Macroeconomics

Macroeconomics is the study of entire economies

Review: ScarcityEconomics is complicated because people have unlimited wants, but limited resources

This is scarcity, the condition that results from limited resources and unlimited wants.

Economists study the production of goods and services using scarce resources. They are looking to see efficiency, or whether we are best using our scarce resources.

MacroeconomicsMacroeconomics studies whole economies including national, regional and global economics.

Macroeconomics is also often referred to as the study of economies at the aggregate level. Aggregate is the whole formed by combining several elements such as unemployment, national income, rate of growth, inflation and price levels. In Macroeconomics we are looking at the interaction between businesses, consumers, sellers, governments and nations.

Macroeconomics GDPMacroeconomics studies whole economies. This means the United States, England or even the World Economy.

To measure these economies we use GDP (Gross Domestic Product). GDP measures the dollar total of all final goods and services produced in a country during one calendar year.

GDP is measured using only the FINAL output, this helps avoid counting products more than once.

A higher GDP means a higher standard of living, while a low GDP indicates a lower standard of living.

It is estimated that the United States GDP is made up of approximately

70% consumer spending

GDP: Final output

Example:A lumberjack cuts down a tree and sells it to a saw mill. The saw mill cuts the tree into lumber and sells it to a furniture maker. The lumber is used to build a dining table. Only the table would be counted towards GDP.

The lumber would be seen as an intermediate good, or a good used to make other products.

Only the dining table is counted towards GDP

GDP is calculated using ONLY the final product. The raw materials and other supplies are not calculated towards GDP.

Economic GrowthMacroeconomists spend a lot of time examining ways to stimulate the economy. There are several factors that can contribute to growth:1) Natural resources2) Human Resources3) Capital Resources4) Entrepreneurship

Natural ResourcesThe more natural resources a nation has the better. Without natural resources they must import resources, making them dependent on the international markets.

Economic growth is hindered because the nation is dependent on another nation for the resources needed to expand.

Lucky USAThe United States has access to most of our necessary natural resources. Many Island nations like Japan must depend on foreign trade for many resources. In the US we have natural resources, as well as several climatic regions that support agriculture, industry and even tourism.

Human ResourcesIn order to grow the economy, a nation must have enough workers. To determine the labor input economists multiple the employed workforce by the average number of worker hours.

Example:The US has 245,552,000 workers who work an average of 34.5 hours:

245,552,000x34.5= 8,471,544,000. This is the labor input for the United States.

Statistics from:http://www.bls.gov/news.release/pdf/empsit.pdf May 2014

For your Macroeconomics Business Projects, some groups were wary of investing in

countries with high unemployment, but other groups were willing to expand into areas with

low unemployment. However, with low unemployment your new business would have

no workers!!

Capital ResourcesIn order to improve the economy, businesses must also be improving. This means the more modern, efficient and quality a company uses, the more growth that can be achieved. Better facilities tend to lead to more economic growth

**Please note, this does not mean more employment, just more economic GDP growth**

InfrastructureInfrastructure refers to the roads, bridges, communication systems and other daily necessities that allow business to be completed. Many times, businesses push governments to improve infrastructure, but with declining economies many governments are unable to invest needed money to new transportation systems.

For instance, the US still uses outdated and slow moving trains. Countries like Japan, on the other hand, have increased funding for developments such as the Bullet Train.

Research indicates that investments in infrastructure return 3x the investment in economic growth. Many major corporations and Americans are pushing for a

high speed rail system in the US. Business Insider proposes the following locations.

EntrepreneurshipFor an economy to continue growing there must be entrepreneurs willing to take on the risks of starting a new business. These entrepreneurs are essential because they develop new ideas which constantly stimulate output and demand.

Entrepreneur’s also challenge the BIG

businesses to create new products, technologies

and methods!

Challenges to the EconomyThere are many challenges to macroeconomics that can stall or directly hurt the economy:-Unemployment-Inflation-Poverty and Income Distribution

Expansion and RecessionWhen the economy is expanding and doing well we call it expansion.

When the economy is doing poorly and shrinking we call it recession.

If the economy has crashed we refer to it as a depression. The last depression was in the 1930s.

UnemploymentUnemployment hurts the economy in many ways. First, the national GDP decreases because the unemployed are not making any goods or services.

Secondly, the business lose sales because the unemployed cannot buy goods and services

Finally, the government may decide to intervene and help the unemployed. This takes government resources, costs money and can lead to unforeseen problems.

Employment definedMany people are familiar with the word unemployment, especially with the current recession. However, few people truly understand what unemployment means and who economists count for the unemployment rate.

To understand who is unemployed, first we must determine who counts as employed. When the Bureau of Labor Statistics wants to know who is employed, they look at several criteria:

-16 years old or older and:-worked for pay 1 or more hours in the last week-worked without pay for the family business for 15 or more hours-have jobs but are not working due to illness, weather, vacation or labor

disputes (strikes)

If a person is 16 years old or older and matches any of the criteria they are considered employed.

Unemployment definedA person is considered unemployed if they are 16 years or older and do NOT meet any of the employed criteria. However, to meet the standard of unemployment, the individual must be actively looking for employment.

If a person is neither employed or unemployed then they are “not in the labor force”.

The unemployment rate refers to the percentage of people in the civilian labor force who are unemployed. To find this number economists divide the number of employed by the total work force:

Unemployed/ labor force= unemployment rate.

Currently the United States unemployment rate is approximately 5.5%. During the Great Depression it was nearly 22%

Problems with employmentRemember, employment refers to people who have worked for pay at least ONE hour in the last week. However, most of us would agree that one hour of work a week is not enough to support oneself or a family. This leads to the idea of underemployment.

A person is underemployed when they are working jobs beneath their skill level, or who work part time but want full time work. Example: An engineer with a masters degree is working at subway. He would be underemployed because his skills are much higher than crafting delicious sandwiches.

Another problem with the employment numbers are the marginally attached workers. These are people who once held jobs but have given up looking for work. For example, a TV repair man would no longer be useful in today’s electronics business.

Types of UnemploymentWe already know that unemployment can negatively impact the economy, but there is ALWAYS some unemployment expected. To help understand why some unemployment is a good thing you must understand the four types of unemployment:

1) Frictional2) Structural3) Seasonal4) Cyclical

Remember the goal is around 2%

FrictionalWhen a person is moving from one job to another

For example a receptionist is moving from Aspen dental to Dr. Michelson's office.

StructuralChanges in technology or economic structure make a job obsoleteFor example a TV repair man is no longer needed as LED TVs become more popular.

SeasonalEmployment affected by seasons

For example teachers, construction workers, agriculture workers

CyclicalResulting from a recession or economic downturn.

For example current unemployment has decreased from around 9% to 5.5%. This can change at anytime.

InflationThe second major challenge to economic growth is inflation. Inflation is an increase in the average price level of all products in the economy. We measure inflation using the Consumer Price Index, which shows the change in price for items a typical family buys

Inflation reduces the purchasing power of the dollar. In other words, you can not purchase as much with a single dollar.

Often inflation is caused by a greater increase in demand than the increase in supply because the consumers compete for goods by paying more.

Want a soda with that?Inflation occurs nearly every year, and is sometimes referred to as cost of living increases, because the cost of everyday products increases. For example, in 2005 a soda at Stewarts cost $1.00. Today, that same product costs $2.00 or more. The product is the same, but the cost has inflated.

HyperinflationHyperinflation is the worst degree of inflation, causing money to be nearly worthless. Think back to Germany after WWI when they kept printing money. The money had nearly no value, with the cost of bread in the Billions of dollars.

Inflation CategoriesThere are two categories of inflation, and are determined by cause:

Demand-pull inflation- this is the more common form of inflation and is caused by the demand increasing faster than the supply. Because there is less supply than demanded, the prices increase. (Scarcity Supply and Demand)

Cost-push inflation- this occurs when the cost of resources increase. As a result the producers set their prices to cover their costs and to earn a profit, resulting in producers pushing prices higher. (Gas prices went up so food prices increased as well)

VideoWatch the following video to understand why having too much money is a bad thing.

https://www.youtube.com/watch?v=Vg4-gMW89E0

Effects of InflationThere are five main effects of inflation:Decreased Purchasing Power- as costs rise those on fixed incomes can’t buy as much.

Real Wages- Wages will rise but typically at the same rate as inflation (called Cost of Living adjustments) so people are not getting ahead

Interest Rates- Price of borrowing money increases, sometimes doubling or tripling

Decreased savings/ investing- the interest rate on savings accounts decreases so people are not interested in saving.

Production costs- The cost to produce increases so businesses raise prices. However, if the consumers refuse to pay the higher cost then the business may collapse.

Poverty and Income DistributionAnother challenge to growing the economy is poverty and unequal income distribution.

Economists pay close attention to poverty rates, because higher rates indicate a troubled economy.

Graph You will notice that in 2007 over 85% of all American wealth was in the hands of a mere 20% of the population.

PovertyThe Poverty rate refers to the percentage of families in the total population living below the poverty threshold. The Threshold is the lowest income that a family household needs to maintain a basic standard of living. For a family of 4 that means an annual combined income of $24,250.

High poverty rates are often combated with government programs such as welfare and HEAP (utility assistance)

>30 Means Greater than 30

Income distributionThe income distribution was first examined by Jakob Reis. He noticed a widening gap between the rich and the poor. Later, the Lorenz curve was developed to illustrate the income gap and how it differs from a normal distribution of income

The problem with an abnormal distribution of wealth is that the majority of wealth is held by a small percentage of the people.

Government AssistanceTo combat the issues with of poverty, the American Government offers several ways to help:

-Subsidies-Trickle Down tax rebates-Tax Rebate-Welfare and Assistance programs

Practice for College lectures: Fill in notes on

the 4 Government assistance programs as

we discuss them

Trickle Down EffectMany Americans don’t believe in the Trickle Down Effect. The goal of Trickle Down effect is that providing tax cuts and subsidies to the businesses may allow the business to increase employment.

More employees will stimulate the economy by purchasing goods and creating more demand, resulting in more supply. Thus the cycle continues.

Task1) Classify each of the following individuals as employed, unemployed or completely out of

the labor force:a. Charles Renaud- bartender and owner of the cityscape bar and grillb. May Lau- a high school student hired to work at buds burger barn for the summer,

who starts in three weeksc. Jared Turner- full time college student who works about 20 hours for his parents at

their businessd. Jill Scott- an on call substitute teacher who did not receive any work this weeke. Rick Roller- a game enthusiast who has not looked for work for 3 months.

2) Explain why the unemployment rate increases during a recession and decreases during an expansion.

3) Give an example of a person who is underemployed and explain why.

4) Who is negatively affected most by inflation and why?

5) Refer to slide 18. What kind of inflation is my soda example?

6) How can governments help heal uneven income distribution?