is directly tied to the business cycle

UnemploymentUnemployment• Full Employment

– Definition: the absence of cyclical unemployment

– Means that the business cycle is at a ____.

• Underemployment– Definition: People who are working part-

time, when they need full-time work; and people who are overqualified for their current job.

Relationship between GDP and Unemployment

• As GDP increases, unemployment decreases b/c more workers are needed when the nation increases output.

• Remember the business cycle, GDP and employment rates are connected

The Government’s Role

• 2 Govt policies for increasing GDP• Demand-side Economics~ focuses on

shifting the aggregated demand cure to promote employment and price stability

• Supply-side Economics~ focuses on shifting the aggregate supply cure rightward through tax cuts or other incentives to increase production

And now… a short history lesson

• Before WWII our economy experienced many peaks and troughs

• The worst troughs (depressions) were between 1873 and 1879 (80 bankrupt railroads and the near complete shut down of the steal industry), depression of the 1890’s (18% unemployment) and 1929 – the 1930’s (Great Depression)

Economic Cause of the Great Depression…

• Decrease in aggregate demand- a left-ward shift in the aggregate demand curve

• Why this happened- stock market crash, poor business expectations, bank failures, decrease in consumer spending, decline in the nation’s money supply and trade restrictions

• Real GDP fell 27%, price levels fell 26%, and unemployment rose to 25.2% (highest EVER)

A shift in US Economic Policy

• Pre-Great Depression= Laissez-faire- recessions/depressions of the business cycle are unfortunate, but necessary

• The severity of the Great Depression stimulated new thinking

• John Maynard Keynes- aggregate demand is unstable, so the government should intervene to stimulate it- led to reforms of the New Deal

Stimulating Aggregate Demand

• How- Increase spending

• Directly- govt increases it’s spending

• Indirectly- cut taxes to stimulate consumer spending

• Either would lead to a federal budget deficit (spending exceeds revenue)

• This is Demand-side economics!

US Fiscal Policies WWII Era

• Fiscal policy= government spending and taxes

• WWII- increased production of war goods led to increased GDP and decreased unemployment

• Employment Act of 1846- made the gov’t responsible for fostering maximum employment, production and purchasing power

1950’s – 1960’s

• 1950’s- economy prospered without government fiscal policy interference

• 1960’s “Golden Age of Keynesian economics”- economies around the world were “on a roll” with modest inflation, low unemployment rates and healthy growth

Great Stagflation 1973 - 1980

• This is a contraction in the economy’s aggregate output combined with inflation

• Causes- increased govt spending, price ceilings on wages and prices (Nixon), crop failures around the world, OPEC cut supplies

• Real GDP dropped $40 billion, price levels increased 20% unemployment climbed to 8.5%

Why not just use Keynesian Policies?

• They would decrease unemployment, but increase inflation

• New approach (since 1980)= Supply- side economics

• Cutting taxes would stimulate aggregate supply

• It worked, BUT the federal deficit grew to all-time highs

What About Today?

• During the 1990s- govt started to increase tax rates

• Bush 1 and Clinton both did this to the point where there was a budget SURPLUS

• Expansion of the US economy from 1980s-1990s was the longest on record

• Now we are in a recessionary period that began in March 2001

Poverty, Jobs and Unemployment

• Poverty is higher in homes with no workers than in those with at least one

• Homes headed by unemployed females are 15 times more likely to be poor

• NM, MS, LA had highest birthrates to unmarried mothers and the highest poverty rates in 2001

• Poverty is directly linked to unemployment high unemployment = high poverty

Income Assistance

• Anti-poverty programs allow children (the largest group) to increase consumption possibilities

• Unplanned results– Increased income = reduced benefits– Long-term dependence = reduced skills– Cycle of poverty

Reforms to the Welfare System

• 1996

• Limits recipients to 5 years total

• Education, training, job search, take paid or unpaid positions

• Childcare services

• Welfare to work transitions periods- recipients can keep some benefits