You also need to consider intermediate goods used to construct a car in the US may have been made overseas.
Two Types of Goods
Durable Goods: Goods that last a long time such as a car or TV.
Nondurable Goods: Goods that last a short amount of time such as light bulbs and sneakers.
Aggregate Supply: The total amount of goods and services in the economy available at all possible price levels.
It shows the quantity of real output supplied at various price levels ceterus paribus.
Price Levels: The average of all prices in the economy.
Aggregate Demand: The amount of goods and services in the economy that will be purchased at all possible price levels.
It shows the quantity of real output demanded at various price levels ceterus paribus.
Things to Think About
Aggregate supply and demand and macroeconomics are a separate course in college and we just do not have the time to go too deep into them.
GNP was used more by the US in the “old days” while the rest of the world focused on GDP.
Since the economy is global now everyone uses GDP and you do not see much on GNP.
Both can be manipulated and can be questionable.
GNP does not deal with depreciation, or the loss of value.
The Business Cycle
The business cycle represents the macro study of the irregular periods of alternating contraction and expansion in economic activity and business.
Peak: The highest point before a recession.
Recession: A prolonged contraction and a decline that lasts at least 6 months (2 quarters).
Trough: The lowest point at the end of a recession and before expansion.
Expansion: The period between the end of recession and the next peak.
Recovery: The very beginning of an economic expansion.
Boom: The extremely fast increase in output, usually at the end of an expansion.
Depression/Stagflation: A very long and low recession with a decline in real GDP and a price level increase.
Economic Growth: A very long and steady time of expansion with an increase in real GDP.
What Keeps the Business Cycle Going?
Interest Rates and Credit: Low interest rates help expansion!
Consumer Expectations: Confidence must exist!
External Shocks: You don’t want surprises, especially bad ones!
Forecasting the Cycle
Economists use key indicators called “leading indicators” to predict the phases of the cycle.
Consumer Price Index
CPI Market Basket
Producer Price Index (PPI)
Major Historical Cycle Events
a. The Great Depression
b. 1970’s Inflation.
c. 1980’s Recession
d. 1990’s Expansion
f. The Future (?)
A very long and steady time of expansion with an increase in real GDP.
Sources of Growth
Capital Deepening: Physical capital, the equipment used to produce goods and services, makes an important contribution to the output of an economy.
With more physical capital, each worker becomes more productive, producing more output per hour of work.
This labor productivity and increasing amount of capital per worker is capital deepening and is a source of economic growth.
Saving and Investing: Income not used for consumption is saving.
The proportion of disposable income that is saved is called the savings rate.
Often higher savings lead to more investment because more funds are available for it.
If the money is invested that leads to growth.
Population Growth: Populating growth can lead to economic growth but it can also lead to an economic slowdown.
The standard of living, education, per capita income and other factors will impact this combination.
Government: The activities of a government and a system of government can help or hinder economic growth.
Foreign Trade: Imports and exports impact growth.
Exports bring in money but a trade deficit from imports can be a positive or a negative.
Technology: Advanced tech and technological progress can increase efficiency leading to growth.
Where this advancement comes from :
a. Scientific research
c. Scale of the market: The larger the market the more incentive for change, innovation, and advancement.
d. Education and expertise levels
e. Resources: Natural resource use, change in use, and overuse can spur advancement.
Even in good times unemployment exists and will impact a percentage of a population.
Unemployment rates often are excellent insight into the health of an economy.
Types of Unemployment
Frictional: Unemployment that occurs when people take time to find a job.
They are not currently working but they are actively looking for work.
Economists consider this a normal part of the economy.
These are often new workers coming into the labor force for the first time.
Seasonal: Unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season.
Students who only work during the summer or during Christmas break are factored into this by economists.
This type of unemployment is also considered normal.
Structural: Unemployment that occurs when a workers’ skills do not match the jobs available.
Economists consider this abnormal upheaval and training and education are the typical responses.
Causes of structural unemployment
1. The development of new technology: New tech can result in job loss.
Workers in a typewriter factory lost jobs when word processors replaced typewriters.
2. The discovery of new resources.
Whale oil was once a major industry that no longer exists in the United States because whale oil was replaced by petroleum based products.
Whalers lost jobs causing unemployment.
3. Changes in consumer demand: If a product falls out of favor a company can fail or shift production causing unemployment.
4. Globalization: Because the economy has become a global economy jobs have been lost for reasons such as a factory being moved to take advantage of cheap labor in another country.
5. Lack of education can lead to unemployment because basic skills might be lacking and a worker can not do a job.
Idiot who sold her forehead...she needed an education!
Cyclical: Unemployment that rises during economic downturns of the business cycle and falls when the economy improves.
The US Bureau of the Census conducts counts of the populations that are used with the Department of Labors information gathered by the Bureau of Labor Statistics to compute unemployment rates.
The level of employment reached when there is no cyclical unemployment.
Frictional, seasonal, and structural unemployment will exist but unemployment should be no more that 4 to 6 percent.
A worker doing a job they are considered over qualified for or a worker working part time when they desire to work full time is considered underemployed.
Underemployed workers are not counted against full employment.
Did somebody say "Underdog?" Nope, underemployment, dog...
People who want jobs but have given up looking for them.
Economists do not count these people against full employment.
Exiting the Workforce
People retiring are not counted against full employment.
Cya sugar...I am out of here!
The Target Rate of Employment
The lowest sustainable rate of unemployment believed to be achievable under existing circumstances.
Unemployment found during times of full employment.
Economist Okun theorized that unemployment is related to economic output and Okun’s Rule states that for every 1 % decrease in the unemployment rate you will have a 2 % increase in output growth.
A general increase in prices that results in a reduction in the purchasing power of consumers.
In other words your dollar is buying less as a result and you can not get as many goods and services with it as you used to.
As we have seen economists forecast the business cycle using “leading indicators,” and some of these indicators can be used in gauging inflation.
Core Inflation Rate
In many cases economists will use a core inflation rate that excludes the effects of food and energy prices.
We will not be dealing with this but be aware of it.
Inflation that is out of control that will lead to economic collapse and a complete devaluing of money.
Think Germany post WW I.
Theories for the Causes of Inflation
a. Quantity Theory: Too much money or currency in the economy can cause inflation and devalue the dollar.
b. Demand Pull Theory: Inflation resulting from the demand of goods and services that exceeds supply.
c. Cost Push Theory: Inflation resulting from increased prices due to an increase in costs.
d. Wage Price Spiral: Often occurs due to Cost Push Inflation and is a worsening of conditions due to increases in wages resulting from inflation.
Wages are increased to counter Cost Push Inflation so people can buy more but the increase in wages causes a higher increase in prices that spirals out of control in a domino effect that leads to even higher levels of inflation and an even weaker dollar.
Effects of Inflation
a. Decreased buying power.
b. Income erosion because of reduced buying power and fixed incomes that do not go up when prices go up.
c. Increases in interest rates.
Inflation rates in our history have always increased, but in the late 1990’s the US experienced something new called deflation, or a drop in price levels.
In the late 90’s unemployment was low and inflation was kept in check, a situation some economists did not consider possible.
Despite the tremendous success of our nation’s economy millions of Americans are classified as poor.
What does that mean?
How do you combat this, and are Americans truly poor when compared to the poor in other nations?
The income level below which income is insufficient to support a family or household.
The threshold does vary based on the size of a family.
The percentage of people who live in households with income below the official poverty line.
Poverty levels are broken down into categories based on several indicators.
a. Race and ethnic origin.
b. Type of family such as two parent, single parent, single parent mother, and so on.
c. Age group. Children make up a large group of poor and they can not do much about it.
d. Location and place of residence.
Factors such as rural and urban are focused on.
Causes of Poverty
a. Lack of education often leads to unemployment and unemployment often leads to poverty.
b. Location often contributes to poverty.
Issues such as the concentration of minorities in inner cities often are an obstacle to prosperity along factors such as rural and urban living.
c. Racial and gender discrimination occur even with intervention and cause cases of poverty.
d. Economic shifts and downturns in the economy can cause unemployment and poverty.
e. Shifts in the family structure from divorce, unwed mothers, and similar factors can lead to poverty.
How the nations total income is distributed among its population.
Various factors are brought together and placed on a Lorenz Curve to illustrate this distribution and the income inequity of the nation.
The “gap” between the poor and rich and everyone in between.
Key factors for the gap:
1. The differences in skill, education, motivation, and ability of individuals.
The government invests large sums of time, effort, and money to battle poverty.
Enterprise Zones: Area where companies can locate free of certain local, state, and federal taxes and restrictions.
Areas can be revitalized this way and jobs created to battle poverty.
Employment Assistance: The minimum wage, job training, and job placement are all used by the government to battle poverty.
Welfare: Food Stamps (coupons that can be exchanged for food), bloc grants (lump sums of money given to states for programs), and workfare programs that require work in exchange for temporary assistance, and other programs constitute the welfare system created to battle poverty.
This system is constantly debated and has had mixed results but much good has come from welfare programs.
2006 HHS Poverty Guidelines
Persons in Family or Household
48 ContiguousStates and D.C. Alaska Hawaii
1 $ 9,800 $12,250 $11,270
2 13,200 16,500 15,180
3 16,600 20,750 19,090
4 20,000 25,000 23,000
5 23,400 29,250 26,910
6 26,800 33,500 30,820
7 30,200 37,750 34,730
8 33,600 42,000 38,640
For each additional person after 8 add 3,400 for the 48, 4,250 for Alaska, and 3,910 for Hawaii.
SOURCE: Federal Register, Vol. 71, No. 15, January 24, 2006, pp. 3848-3849