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Transcript of How can these factors be controlled? Number of workers Their education and training Technological...
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Unit 2
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I. Macroeconomic Questions
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Why does output fluctuate? How can these factors be controlled?
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What determines economic growth? Number of workers Their education and training Technological advances Available machinery and labor Material resources How can we encourage the development of
these?
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Why do we have unemployment, and why is it a problem?
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Why do we have inflation, and why is inflation a problem?
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Which government policy affects output, growth, unemployment and inflation?
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How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?
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How do domestic economic activities affect other countries and our trade?
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A. U.S. Economic Goals The Employment Act of 1946
◦ Full Employment◦ Price Stability◦ Economic Growth
The Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act )◦ Unemployment rate of 4%◦ 0% inflation rate
II. Measuring Macroeconomic Goals
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B. Measuring Employment Civilian unemployment
◦ 60,000 households are surveyed Groups people (age 16+) into categories:
◦ Employed◦ Unemployed◦ Not in the labor force (too old to work, unable to
work, choose not to work)
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Unemployment Rate (UR)
UR = number of unemployed x 100 labor force
Labor Force Participation Rate (LFPR)
LFPR = number in labor force x 100 adult population
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C. Measuring Price Changes – Price Indexes Consumer Price Index (CPI)
◦ Measures changes in the prices of a “Market Basket” – about 400 goods and services commonly bought by consumers.
◦ Items the average consumer spends more money on are given more weight (than items consumers spend comparatively less on)
The Producer Price Index◦ Measures changes in prices of consumer goods
before retail Gross Domestic Product (GDP) Price Deflator
◦ Most inclusive – takes into account all goods and services produced
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How to construct a price index◦ Select a time period for the base year◦ Prices of any subsequent period are a percentage of
the base period (the base is set at 100)
Formula to measure price change from the base period:
CPI = weighted cost of base period items in current year prices x 100 weighted cost of base period items in base year prices
Rate of change:
Price Change = change in CPI x 100beginning CPI
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D. Measuring Short-Run Economic Growth Fluctuations in output (short-run economic
growth) Gross Domestic Product (GDP) is used to
measure this.
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How is GDP measured?◦ Add up the value of expenditures on final (sold to the
end user) goods and services.◦ These are divided into four categories:
Consumption (C) - spending by households on goods and services
Investment (I) – spending on capital equipment, inventories, and structures.
Government purchases (G) – spending on goods and services by all levels of government
Net exports (NX) – value of exports minus value of imports (imports must be subtracted because C,I, G purchases include expenditures on all goods, foreign and domestic, and the foreign component must be removed to only spending on domestic production remains)
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◦ What goods/services are NOT counted? Spending on stocks and bonds. Spending on welfare, social security, etc. Sale of illegal drugs Household production (ex. When homeowners clean
their houses) Intermediate goods – goods produced by one firm to be
further processed by another firm
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GDP: Is it counted and where? (Consumption, Investment, Government, Net Exports, Not counted)◦ You spend $7.00 to attend a movie.◦ A family pays a contractor $100,000 for a house he
built for them this year.◦ An accountant pays a tailor $175 to sew a suit for her.◦ The government increases its defense expenditures by
$1,000,000,000.◦ The government makes a $300 Social Security
payment to a retired person.◦ You buy GM stock for $1,000 in the stock market◦ A homemaker works hard caring for her spouse and
ten children.◦ Ford Motor Co. buys new auto-making robots.◦ You buy a new Toyota that was made in Japan◦ You pay tuition to attend college.
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GDP must be adjusted for price changes before Short-run economic growth can be measured
◦Real GDP – has been adjusted for price changes◦Nominal GDP – has NOT been adjusted for price
changes
Real GDP in Year 1 =
nominal GDP x 100 price index
Real output growth in GDP from year to another =
(real GDP in Year 2 – real GDP in Year 1) x 100 real GDP in Year 1
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To understand the impact of output changes, we look at real GDP per capita.
Real GDP per capita = Year 1 real GDP population in Year 1
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A. Historical background High inflation rates of the late 1960s and
1970s led to the severe recession of the early 1980s.
Impact on Monetary policy - Alan Greenspan’s time as the chair of the Federal Reserve revolved around controlling inflation.
III. Inflation
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B. Anticipated Inflation Level of inflation people expect to occur and
have built into their economic decisions Economic costs of high levels
◦ Boot Leather costs People running around trying to avoid losses from the
declining value of money Ex) In 1985 the inflation rate in Bolivia reached almost
8,000%. The value of the peso changed daily. One day 25 million pesos was worth $50 (US). Within a few days, 25 million pesos was worth $27 (US).
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(Cont - Economic costs of high levels)◦ Tax Distortions
Raises the tax burden on income earned from savings Example
You invest $10 in stock in 1990. You sell the stock for $50 in 2000. You have earned a capital gain of $40, which you must
include in your income taxes. BUT, the $10 in 1990 had more purchasing power than it
does in 2000. $10 in 1990 might be equivalent to $20 today. So your Real Gain is only $30.
◦ Confusion and Inconvenience Ex) it is difficult for investors to determine which firms
are successful
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C. Unanticipated Inflation The level of inflation that is not expected. Economic Costs
◦ People have not adjusted earnings and expenditures for this level of inflation.
Who is hurt?◦ Savers, people on fixed incomes
Who is helped?◦ Borrowers with fixed interest rates
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Contestant Gain/ Hurt
Reasoning
Priscilla (homeowner/worker)
Mayor
Peter (store owner)
Theresa (auto worker/union member)
Jerry (real estate developer)
Elmer (retiree)
Mr. Sad Class (teacher)
Lucy (high school senior)
Bernie (bank president)
Helga (retiree)
Jerome (potential homeowner/borrower)
Lawrence (British business owner)
The Inflation Game – Examples of Unanticipated Inflation
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A. Includes people who are actively looking for work.
IV. Unemployment
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B. Issues
Discouraged workers – people who gave up looking for work because they couldn’t find a job. Leads to underestimation of the number of people who would like to work.
Underemployed – people who are working part time but want a full time job
Different groups experience different rates of unemployment
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C. Types Frictional unemployment – people who are
temporarily between jobs
Cyclical unemployment – people who are not working because firms do not need their labor due to a lack of demand or a downturn in the business cycle
Structural unemployment – involves mismatches between job seekers and job openings. Unemployed people who lack skills or do not have sufficient education
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For each of the following, label it Frictional, Cyclical, Structural
A computer programmer is laid off because of a recession.
A literary editor leaves her job in New York to look for a new job in San Francisco.
An unemployed college graduate is looking for his first job.
Advances in technology make the assembly-line workers job obsolete.
Slumping sales lead to the cashier being laid off An individual refuses to work for minimum wage. A high school graduate lacks the skills necessary
for a particular job
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V. Business Cycles
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A. Refers to alternating rises and declines in the level of economic activity
• A cycle is one “up” followed by one “down”
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B. There are 4 phases to the business cycle1) Expansionary/Recovery • Real output is increasing• Unemployment is declining• As expansion continues, inflation may begin to
accelerate
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2) Peak• Real output (GDP) is at its highest point of the
business cycle
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3) Contractionary/Recession• Real output in the economy is decreasing• Unemployment rate is rising• As contraction continues, inflationary
pressures subside• If the recession continues long enough,
deflation may occur (falling prices)
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4) Trough• Lowest point of Real GDP reached during the
business cycle• If very deep, it may be called a depression• Very low output• Very high levels of unemployment• There is no precise decline when a recession becomes
a depression