Unit 3 macroeconomics academic


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Unit 3 macroeconomics academic

  1. 1. Unit 3 Macroeconomics - Academic
  2. 2. I. Measuring the Economy
  3. 3. A. GDP <ul><ul><ul><li>Defined – $ value of products made within a country’s borders. </li></ul></ul></ul><ul><ul><ul><li>Used by economists & leaders to analyze domestic and foreign economic policy. </li></ul></ul></ul><ul><ul><ul><li>Calculates foreign and domestic production within a nation-state. </li></ul></ul></ul>
  4. 4. B. Ways of Calculating GDP <ul><ul><ul><ul><li>Expenditure Approach - Add together </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Add together all goods and services. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Net exports or imports of goods and services. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Income Approach </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Add together all incomes in the economy. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Much more accurate </li></ul></ul></ul></ul></ul>
  5. 5. C. Downsides of using GDP <ul><ul><ul><ul><li>It does not take into account.. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Types of items produced – Higher quality of work </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Health – ailments cost money, lower standard of living </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Black Market – large in some nations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Households – Services provided without value </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Amount produced per person – efficiency of production </li></ul></ul></ul></ul><ul><ul><ul><ul><li>How goods are distributed – Income Gap </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Over adjustment for inflation – Fixed by real GDP </li></ul></ul></ul></ul>
  6. 6. D. A Wealthy Nation has the following… <ul><ul><ul><ul><li>Amounts of natural resources (including productive labor) within a nation. </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>USA has oil, water, timber, arable soil, freshwater, natural gas, etc </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Russia has oil and natural gas </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>China has labor </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Technology and equipment available to a nation – USA has high level of use, production, and skill </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Skill and educational level of workforce – USA guarantees education of all </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Price levels – Price levels in USA mostly stable </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Capital deepening – more spent on capital with each worker. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Savings invested in the economy help spur growth – China and India have large amount of savings </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Population increase means more workers for more production – Declining population is bad </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Government investing in public goods – Infrastructure especially </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Foreign trade increases growth if we export goods or import investments – USA world’s leading importer and exporter </li></ul></ul></ul></ul>
  7. 7. E. Other Measurements <ul><li>Real GDP – adjusted for inflation </li></ul><ul><li>Purchasing Power Parity – How much can be bought with money </li></ul><ul><li>Unemployment – amount unemployed </li></ul><ul><li>Inflation – rate of rising prices </li></ul><ul><li>Average life expectancy </li></ul><ul><li>Infant Mortality Rate </li></ul><ul><li>Gross National Product – value of everything produced within a country’s borders. </li></ul><ul><li>Literacy Rate. </li></ul>
  8. 8. F. Ups & Downs <ul><ul><ul><li>Phases – Business cycle </li></ul></ul></ul><ul><ul><ul><ul><li>Expansion – Period of economic growth </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Peak – height of economic expansion. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Contraction – period of economic decline </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Trough – Lowest point in an economic contraction. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Not all cycles are shaped the same </li></ul></ul></ul></ul>
  9. 9. 2. Negative Parts of the Cycle <ul><ul><ul><ul><li>Recession – ½ year of declining GDP. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Depression – Recession that is especially long and severe, longer than 1 year </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Stagflation – Decline in real GDP combined with a rise in the price level. </li></ul></ul></ul></ul>
  10. 10. F. What can impact GDP? <ul><ul><ul><ul><li>Business investment – increased investment will lead to employment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Interest rates and credit – Rates must remain low for easy access to cash </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Consumer expectations – Must remain high, economics is a game of emotion </li></ul></ul></ul></ul><ul><ul><ul><ul><li>External shocks (bad weather & war) good for foreign victor, but for domestic victor, worse for lose. </li></ul></ul></ul></ul>
  11. 11. G. Historical Examples <ul><ul><ul><li>Great depression – </li></ul></ul></ul><ul><ul><ul><ul><li>GDP falls over 10% </li></ul></ul></ul></ul><ul><ul><ul><ul><li>unemployment rate - over 20%. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Leads to political radicalism in world </li></ul></ul></ul></ul><ul><ul><ul><ul><li>FDR and Democrats win control of DC </li></ul></ul></ul></ul><ul><ul><ul><li>1970’s </li></ul></ul></ul><ul><ul><ul><ul><li>Greatest example of stagflation. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>OPEC reduces supply, prices rise </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Increased government spending </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Production slows due to end of Vietnam </li></ul></ul></ul></ul>
  12. 12. H. World’s GDP (PPP) <ul><li>USA – 14.2 trillion </li></ul><ul><li>China – 7.9 trillion </li></ul><ul><li>Japan – 4.3 trillion </li></ul><ul><li>India – 3.2 trillion </li></ul><ul><li>Germany 3.6 trillion </li></ul><ul><li>11. Mexico – 1.5 trillion </li></ul><ul><li>Haiti – 11.5 billion </li></ul><ul><li>151.Sierra Leone – 4.2 billion </li></ul>
  13. 13. II. Unemployment
  14. 14. A. Types <ul><ul><ul><ul><li>Frictional – When people take time off to find a job. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Seasonal – Industries slow or shut down for the season </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Structural – Workers’ skills do not match the jobs that are unavailable. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cyclical – unemployment that increases with economic hard times </li></ul></ul></ul></ul>
  15. 15. B. Measuring <ul><ul><ul><ul><li>Unemployment rate = number of people unemployed divided by the labor force </li></ul></ul></ul></ul><ul><ul><ul><ul><li>National unemployment is for USA as a whole. Different from state to state. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Unemployment is usually short. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Noticeable unemployment is long-term. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Few workers make up jobless rate for extensive periods of time. </li></ul></ul></ul></ul>
  16. 16. C. Problems <ul><li>Its difficult to distinguish a person who is unemployed from a person who isn’t in labor force. </li></ul><ul><li>Discouraged workers, those who like to work but give up searching for jobs after unsuccessful attempts, aren’t in statistics. </li></ul><ul><li>Some people may claim to be jobless to receive assistance, even if they aren’t searching for work. </li></ul>
  17. 17. C. Full Employment <ul><li>No cyclical unemployment. </li></ul><ul><li>Few people left for employers to hire. </li></ul><ul><li>Companies raise pay, pass on costs to customers = inflation. </li></ul>
  18. 18. III. Inflation <ul><ul><ul><li>A. Defined </li></ul></ul></ul><ul><ul><ul><ul><li>General increase in prices. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Creeping – Slow inflation rate between 1 -3% annually. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Chronic – Accelerated and hard on the economy. Hard to predict. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Hyperinflation – Inflation that rises rapidly as high as 100-500% per month. Hyperinflation is equivalent with total economic collapse. </li></ul></ul></ul></ul>
  19. 19. B. Measuring <ul><ul><ul><ul><li>Price index – measured amount of price increases for a standard group of goods over a period of time. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Consumer price index is computed by the Bureau of Labor Statistics. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>CPI = updated costs x 100 </li></ul></ul></ul></ul><ul><li> Base period cost </li></ul>
  20. 20. C. Causes <ul><ul><ul><ul><li>Quantity – too much money in the economy causes prices to rise. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Demand-pull – When demands for goods and services exceeds supplies. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cost-push – producers raise prices in order to pay increased costs. </li></ul></ul></ul></ul>
  21. 21. D. Trends <ul><ul><li>Last 60 years, prices have gone up about 5 percent per year. </li></ul></ul><ul><ul><li>Deflation, occurred during the 1800’s in the USA. </li></ul></ul><ul><ul><li>Hyperinflation has occurred in Confederate States of America, Weimar Germany, and Zimbabwe </li></ul></ul><ul><ul><li>During 1970s Costs went up 7 percent annually. </li></ul></ul><ul><ul><li>In 1990s, prices went up 2 percent per year. </li></ul></ul>
  22. 22. D. Effects <ul><ul><ul><ul><li>Purchasing power – as prices increase, your purchasing power decreases. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Fixed income recipients like those on social security, have less purchasing power when prices rise. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The amount of interest you receive from investments will be of less value. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>When the Fed increases the money supply and creates inflation, it erodes the real value of the unit of account. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inflation causes dollars at different times to have different real values. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Therefore, with rising prices, it is more difficult to compare real revenues, costs, and profits over time. </li></ul></ul></ul></ul>
  23. 23. IV. Poverty <ul><ul><ul><li>A. Measured </li></ul></ul></ul><ul><ul><ul><ul><li>Poverty Threshold – income below which is sufficient to support a family or household. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>varies among size of the household. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Poverty is higher for </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>African-Americans </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Hispanics </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Single mothers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Children </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Inner cities </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Isolated rural regions </li></ul></ul></ul></ul></ul>
  24. 24. Figure 1 The Poverty Rate Copyright©2003 Southwestern/Thomson Learning Percent of the Population below Poverty Line 1960 1965 1970 1975 1980 1985 1990 1995 2000 5 10 15 20 25 Poverty rate
  25. 25. B. Causes <ul><ul><ul><ul><li>Lack of Education – as you increase a person’s education, the average level of income also increases. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Location – Inner city residents –less likely to own automobiles. Rural residents distant from everything. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Discrimination – </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>European descent earn more than racial minority groups </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Men earn more than women. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Discrimination is diminishing. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Programs like affirmative-action don’t close the gap. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Economic Shifts –bad times hurt poor worse. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Family Structure - Two incomes are better than one.. </li></ul></ul></ul></ul>
  26. 26. C. Income <ul><ul><ul><ul><li>1. Average income in the USA $37,000. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Income inequality is decided by… </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Ranking the nation’s household incomes </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Dividing them into quintiles </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Average each quintile’s income] </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Then calculate their share of total income. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Uneven distribution is caused by lack of skills, education, and inheritances. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>From 1935-1970, the distribution of income gradually became more equal. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In more recent years, this trend has reversed itself. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The following have tended to reduce the demand for unskilled labor and raise the demand for skilled labor: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Increases in international trade with low-wage countries </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Changes in technology </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Therefore, the wages of unskilled workers have fallen relative to the wages of skilled workers. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>This has resulted in increased inequality in family incomes. </li></ul></ul></ul></ul>
  27. 27. Table 1 The Distribution of Income in the United States: 2000 Copyright©2004 South-Western
  28. 28. D. Antipoverty <ul><ul><ul><ul><li>Enterprise zones – area of underdevelopment that businesses are lured to by tax breaks. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Government employment assistance: training, unemployment, and minimum wage. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Welfare: Begun by President Johnson, reformed by President Clinton. </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Food Stamps </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>WIC </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cash assistance’ </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Heating. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Housing. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Welfare to work. </li></ul></ul></ul></ul></ul>
  29. 29. <ul><li>Negative income tax gets revenue from wealthy households, transfers to poor. </li></ul><ul><ul><li>Rich pay a tax based earnings. </li></ul></ul><ul><ul><li>Poor receive a assistance—a “negative tax.” </li></ul></ul><ul><ul><li>Poor families receive aid with no demonstration of need. </li></ul></ul><ul><li>In-kind transfers are to poor = goods and services (Food stamps and Medicaid) </li></ul>