Economics Unit Four

Macroeconomics

Macroeconomics

Macroeconomics is the study of the whole

economy together – the aggregated spending,

saving, and investing decisions of all consumers

and businesses

describes the health of the economy as a whole!

Key Economic Indicators

The health of the economy and the “big picture” of

economics is measured in several ways

These include:

Gross Domestic Product (GDP)

The Consumer Price Index (CPI)

This is a measure of the rate of inflation

Unemployment

Gross Domestic Product (GDP)

Gross Domestic Product (or GDP),

which is the total dollar value of all

final goods and services produced

within a country during one calendar

year.”

Gross Domestic Product

The Net Exports (NM/NX) Sector The reason we subtract our imports from our exports is

this:

Exports - The money other countries spend on our

exports adds value to our economy

Imports - The money we spend on goods imported

from other countries takes money out of our

economy

So, the foreign sector’s

expenditure is

calculated only when

the transactions

add value to our

economy!

Real vs. Nominal GDP

To adjust GDP for price increases economists

calculate both

NOMINAL GDP: the current GDP expressed in

current prices

REAL GDP: which is adjusted for price

increases-inflation

Changes in Real GDP helps to determine if the

economy has increased or decreased its

actual production of new products

Limitations of GDP

Non-market activities: GDP does not include goods and services that people make or do themselves i.e. baby-sitting, mowing the lawn,

cooking dinner, washing cars

Underground economies: production and income not reported to the government i.e. black market products: illegal drugs,

weapons, stolen goods, exotic pets

Limitations of GDP

Negative Externalities: unintended economic side effects, or externalities that have monetary value not reflected in the GDP

Quality of Life: Some things that improve well-being cannot be included in GDP i.e. pleasant surroundings, ample leisure

time, personal safety

GDP does NOT include: value of used products

value of volunteer work

purely financial transactions

value of intermediary goods

Transfer of assets

GNPGross National Product: annual income

earned by U.S. owned firms and U.S.

citizens

Market value of all goods produced by

Americans all over the world in one year

Consumer Price Index The Consumer Price Index (CPI) is a measure of the

change in prices in an economy

Economists add up the total price of a “market

basket” of typical items bought by the average

family in a month

Then, they compare the total price of these goods

to the total price of the same items during a base

period (or previous year) by dividing the total by

the base

Then, they multiply the result by 100 to have an

index figure for comparison purposes

CPI = cost of today’s market basket

cost of a market basket in previous timeX 100

Unemployment

To again monitor the health of our economy,

economists measure the Unemployment Rate.

Each month, they survey certain Americans to

find out their employment status.

The U.S. Government defines “employed” as

people 16 and older meeting one or more of

the following criteria.

Criteria to be considered “Employed”

1. Working for pay or profit for 1 or more hours

this week.

2. Working without pay in a family business 15

or more hours.

3. Having a job, but being ABSENT due to

illness, weather, vacation, etc.

The U.S. Government defines

“Unemployed" as:

1. NOT meeting any of the criteria above

AND

2. ACTIVELY looking for work during the past 4 weeks.

The most closely watched and highly publicized labor force

statistic is

the UNEMPLOYMENT RATE=the percentage of people in

the civilian labor force who are UNEMPLOYED.

Unemployment

rate

unemployed

labor forcex 100=

Measuring Unemployment

4 Types of Unemployment

Structural Worker’s skill sets no longer match up with job

needs – usually requires retraining for a new job

Cyclical Worst kind – due to downturns in the economy

Frictional Workers looking for a better job

Seasonal

Predictable – due to school schedules,

weather, production schedules, etc.

The Business Cycle

Economies go through a cycle of good times and

bad times – alternating periods of growth (upturns)

and recession (downturns)

This is called the Business Cycle

Business Cycles Fluctuations in Real GDP are referred to

as Business Cycles.

The duration and intensity of each

phase of the Business Cycle are not

always clear.

Business Cycles are typical of Market,

Capitalistic economies due to the free

nature of those economic systems

Phases of the Business Cycle Expansion

Peak

Contraction

Trough

Expansions are periods of increasing

Real GDP.

Unemployment decreases, businesses

expand, and Personal Consumption

increases.

As expansions continue, there tend to

be upward pressures on prices

(inflation) and interest rates.

Expansions

Peak

A peak is a period when the economy

starts to level off.

Businesses postpone new investments,

and consumer saving tends to increase.

Rising prices and interest rates tend to

restrict purchases and investments,

often leading to a Contraction.

Contraction

A Contraction is a period of declining Real

GDP.

Consumer spending decreases, and

unemployment increases as businesses layoff

workers and shorten work hours.

Interest rates and prices level off, and often

decline during long contractions.

Recession:

Six months of declining Real GDP

Depression:

Twelve months of declining Real GDP

coupled with at least 15%

unemployment.

Long Term Contractions

TroughA Trough is the bottom of a

Contraction. Lower interest rates and

prices bring customers back to markets.

Factors That Affect the Business Cycle

Business Investment: High levels of business

investment (capital good increases like

machinery and equipment) promote

expansion. Low levels of business

investment contribute to contraction.

Money and credit: When interest rates go

up, people borrow less, and less money is

circulating in the economy, thus

contributing to a contraction. (and vise

versa)

Factors That Affect the Business Cycle

Public Expectations: People will

increase their spending if they believe

the economy is strong. This helps

promote expansion.

External Factors: Like energy crisis and

war.

Economic IndicatorsEconomic Indicators are specific economic activities

that have historically been good indications of the

general cycle of the economy.

There are three types:

Name Timing

Leading 3-6 months before a business cycle change

Coincident About the same time as the business cycle

change

Lagging occurs after the business cycle change – it

confirms what is going on

Monetary Policy

• Monetary policy is the responsibility of The Federal

Reserve

• The Federal Reserve has several tools they can use to

help the economy:

• Open-Market Operations (buying and selling

bonds)

• Discount Rate

• Reserve Rate

Tools of the Federal ReserveTool To Increase Consumer

Spending

To Decrease Consumer

Spending

Open-Market

Operations

Buying & Selling Bonds

Buy Treasury Bonds

- puts more $$ in

economy

Sell Treasury Bonds

- takes $$ out of the

economy

Discount RateThe interest rate the

Fed charges their banks

for loaning money to

them

Lower the discount rate

- lowers consumer interest

rates

- encourages spending

Raise the discount rate

- increases consumer

interest rates

- discourages spending

Reserve Rate

Amount banks have

to keep on ‘reserve’ for

demand withdrawals

Lower the reserve rate

- frees up bank deposit

money so that it can be

used for consumer loans

- encourages loans &

spending

Increase the reserve

rate- banks have to keep

more deposit money on

reserve

- reduces the amount of

money available for loans

- reduces loans &

spending

Buying Bonds

Increases money supply

Lowers Interest

Rates

Selling Bonds

Decreases money supply

Interest RatesGo Up

Fiscal Policy Like the Fed, the government also tries to

carry out actions that aim to promote

economic growth and stability

However, unlike the Fed, the government

can’t print money or directly control the

money supply (i.e. monetary policy)

Instead, the government can change its

taxing or spending decisions to try to

influence the economy

Fiscal Policy ToolsTools To Increase Consumer

Spending

To Decrease Consumer

Spending

Taxing Lower Taxes

- consumers have MORE

money to spend

Raise Taxes

- consumers have LESS

money to spend

Spending Increase Government

Spending

- increases demand for

goods & services

>> increases production of

goods & services

>> leads to additional jobs

>> more income

>> more spending

Decrease Government

Spending

- lowers overall demand for

goods & services

>> suppliers produce less

>> can lead to fewer jobs

>> less income

>> less spending

The Deficit and Debt

If the government spends more money than it

takes in for the year, it is operating under a

budget deficit

This is more of a prediction – the idea that

the government will have less money in the

end

If the government has a deficit, it needs to

borrow money to finance the difference – this

is called the national debt

It is all of the money that the government

borrows to make up for the extra money it

spends!