The Big Picture of Macroeconomics (Day 1)

THE BIG PICTURE OF MACROECONOMICS

•Can the whole of something be greater than the sum of its parts?

- In macroeconomics, YES

GOVERNMENT INTERVENTION

•Government intervention is necessary-even though it causes inefficiency.

•Price ceilings, price floors, taxation, and tariffs are all necessary for the long term benefit of the economy.]


ECONOMIC AGGREGATES

•Measures that summarize data across different markets for goods, services, workers, and assets.

•Macroeconomics will focus on aggregates because they represent the big picture.


For all countries there are three major economic goals:

1.Promote economic growth

2.Limit unemployment

3.Keep prices stable (Limit inflation)


How do we know how well the economy is doing?

•National income accounting

- Economists collect statistics on production, income, investment and savings.


The most important measure of growth is GDP

•Gross Domestic Product is the dollar value of all final goods and services produced within a country's border in one year.

- Dollar value-GDP is measured in dollars

- Final goods-GDP does not include the value of intermediate goods.

Intermediate goods are goods used in the production of final goods and

services.

- One year-GDP measures annual economic performance.


WHAT DOES GDP TELL US?

•Just like calculating your own income, GDP measures how well the U.S is doing financially.

•HOW DO WE USE GDP?

1. Compare previous years, (Is there growth?)

2. Compare policy changes (did a new policy work?)

3. Compare to other countries (Are we better off?)


HOW CAN YOU MEASURE GROWTH FROM YEAR TO YEAR?

% Change in GDP = ((year 2 - year1)/Year 1) X 100


Mordor's GDP in 2007 was $4,000

Mordor's GDP in 2008 was $5,000

What is the percent change in GDP?


What is NOT included in GDP?

1.Intermediate goods.

• No multiple counting, only FINAL goods.

- EX. Price of finished car, not the radio, tires...

2. Non-production transactions

• Financial transactions

- EX. Stocks bonds, real estate

• Used goods

- EX. Old cars, used clothes

3. Non market (Illegal) activities

- EX. Illegal drugs, unpaid work.


CALCULATING GDP

Two ways of calculating GDP:

1.Expenditures approach-Add up all the spending on final goods and services in that given year.

2.Income approach-Add up all the income that resulted from selling all the final goods and services produced in a given year.

Both ways generate the same amount since every dollar spent is a dollar of income.


EXPENDITURES APPROACH

Four components of GDP:

1.Consumer spending

-EX. $6.01 little Ceasar's Pizza

2. Investment - When business put money back into their own business

- Machinery or tools

3. Governement spending

Ex. Bombs and tanks NOT social security

4. Net exports - Exports (X) – Imports (M)

- EX. Value of 3 Ford Focuses minus to Hondas

GDP = C + I + G + X


NOMINAL GDP - REAL GDP

How can you figure out which is the most popular movie of all time?\


THE PROBLEM WITH GDP

If a country's GDP increased from $4 Billion to $5 billion in one year, is the country experiencing economic growth?

•Did the country produce 25% more products?

•Something about apples and not increasing production so no.


Real GDP vs. Nominal GDP

•Nominal GDP

- GDP measured in current prices. It does not account for inflation year to year.

•Real GDP

- Adjusts for inflation and is a better comparison for economic growth.

What to Focus on for Unit 2 Exam

The Laffer Curve

The Laffer Curve

Elasticity Notes (9/15/2011)

ElasticityFall 2011AP Macroeconomics Elasticity Defined a measure of responsiveness of a dependent variable to an independent variable. Three kinds: Elastic Demand Inelastic Demand Unit Elastic Demand Elasticity Demand Elasticity Demand Elasticity Demand Elasticity Expenditures Payment of cash or cash-equivalent for goods or services Total Expenditures is a measure of the money customers are willing to spend on a product at a particular price. Multiply the number demanded by the price to get total expenditures. Total Expenditures Test:Price * Quantity= Total Expenditures Determinates ofDemand Elasticity Can the purchase be delayed? Are adequate substitutes available? Does the purchase require a large portion of income? YES = ELASTIC NO = INELASTIC Best 2/3 Examples of Demand Elasticity Supply Elasticity a measure of the way in which the quantity supplied responds to a change in price. Three Kinds Elastic Supply Inelastic Supply Unit Elastic Supply Determinates of Supply Elasticity 3 ?s to Remember- Elasticity 1) Can the purchase be delayed? 2) Are adequate substitutions available? 3) Does the purchase require a large portion of income? Predicting the Market using supply, demand, and elasticity. Effect of Elasticity on Oil Prices: In the short-run… Supply and demand are inelastic. Neither can respond quickly to a change in price. Prices are volatile. In the long run… Supply and demand are elastic. Both can respond slowly to a change in price. Prices are stable. Inelastic Demand for illegal drugs If you reduce the supply of illegal drugs in the US… Prices will increase, but the quantity sold will not be altered significantly. If you reduce the demand for illegal drugs in the US… You more effectively reduce the quantity of drugs sold.

Government Intervention and Teaxes

GOVERNMENT INTERVENTION WHY WOULD THE GOVERNMENT WANT TO CONTROL PRICES? • Equity -An attempt to make things fair or equal. • Quality of life • A fair chance for everyone. SOCIAL GOALS VS. MARKET EFFICIENCY • People's economic goals often come into conflict with each other. The governmentserves a role of regulating the economy to provide equality and security. The government in effect distorts the Market to achieve social goals PRICE CEILINGS • The maximum legal price that can be charged for a product. • Lead to inefficiency: -Inefficient allocation to consumers -Wasted resources -Inefficiently low quality -Black markets PRICE FLOOR • The lowest legal price that can be paid for a good or service. • Minimum wage is a price floor. • Also lead to inefficiency -Inefficient allocation of sales among sellers -Wasted resources -Inefficiently high quality -Illegal Activity. THE EFFECTS OF TAXES • Tax incidence • Excise tax -specific taxes on specific goods or services • Excess Burden or "deadweight loss" -cost of the loss in efficiency due to taxhow do taxes cause inefficiently? TAXES • Tax revenues exceeded $3.3 Trillion last year • $11,800 average for each citizen • Government revenues have grown over 800% since 1940 even when adjusted forinflation. TAX EXAMPLES • Federal income tax (0-35%) Progressive tax, largest form of federal income. • Social Security tax (FICA; 6.2%) Second largest form of federal income • Medicare tax; (1.45% no cap)  • Corporate income tax (15 -39%) 2nd largest source of federal income • Excise Tax, 4th largest source of federal income. • Luxury Tax. Mostly paid on veblin--prices increase with demand. • Transfer Tax. Tax on an item that changes ownership. 2% of revenue -Gift tax, taxation on large goods or gifts. -Estate tax, taxation of a persons assets upon transfer upon their death. • State and local taxes -Property taxes -Permits -Fees EFFECTIVE TAXES • To be effective, they must be: -Equitable -Simple -Efficient TAXATION PRINCIPLES • Benefit principle • Ability to pay principle SYSTEMS OF TAX INCIDENCE • Proportional -Everyone pays the same percentage --flat  • Progressive -Pay more as you increase your income • Regressive -Higher rate of taxation the lower you income you make. 

Supply & Demand Notes (Alec Soard)

SUPPLY AND DEMAND

DEMAND

•The desire, ability and willingness to buy a product.

•All three must be present.


Demand curve

Individuals demand


Market Demand Curve

Individual + all others in market's demand.


LAW OF DEMAND

As price goes up - quantity goes down.

Quantity demanded of a good or service varies inversely with its price.


•Utility- usefulness or satisfaction a person derives from a product.

•Do you buy things that have no use or provide no satisfaction.


MARGINAL UTILITY

•The extra benefit or usefulness a person will get form acquiring one more unit of a product.

•DIMINISHING MARGINAL UTILITY UTILITY: States that the extra satisfaction we get from using additional quantities of a product will diminish as more are added. This explains the downward slope of the demand curve. Larry will not pay as much for three CDs as he will for one.


CHANGES IN QUANTITY DEMANDED

•is a response to a change in price.


CHANGE IN DEMAND

•Means people are now willing to buy different amount of something without a change in price.


DEFINITION OF SUPPLY

•The amount of a product that will be offered for sale at all possible prices.

•Suppliers will normally offer more of an item at high prices and less at lower prices.


CHANGES IN QUANTITY SUPPLIED

•Response to change in price.

•Increase in quantity supplied when prices increase and show a decrease in quantity supply when prices decrease.

•A change in supply curves when suppliers offer different amounts of products for sale at all possible prices.



PRICE

•Monetary value of a product established by supply and demand.

•Link between producers and consumers to determine the three questions of what to produce, how to produce and who is it for.

•Signal to make economic decisions.

•"If you're going to do something dumb, be smart about."


•Prices do not favor sellers or buyers.

•Prices are the result of competition and represent a compromise that both sides can live with.

•Prices are also flexible. capable of adjusting to unseen events and can accommodate change.

•Prices are free...

•Prices are familiar, they are easy to understand.

•Allocation without prices is rationing.

•Rationing is a system where the government decides everyone's fair share.

•Rationing isn't fair.


COMBINING SUPPLY AND DEMAND TO EQUILIBRIUM

•Situation in which the supply of goods and services is equal to the quantity demanded.

•Where the two curves intersect is your market equilibrium.

Supply & Demand Video

Supply and Demand Powerpoint on Google Docs

https://docs.google.com/present/edit?id=0AbxQN7GyomHPZGNzdHpkY3FfNjlyNzU3Nzlmdw&hl=en_US

Click or copy & Paste the link above to see today's powerpoint in case you missed anything.

9/11: A Day That Changed The World

Here's a link to the rest of the video we watched about Mayor Giuliani, President Bush and his cabinet members' first-person accounts of 9/11. It's a free download.

http://itunes.apple.com/us/tv-season/9-11-day-that-changed-the-world/id458405290?i=460003910

Business Organization Notes (From Alec Soard)

BUSINESS ORGANIZATIONS

TYPES OF BUSINESSES
0. Sole proprietorship
1. Partnerships
2. Corporations
3. Non-profit

SOLE PROPRIETORSHIPS
•When only one person owns a business
•Advantages
* Easy to start and manage
*No profit sharing
*Tax benefits
•Disadvantages
*Liability, hard to raise money, experience

PARTNERSHIPS
• A business jointly owned by multiple people
• Two kinds of partnerships
•General partnerships
* All partners are responsible for the management and financial obligations for
the business
•limited partnerships
* At least one partner is not active in the daily running of the business
• Advantages
* Easy to start and manage
* More stable-better able to attract talented and easier to gain financing
• Disadvantages
* Liability-each parter is fully responsible for the other
* Potential for conflict
* Lifespan of the business

CORPORATIONS
• Form of a business organization recognized by law as a separate legal entity and has
all the rights and responsibilities of an individual
•
Buy and sell property, sue and be sued
• Have to apply for a charter. Charters contain name and address of company purpose
of business and number of shares to be sold



STOCKS
• Common stock
- Represents basic ownership of a corporation
- You get on vote for each share they own
- Vote is used to elect the board of directors
* Board of directors are who control the policies and goals of a corporation

* They hire the management that runs the company
- Common stock doesn't pay as much in the way of dividends by has potential for large
profit for yourself.

• Preferred stock
- Non-voting ownership of a corporation
- No say in board of directors
- You are paid dividends before the common stock holders
- Usually pays regular guaranteed dividends

CORPORATE ADVANTAGES
• Ease of raising financial capital
- Need more money? Sell more stock or corporate bonds
• Professionalism
- Board of Directors will hire experienced people to run the company
• Limited liability
- As an investor, you are not liability for a company's actions
• Can buy or sell your stocks as you please

CORPORATE DISADVANTAGES
• Difficult and expensive to apply and obtain a charter
- Court fees, lawyers etc.
• Control
- Shareholders have little input over the operations of the company
• Double taxation
- Corp is taxed on its earnings and stockholders pay taxes on dividends
• Highly regulated by government

NON-PROFIT ORGANIZATIONS
• Operate in a business-like manner to promote interests of its members
• Operate similar to corporations:
- Have a charter and Board of Directors
- Don't issue stock or pay dividends
- Don't pay taxes
• Examples
- Churches, Schools, Co-ops

COOPERATIVES
• Consumer Cooperative
- People band together to purchase items in bulk to reduce the price
• Service Cooperative
- People band together to provide a service at a lower cost
• Producer Cooperative
- People band together to promote their products at a lower price.

Another Explanation of the PPC

Link to Bill Gates TED Talk on Eliminating Carbon Emissions

Remember to post your response to the prompt in Edmodo!