The National Economy Economic Performance Economic Growth Economic Challenges.
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Transcript of The National Economy Economic Performance Economic Growth Economic Challenges.
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The National Economy
Economic Performance
Economic Growth
Economic Challenges
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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)
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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
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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)
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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
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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.
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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
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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
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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)?
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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
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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
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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
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CPI Calculation
• Pack of Hot Dogs in 1999 – $1.50
• Pack of Hot Dogs in 2006 – $2.20
2.20 / 1.50 - 1 = ________%
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Economic Indicators
• GDP
• CPI
What does all of this mean????
It goes back to the Business Cycle…
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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
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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
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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.
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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
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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.
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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
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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?
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UnemploymentUnemployment
•Do you know anyone who has lost their job? Not quit, but actually lost their job.
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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)
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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)
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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
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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!
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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
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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
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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%
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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
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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
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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
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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
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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