Key Issues in Macroeconomics 1. Macroeconomic Indicators
(Chapters 12 and 13- Friday and Monday) Gross Domestic Product
(World Factbook)World Factbook Employment (The Vast Effects of
Joblessness)The Vast Effects of Joblessness Inflation
(Calculator)Calculator Health of Financial Institutions 2. Domestic
Policy (Chapters 14, 15 and 16-Tuesday and Wednesday) Domestic
Policy Fiscal Policy Monetary Policy 3. Foreign Policy (Chapters 17
and 18- Thursday and Friday) Globalization Trade Humanitarian Aid
4. Quiz (Monday) 5. Project (Due Tuesday) Macroeconomics
Project
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Gross Domestic Product The main indicator used to determine
overall health of the economy is gross domestic product (GDP) which
is the dollar value of all final goods and services produced within
a countrys borders in a given year. Breaking down the definition:
Value Produced (based on current market prices) Final good or
service A good or service that is produced for its final user and
not as a component of another good or service Not an intermediate
good or service (A good or service that is produced by one firm,
bought by another firm, and used as a component of a final good or
service) Gross domestic product is used by the government to
analyze upcoming business cycles to determine prosperity, recession
or depression.
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MEASURING U.S. GDP The Expenditure Approach Measures GDP by
using data on consumption expenditure, investment, government
expenditure on goods and services, and net exports. Expenditures
Not in GDP Used Goods- Expenditure on used goods is not part of GDP
because these goods were part of GDP in the period in which they
were produced and during which time they were new goods. Financial
Assets- When households buy financial assets such as bonds and
stocks, they are making loans, not buying goods and services.
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MEASURING U.S. GDP The Income Approach Measures GDP by summing
the incomes that firms pay households for the factors of production
they hire. Incomes are divided into two big categories: Wages-
(Compensation of employees) The payment for labor services. It
includes net wages and salaries plus fringe benefits paid by
employers such health care insurance, social security
contributions, and pension fund contributions. Interest, rent, and
profit- (Net operating surplus) The sum of the incomes earned by
capital, land, and entrepreneurship. oInterest is the income
households receive on loans they make minus the interest they pay
on their borrowing. oRent includes payments for the use of land and
other rented inputs. oProfit includes the profits of corporations
and small businesses.
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MEASURING U.S. GDP Statistical Discrepancy The income approach
and the expenditure approach do not deliver exactly the same
estimate of GDPthere is a statistical discrepancy (the discrepancy
between the expenditure approach and income approach estimates of
GDP, calculated as the GDP expenditure total minus the GDP income
total)
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MEASURING U.S. GDP vs. GNP Gross national product or GNP- The
market value of all the final goods and services produced anywhere
in the world in a given time period by the factors of production
supplied by residents of the country. U.S. GNP = U.S. GDP + Net
factor income from abroad GDP vs. GNP Annual income earned by US
owned firms and citizens regardless of origin.
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THE LIMITATIONS OF GDP Standard of Living Across Countries
Non-market Activities Household production Underground production
Quality of Life Environment quality
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Unemployment
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LABOR MARKET INDICATORS Two Main Labor Market Indicators The
unemployment rate (The percentage of people in the labor force who
are unemployed.) The labor force participation rate (The percentage
of the working-age population who are members of the labor force.)
Unemployment rate = Number of people unemployed x 100 Labor force
Labor force participation rate = Working-age population x 100 Labor
force
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SOURCES AND TYPES OF UNEMPLOYMENT Types of Unemployment
Frictional unemployment The unemployment that arises from normal
labor turnoverfrom people entering and leaving the labor force and
from the ongoing creation and destruction of jobs. Structural
unemployment The unemployment that arises when changes in
technology or international competition change the skills needed to
perform jobs or change the locations of jobs. Seasonal unemployment
The unemployment that arises because of seasonal weather patterns.
Cyclical unemployment The fluctuating unemployment over the
business cycle that increases during a recession and decreases
during an expansion.
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SOURCES AND TYPES OF UNEMPLOYMENT Duration and Demographics of
Unemployment On the average from 1995 to 2005, blacks experienced
more than twice the unemployment rate of whites.
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SOURCES AND TYPES OF UNEMPLOYMENT Duration and Demographics of
Unemployment Teenagers experienced more than three times the
unemployment of workers aged 20 and over. Women have lower
unemployment rates than men.
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Full Employment Full employment When there is no cyclical
unemployment or, equivalently, when all the unemployment is
frictional, structural, or seasonal. Natural unemployment rate The
unemployment rate when the economy is at full employment.
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SOURCES AND TYPES OF UNEMPLOYMENT Unemployment and Real GDP
Cyclical unemployment is the fluctuating unemployment over the
business cycleunemployment increases during recessions and
decreases during expansions. At full employment, there is no
cyclical unemployment. At the business cycle trough, cyclical
unemployment is positive. At the business cycle peak, cyclical
unemployment is negative.
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The figure below shows the unemployment rate in the United
States from 1975 to 2005. As the unemployment rate fluctuates
around the natural rate unemployment SOURCES AND TYPES OF
UNEMPLOYMENT Cyclical unemployment is negative (shaded red) and
positive (shaded blue).
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Inflation
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Going.UP!!!!!!!!!! Inflation is a general increase in prices.
Purchasing power (the ability to purchase goods and services) is
decreased by rising prices. A price index is a measurement that
shows how the average price of a standard group of goods changes
over time. The consumer price index (CPI) is computed each month by
the Bureau of Labor Statistics. The CPI is determined by measuring
the price of a standard group of goods meant to represent the
typical market basket of an urban consumer. What is in the market
basket? There are over two hundred categories of products that are
included in the basket. These categories fall under 8 major groups:
FOOD AND BEVERAGES HOUSING APPAREL TRANSPORTATION MEDICAL CARE
RECREATION EDUCATION/COMMUNICATION OTHER GOODS AND SERVICES
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Inflation Theory 1. Quantity Theory- Too much $ in the economy
2. Demand-Pull- Demand exceeds supply 3. Cost-Push- Increased input
costs for the supplier
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The impact of inflation High inflation is a major economic
problem, especially when inflation rates change greatly from year
to year. The three main problems are: Reduced Purchasing Power
Erosion of Interest Income Erosion of Wages
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The Financial System The United States financial system
includes banks, securities exchanges, pension funds, insurers, the
Federal Reserve and national regulators. These firms and
institutions: 1. Provide infrastructure for economic transactions
2. Channel funds from savings to investment 3. Control monetary
policy A sound financial system is essential for macroeconomic
growth and financial stability.
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Result of Instability in the Financial System 1. Diminished
monetary policy 2. Prolonged economic downturn 3. Capital flight 4.
Costs of rescue 5. Impact global markets
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Managing the Economy Types of Economic Policies Fiscal Policy:
Tax and spend (the federal budget). Handled primarily by Congress
and the President. Monetary Policy: Regulation of the money supply.
Handled primarily by the Federal Reserve Board (the Fed). Types of
Economic Policies Fiscal Policy: Tax and spend (the federal
budget). Handled primarily by Congress and the President. Monetary
Policy: Regulation of the money supply. Handled primarily by the
Federal Reserve Board (the Fed). Economic Theories for Managing the
Economy: 1.Keynesian economics: Government can manipulate the
health of an economy through spending 2.Supply-side economics: Cuts
in taxes will produce business investment that will offset loss of
money due to lower taxes 3.Monetarism: Money supply is the most
important factor for determining the health of the economy
4.Economic planning: The free market is unstable and therefore the
government must plan parts of the countrys economic activity
Economic Theories for Managing the Economy: 1.Keynesian economics:
Government can manipulate the health of an economy through spending
2.Supply-side economics: Cuts in taxes will produce business
investment that will offset loss of money due to lower taxes
3.Monetarism: Money supply is the most important factor for
determining the health of the economy 4.Economic planning: The free
market is unstable and therefore the government must plan parts of
the countrys economic activity
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Funding the Government We authorize the government, through the
Constitution and elected officials, to raise money through taxes.
We authorize the government, through the Constitution and elected
officials, to raise money through taxes. Taxation is the primary
way that the government collects money. Taxation is the primary way
that the government collects money. Without revenue, or income from
taxes, government would not be able to provide public goods and
services. Without revenue, or income from taxes, government would
not be able to provide public goods and services. The Power to Tax
Article 1, Section 8, Clause 1 of the Constitution grants Congress
the power to tax. The Sixteenth Amendment gives Congress the power
to levy an income tax. Limits on the Power to Tax 1. The purpose of
the tax must be for the common defense and general welfare. 2.
Federal taxes must be the same in every state. 3. The government
may not tax exports.
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Tax Structures Proportional Taxes (PA State Tax) Proportional
Taxes (PA State Tax) A proportional tax is a tax for which the
percentage of income paid in taxes remains the same for all income
levels. Progressive Taxes (Federal Income Tax) Progressive Taxes
(Federal Income Tax) A progressive tax is a tax for which the
percent of income paid in taxes increases as income increases.
Regressive Taxes (Sales Tax) Regressive Taxes (Sales Tax) A
regressive tax is a tax for which the percentage of income paid in
taxes decreases as income increases.
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Spending Categories Mandatory Spending Money that lawmakers are
required by law to spend Interest payments on the national debt
Entitlement programs (Social Security, Medicare and Medicaid)
Discretionary Spending Money that government planners can choose
how to spend. Defense Education Training Environmental cleanup
National parks and monuments Scientific research Land management
Farm subsidies Foreign aid
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Source of Federal Revenue Social Security and Medicare Taxes
(21%) Unemployment Taxes (12%) Federal Income Taxes (49%) Corporate
Taxes (10%) Excise Taxes (3%) Other (4%) Estate Taxes Gift Taxes
Import Taxes The Presidents Message on the 2010 budget
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Taxing and Spending Entitlements: Programs where money is
automatically spent without annual review of programs. 1.Social
Security 2.Medicare 3.Federal Pensions 4.Interest on National Debt
Makes up almost 2/3 of federal budget Problem because Congress and
the President cannot control much of spending...wait till 2040!
Entitlements: Programs where money is automatically spent without
annual review of programs. 1.Social Security 2.Medicare 3.Federal
Pensions 4.Interest on National Debt Makes up almost 2/3 of federal
budget Problem because Congress and the President cannot control
much of spending...wait till 2040!
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Budget Process 1. Agencies prepare their budget needs and
submit to Presidents Office of Management and Budget (OMB) 2. OMB
makes recommendations to President 3. President submits budget to
Congress 4. Congressional Budget Office (CBO) checks Presidents
budget 5. Ways and Means committee in House review taxes and
revenues. 6. Appropriations committee review spending 7. Agencies
lobby for money 8. Majority vote in both houses passes budget 9.
President signs or vetoes bill (no line-item veto)
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The Federal Budget Debate
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The Federal Reserve The Federal Reserve (Fed) serves as the
nations central bank, which is designed to oversee the banking
system and regulate the quantity of money in the economy. The Fed
is a privately owned institution, authorized in 1914 by Congress to
ensure the health of the nations banking system. The Fed is run by
its Board of Governors. Seven members appointed by the President of
the United States. The Chairman of the Board is the most important
position: presiding, directing, and testifying about Fed policy. He
is appointed by the President and confirmed by the Senate. The
Federal Reserve System is made up of the Federal Reserve Board in
Washington, D.C. and twelve regional Federal Reserve Banks.
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Three Primary Functions of the Fed Regulate the private banking
industry to make sure banks follow federal laws intended to promote
safe and sound banking practices. Act as a bankers bank, making
loans to other banks and as a lender of last resort. Control of the
supply of money