Ch 13 measuring_the_economys_performance


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Ch 13 measuring_the_economys_performance

  1. 1. Economics Chapter 13
  2. 2. Learning Goals Describe the four categories of economic activity that are used to measure GDP Identify the differences between national, personal and disposable income.
  3. 3. Do Now In your notes, write down as many EXAMPLES as you can on what YOUTHINK THE GOVERNMENT & PEOPLE SPENDS THEIR MONEY ON!!
  4. 4. National Income Accounting The measurement of the national economy’s performance.  A measure of the amount of goods and services produced yearly by the nation and the amount of income people have to spend.
  5. 5.  Gross Domestic Product (GDP)  The broadest measure of the economy’s size.  The total dollar value of all final goods and services produced in the nation during a single year.  Includes all final products in four sectors:  Consumer goods and services  Investment goods and services  Government goods and services  Net exports
  6. 6. GDP= C+I+G+X (C) Consumer purchases (I) Investments goods for business (G) Government (X) Net Exports  {Exports-Imports}
  7. 7. Using your LIST of Government/People Spending Examples… them with the correct GDP component C X GDP I G
  8. 8.  A measure of the economy that subtracts depreciation from GDP. NDP = GDP - Depreciation
  9. 9. Depreciation Loss of value due to wear and tear on DURABLE & CAPITAL GOODS
  10. 10.  A measure of the total amount of income earned by everyone in the economy.  Wages and Salaries  Income of self-employed individuals  Rental income  Corporate profits  Interest on savings and other investments
  11. 11.  A measure of the total income that individuals receive before personal taxes are paid.
  12. 12.  A measure of the income remaining for people to spend or save after all taxes have been paid.
  13. 13. Section 2Correcting Statistics forInflation
  14. 14. Learning Goals Define the relationship between the purchasing power of money and the rate of inflation. Describe the different between CPI and PPI.
  15. 15.  If the MONEY SUPPLY rises faster than available goods/services…….
  16. 16.  Inflation  A prolonged rise in the general price level of goods and services.  Skews GDP Deflation  A prolonged decline in the general price level.  Rarely happens
  17. 17. Real GDP: better picture of standard of living in various countries Adjusted GDP for INFLATION by applying price deflator
  18. 18. Deflation DECLINE in the general price level of goods/services RARE!!!
  19. 19.  When is a dollar not a dollar?  When inflation occurs, the prices of goods and services rise…therefore, the purchasing power of the dollar goes down.  A dollar’s purchasing power is the real goods and services that it can buy.
  20. 20.  Consumer Price Index (CPI) Producer Price Index (PPI) GDP Price Deflator
  21. 21.  The measure of the change in price over time of a specific group of goods and services used by the average household.  Measures the percent increase every three years over the base year.  Market Basket—the specific group of goods and services analyzed. (90,000)
  22. 22. Market Basket  Goods/Services used to compile CPI  Base Year = point of comparison
  23. 23.  The measure of the change in price over time that United States producers have charged for their goods and services.  Often an indicator if the CPI will rise.
  24. 24.  A price index that removes the effect of inflation from GDP so that the overall economy in one year can be compared to another year.  The new figure is called real GDP.  Real GDP is then compared to a base year GDP.
  25. 25. Section 3Aggregate Demand & Supply
  26. 26. Learning Goals Identify the causes for the aggregate supply curve. Utilize aggregate demand and supply analysis to determine the equilibrium price level.
  27. 27. Aggregates Sum of ALL the individual parts of the economy.
  28. 28.  Aggregate Demand is the total quantity of all goods and services in the entire economy demanded by all people.  Aggregate Demand is related to the price level-the average of all the prices as measured by a price index.
  29. 29.  Aggregate Supply is the real domestic output of producers based on the rise and fall of the price level.
  30. 30.  The equilibrium price is where the demand curve intersects the supply curve.
  31. 31. Section 4Business Fluctuations
  32. 32. Learning Goals Identify the phases of a typical business cycle. Describe the three most severe downturns in the U.S. economy since the 1920s
  33. 33.  Business fluctuations are the ups and downs in an economy.
  34. 34.  The business cycle is changes in the level of total output measured by real GDP.
  35. 35. Growth Peak or BoomContraction or Recession TroughExpansion or Recovery Peak or BoomContraction or Recession
  36. 36.  Peak or Boom—period of prosperity Contraction—Business activity slows down Recession—Any period of at least two quarters (6 months) during which real GDP does not grow. Trough—Where the downward direction of the economy levels off. Expansion or Recovery—The increase in total economic activity following a trough.
  37. 37. Business cycle (cont)  Trough = lowest part; economic levels off (DEPRESSION! *deflation) Highest unemployment;
  38. 38.  Business Investment Government Activity External Factors Psychological Factors
  39. 39.  Some economists say that business decisions are the key to business fluctuations.  Capital Investments  Increase or Cut Back  Innovations—inventions and new production techniques.
  40. 40.  A number of economists believe that the changing of policies by the federal government are a reason for cycles.  Policies on taxing and spending  Control over the money supply available in the economy.
  41. 41.  Wars impact the economy. Availability of raw materials (oil)
  42. 42.  Prospects of peace in an area can impact the economy Discovery of new oil reserves War
  43. 43.  Trying to predict what will happen in the economy in the coming months and years. Economic Indicators are the statistics that measure variables in the economy, such as stock prices or the dollar amounts of loans to be repaid.
  44. 44.  Leading Indicators are statistics that point to what will happen in the economy.  These lead to an overall change in the business activity—up or down.
  45. 45.  Economic indicators that usually change at the same time as changes in the overall business activity.  Often lead to a contraction in the economy.
  46. 46.  These economic indicators seem to lag behind overall business activity. These give economists clues as to the duration of the phases of the business cycle.
  47. 47. Causes of the GreatDepression “We in America are nearer to the final triumph over poverty than ever before.” –Herbert Hoover
  48. 48. How did we get here?
  49. 49. Great Depression:(1929-1939) Shocking after a decade of unprecedented prosperity Impacted all areas of America life Damaged confidence in the future Rock bottom: 1932 Median incomes plunged to ½ what they had been in 1929 ¼ out of work
  50. 50. False Advertising Prosperity of the 1920s were superficial Causes of the Great Depression were complex and largely ignored throughout the decade
  51. 51. Causes of the Depression Uneven distribution of income Uneven distribution of corporate wealth Overproduction and under-consumption Easy Credit Large Scale international wealth distribution problems Speculation on the stock market Shortsighted government policies
  52. 52. I. Uneven Distribution ofincome The wealthiest 5% took in nearly 1/3 of the nation’s income Nearly ½ of the nation’s families earned less than $1,500 a year Henry Ford made roughly $14 million/year in the 1920s
  53. 53. Depressed Consumer Purchasing Power  Mellon’s Tax  Business increased Cuts profits while holding down wages.  50% increase in production during the 1920s1.Cut the top income tax rate from 77  No increase in wages to 24 percent2. Cut taxes on low incomes from 4 to  Workers couldn’t afford 1/2 percent goods/ relied on credit3. Reduce the Federal Estate tax or stopped spending4. Efficiency in government  Less money circulating
  54. 54. 2. Uneven distribution ofcorporate wealth In 1929, 200 Corporations controlled ½ of the corporate wealth. Some industries thriving (automobile), while others like agriculture declining steadily (Average income for a farmer: $273) The businesses that were thriving were somehow connected to either radio or automobile industries.
  55. 55. 3. Overproduction andunderconsumption For an economy to function properly: t(d)=t(s) In 1920s- there was an oversupply of goods. (Mech. of industry/farming partly responsible)
  56. 56. 4. Easy Credit  Installment plans  Borrowing on margin to buy stocks  Private banks loaned out millions → rising debt throughout the 1920s
  57. 57. 5. Large scale internationalwealth distribution problems America prospered in the 1920s, while Euro. Nation struggled to rebuild after the war. U.S. lent $7bil. To Euro. during war. Another $3bil by 1920. Dawes Plan of 1924 lent money to Germany [made them dependent of foreign markets]
  58. 58. Protective Tariffs Fordney-McCumber  Hawley-Smoot 1930 1922  raised U.S. tariffs on  raised American over 20,000 tariffs in order to imported goods to protect factories and record levels farms.  Led to a decrease in  Countries injured by imports/exports by WWI- w/ Tariffs they more than ½ would not be able to  Led to a rise in make payments to unemployment America on war loans  Farmers blame Tariff for Depression
  59. 59. 6. Speculation on the stockmarket By 1929 about 4 mil. Americans/ 3% of the population owned stocks Stockbrokers willing to lend up to 75% of stocks purchasing price Americans wanted to take advantage of the “bull market” (rising stock prices) Stock prices peaked in early Sept. 1929 10/24/1929 (Thursday) huge plunge 10/29/1929- “Black Tuesday” 16 mil. shares dumped
  60. 60. 7. Shortsighted governmentpolicies Mellon’s Tax cuts Protective Tariffs Fed Reserve Board fearing inflation, tightened credit [opposite action was needed to fight the slow down in purchasing)
  61. 61. The Role of Hoover in theGreat Depression* Passing Hawley-Smoot (1930) despite objections from 1000 Economists Maintaining Federal Relief was not necessary despite farm prices dropping to record lows and 4,340,000 Americans out of work, 32,000 businesses bankrupt and 5,000 banks failing Attempts made: creating road, public building and airport construction programs; increasing credit facilities, Reconstruction Finance Corporation (RFC)- with $2 bil. To banks, r.r., factories and farmers*source:
  62. 62. Depression’s effects Widespread bank failures Bankrupt businesses High unemployment Decrease in worldwide trade Increasing numbers of homeless persons Widespread hunger and illness