1. Economics Chapter 13

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. Do Now
In your notes, write down as many
EXAMPLES as you can on what YOU
THINK THE GOVERNMENT & PEOPLE
SPENDS THEIR MONEY ON!!

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.  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. GDP= C+I+G+X
 (C) Consumer purchases
 (I) Investments goods for business
 (G) Government
 (X) Net Exports  {Exports-Imports}

7. C
I
G
X GDP
Using your LIST of Government/People Spending
Examples…..place them with the correct GDP
component

8.  A measure of the economy that
subtracts depreciation from GDP.
 NDP = GDP - Depreciation

9. Depreciation
 Loss of value due to wear and tear on
DURABLE & CAPITAL GOODS

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.  A measure of the total income that
individuals receive before personal
taxes are paid.

12.  A measure of the income remaining for
people to spend or save after all taxes
have been paid.

13. CORRECTING STATISTICS
FOR INFLATION
Section 2

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.  If the MONEY SUPPLY rises faster than
available goods/services…….

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. Real GDP: better picture of standard of living in
various countries
 Adjusted GDP for INFLATION by applying
price deflator

18. Deflation
 DECLINE in the general price level of
goods/services
 RARE!!!

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.  Consumer Price Index (CPI)
 Producer Price Index (PPI)
 GDP Price Deflator

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. Market Basket
 Goods/Services used
to compile CPI
 Base Year = point of
comparison

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.  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. AGGREGATE DEMAND &
SUPPLY
Section 3

26. Learning Goals
 Identify the causes for the aggregate
supply curve.
 Utilize aggregate demand and supply
analysis to determine the equilibrium
price level.

27. Aggregates
 Sum of ALL the individual parts of the
economy.

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.  Aggregate Supply is the real domestic
output of producers based on the rise
and fall of the price level.

30.  The equilibrium
price is where the
demand curve
intersects the supply
curve.

31. BUSINESS FLUCTUATIONS
Section 4

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.  Business fluctuations are the ups and
downs in an economy.

34.  The business cycle is changes in the
level of total output measured by real
GDP.

35. Growth
Peak or Boom
Contraction or Recession
Trough
Expansion or Recovery
Peak or Boom
Contraction or Recession

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. Business cycle (cont)
 Trough = lowest part; economic levels
off
(DEPRESSION! *deflation) Highest
unemployment;

38.  Business Investment
 Government Activity
 External Factors
 Psychological Factors

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.  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.  Wars impact the economy.
 Availability of raw materials (oil)

42.  Prospects of peace in an area can
impact the economy
 Discovery of new oil reserves
 War

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.  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.  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.  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. Causes of the Great
Depression
“We in America are nearer to the
final triumph over poverty than
ever before.” –Herbert Hoover

49. How did we get here?

50. 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

51. False Advertising
 Prosperity of the 1920s were superficial
 Causes of the Great Depression were complex and
largely ignored throughout the decade

52. 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

53. I. Uneven Distribution of
income
 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

54. Depressed Consumer
Purchasing Power
 Mellon’s Tax
Cuts
 Business increased
profits while holding
down wages.
 50% increase in
production during the
1920s
 No increase in wages
 Workers couldn’t
afford goods/ relied on
credit or stopped
spending
 Less money circulating
1.Cut the top income tax rate from 77
to 24 percent
2. Cut taxes on low incomes from 4 to
1/2 percent
3. Reduce the Federal Estate tax
4. Efficiency in government

55. 2. Uneven distribution of
corporate 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.

56. 3. Overproduction and
underconsumption
 For an economy to
function properly:
t(d)=t(s)
 In 1920s- there was
an oversupply of
goods. (Mech. of
industry/farming
partly responsible)

57. 4. Easy Credit
 Installment plans
 Borrowing on margin to
buy stocks
 Private banks loaned
out millions → rising
debt throughout the
1920s

58. 5. Large scale international
wealth 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]

59. Protective Tariffs
 Fordney-McCumber
1922
 raised American
tariffs in order to
protect factories and
farms.
 Countries injured by
WWI- w/ Tariffs they
would not be able to
make payments to
America on war
loans
 Farmers blame Tariff
for Depression
 Hawley-Smoot 1930
 raised U.S. tariffs on
over 20,000
imported goods to
record levels
 Led to a decrease in
imports/exports by
more than ½
 Led to a rise in
unemployment

60. 6. Speculation on the stock
market
 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

61. 7. Shortsighted government
policies
 Mellon’s Tax cuts
 Protective Tariffs
 Fed Reserve Board
fearing inflation,
tightened credit
[opposite action
was needed to
fight the slow
down in
purchasing)

62. The Role of Hoover in the
Great 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: http://www.u-s-history.com/pages/h1569.html

63. Depression’s effects
 Widespread bank failures
 Bankrupt businesses
 High unemployment
 Decrease in worldwide trade
 Increasing numbers of homeless
persons
 Widespread hunger and illness