Economics

Unit 6: Micro, Macro, GDP, BC, Unemployment, Poverty

Economics

• Review:– How individuals and societies satisfy their

unlimited wants with limited resources

Micro

• Microeconomics:– The study of the behavior of individual players in

an economy• Individuals• Families • Businesses

Macro

• Macroeconomics:– The study of the behavior of the economy as a whole

• Large scale economic activity• For instance, when referring to labor in macroeconomics,

the focus is on all workers within an economy, not the choices of an individual worker.

• It is one way of building economic models– It takes big ideas and attempts to simplify all the massive

amounts of information into easy bit-sized information

Economic Indicators…

• Economic indicators are “pictures” of the economy…– They are basically a simplified version of lots of

statistical data that can show us the relative health of a nations economy…

WTGDP?• Gross domestic product:

– It sucks and it’s difficult to comprehend. – Currency value (such as U.S. dollar) of all final goods

and services produced within a country in a given time period

– Shows total income of a nation• From 4 main sectors

– Measure of nation’s economic well-being– Measure of a nation’s economic growth from one

period to the next• Usually in quarters or annually

WTGDP?...

• GDP is not perfect, however, it is used as a measure of economic prosperity and growth…

• GDP helps serve as a comparison basis over • The focus needs to be on real GDP, not

nominal GDP, because that is how we actually can measure growth– What?

• Later…

GDP

• GDP = is the sum value of all goods and services produced within a country within a given time period– Quarters– Annually– Decades

Finding GDP– Market prices are used to determine value

• Use a price index – Average price for a good or service

– Only "final" goods and services (those consumed by the end user) are included.

• Final = goods that are ultimately consumed/sold to an end user rather than used in the production of other goods

– Ex: cakes, shoes, cars, etc.

• Intermediate = used in the production of goods– Ex: sugar, steel, cotton, oil, etc.

GDP… simply put…

• GDP– Market value of final goods and services produced

in a set period of time• To be included in GDP, must meet 3

requirements:– 1. Must be final – not intermediate product– 2. Must be produced during the time period –

regardless of when it is sold– 3. Must be produced within the nations’ borders

Not in GDP…

• Intermediate goods• Used goods • Underground production (black market)• Household production• Transfer payments

GDP… the missing story

• Does not measure income distribution• Does not measure non-monetary output or

transactions (e.g., barter, household activities)• Does not take into account desirable

externalities, such as leisure or environment• Does not measure social well-being• Correlates to standard of living but is not a

measure of standard of living

Calculating GDP

• To calculate GDP, we need to look at 4 key components:– 1. Consumption – 2. Investment – 3. Government – 4. Net Exports

*** keep in mind all the things that are not included***

Calculating GDP

• Consumption (C) – These are personal consumption expenditures.

• They are typically broken down into the following categories: durable goods, non-durable goods, and services.

• Think: things people buy

Calculating GDP

• Investment (I) – This is total private (not government) investment

• it is generally broken down into fixed investment and changes in business inventories.

• Think: $$$ spent by private companies to increase their ability to produce (capital)

Calculating GDP

• Government (G) – This category includes government spending on

items that are "consumed" in the current period, such as office supplies and gasoline; and also capital goods, such as highways, missiles, and dams.

• Federal, state, and local• Note that transfer payments are not included in GDP, as

they are not part of current production.• Think: money the government spends

Calculating GDP• Net Exports

– This is calculated by subtracting a nations imports (M) from exports (X).

• Imports are goods and services produced outside the country and consumed within

• Exports are goods and services produced domestically and sold to foreigners.

• Note: this number may be negative, which has occurred in the U.S. for the last several years.

• Think: what is the US producing for ourselves rather than buying from other countries?

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

How much of GDP is each component?

Consumption (PCE) 70 %

Investment 16%

Government 19%

Net Exports -5%

Component % of GDP

GDP 100%

Average Percent of GDP since 2003

Source: Bureau of Economic Analysis

Calculating GDP

GPD = C + I + G + NX

Types of GDP…• Type 1: Nominal GDP

– Price levels for the year in which GDP is measured • States GDP in terms of current value of goods and services• “It is what it is…”

• Type 2: Real GDP– GDP adjusted for changes in prices– How does the current period of time compare with

previous periods of time– This can measure true economic growth/health of a

country

Types of GDP…

• Nominal vs. Real?– The main difference between nominal and real

values is that real values are adjusted for inflation, while nominal values are not.

– As a result, nominal GDP will often appear higher than real GDP.

Inflation…

• Inflation:– An increase in the overall price level. – inflation does not apply to the price level of just one

good, but rather to how prices are doing overall. – For example: A consumer facing inflation that occurs

at the rate of 10% per year will able to buy 10% less goods at the end of the year if his or her income stays the same.

– Basically, inflation can be defined as a decline in purchasing power of the applicable currency.

GNP• Gross National Product:

– measures the income of all of a nation's citizens, even if that income was earned abroad.

• Amounts that foreigners earn within the nation's boundaries are not included.

– GNP = the value of goods and services produced by citizens of a country.

– GDP = the sum value of “all” goods and services produced within a country

Why it all matters….

• The economic decisions of millions of individuals determine the fate of the nations’ economy

• Understanding what is happening to the country’s economy will help you make better personal economic decisions

• GDP is simply a model for us to help us understand the status/health of our economy

Business Cycle• A business cycle is an economic model that

basically shows/explains a series of periods of expanding and contracting activity in the economy– It is measured by increases or decreases in real GDP– It consists of four phases:

• Expansion• Peak• Contraction• Trough

– The length of phases are not set and can vary

Business Cycles…

• Expansion:– This is a period of economic growth

• An increase in real GDP• It has grown/is growing from a low point (trough)

– Jobs are easier to find• Thus, unemployment drops

– More resources are needed to keep up with the spending demand

Business Cycles…

• Peak:– The point at which real GDP is highest– As prices rise and resources tighten, businesses

become less profitable • Business cut back production and real GDP drops

Business Cycles…

• Contraction:– During contraction, producers cut back and

unemployment increases• Resources become less scarce, so prices tend to

stabilize or even fall– Recession:

• Contraction lasting 2 or more quarters– Depression:

• Long period of high unemployment and slow business activity

Business Cycles…

• Trough– The point at which real GDP and employment stop

declining

Business Cycles: why?…

• Business cycle causes can be broken into four major factors:– 1. business decisions– 2. changes in interest rates– 3. consumer expectations– 4. external issues

Business Cycles: why?…

• Business decisions:– Affect suppliers or related businesses

• If enough make similar decisions, those decisions can affect the economy and the business cycle

– New technology can lead to a raise productivity, demand, and employment, and then to expansion

– A slump in demand of a good or service can lead to decreased production, then lay offs, then contraction

Business Cycles: why?…

• Change in interest rates:– As interest rates rise, it makes borrowing more

difficult and more burdensome • This can lower aggregate demand and lead to

contraction

– As interest rates lower, it makes borrowing money easy and less burdensome

• This can increase aggregate demand and lead to expansion

Business Cycles: why?…

• Consumer expectations:– Consumers ideas on prices, business activity, and

jobs influence choices• These choices can either help or hurt aggregate

demand• The more confident the consumer, the higher the

aggregate demand

Business Cycles: why?…

• External issues:– These include things beyond the control of the

nation’s economy• Natural disasters • Conflicts/ wars• Foreign governments policies

Economic Growth

• There are 4 factors that help determine economic growth:– 1. Natural Resources

• Access to– 2. Human Resources

• Population #’s and capital– 3. Capital

• The more and better, the better– 4. Technology and Innovations

• Efficient use of all the above

Unemployment…

• There are 4 main types of unemployment– 1. frictional unemployment

• Temporary, experienced people changing jobs– 2. seasonal unemployment

• Demand for workers changes season to season– 3. structural unemployment

• A business requires fewer employees– 4. cyclical unemployment

• A business lays off employees during low points in the business cycle

Poverty and Income Distribution

• There is no universal standard for poverty– Varies from nation to nation, region to region

• Poverty threshold – This is the minimum income people need to pay

for basic needs• This is set by the government

– Currently:

Federal Poverty Line: 2011# of persons in

familyPoverty guideline

1 $10,890

2 $14,710

3 $18,530

4 $22,350

5 $26,170

Source: US Department of Health and Human Services

Factors affecting poverty…• Education:

– The higher the education level, the higher the average income

• Discrimination:– Minorities and women sometimes face wage

discrimination• Demographic trends:

– Single-parent homes typically have more economic problems

• Income distribution• Income inequality