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:
0. Promote economic growth
1. Limit unemployment
2. 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?
3. 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:
4. Expenditures approach-Add up all the spending on final goods and services in that given year.
5. 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:
6. Consumer spending
-EX. $6.01 little Caesar's Pizza
2. Investment - When business put money back into their own business
- Machinery or tools
3. Government 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.
Reave V.s 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.
Real GDP "deflates" nominal GDP by adjusting for inflation in terms of a base year prices.
Does GDP accurately measure standard or living.
• Standard of living (or quality of life) can be measured in part by the economy by how well the economy is doing.
- But it needs to be adjusted to reflect the size of the nation's population
• Real GDP per capita
- Real GDP divided by the total population. It identifies on average how many
products each person makes
• Real GDP per capita is the best way to measure a nation's standard of living.
PRODUCTIVITY (TECHNOLOGY)
7. Technology
8. Economic system
EX. #1: Capitalist countries have historically had more economic growth.
- Capital (Like robots) can produce more products than people
- Counties with more capital, can produce more products than countries without.
3. Capital machinery, and man-made resources, and tools
Ex 1. India has over a billion people but relatively few capital resources and there
fore
4. Human Capital
5. Natural resources
- Syria has a lower because its a big freaking' desert.
BUSINESS CYCLE
The national economy fluctuates resulting in periods of boom and bust.
• A recession is 6 months drop
• A depression is something that lasts longer than that.
Who cares?
• Macroeconomics measures these fluctuations and guides policies to keep economy stable
• The Government has a responsibility to
- Promote long term growth
- Prevent unemployment (resulting from a bust)
- Prevent inflation
• why does the economy fluctuate?
• Retailer and producers send misleading information about their consumer demand
• Advances in technology, productivity or resources
• Outside influences (Wars, supply shocks, panic)
Characteristics of Expansions and Recession
Expansion
• Less unemployment
• Increase in real GDP
• Rapid job growth
• Increasing prices
• Fewer Social problems (Alcoholism, Suicides Theft...)
Recession
• More unemployment
• Decrease in real GDP
• Decreasing prices
• More Social prices (Alcoholism, Suicides)
WHAT IS ECONOMIC GROWTH?
• An increase in REAL GDP over time
• An increase in real GDP per capita over time (Usually used to determine standard of living)
WHY IS ECONOMIC GROWTH THE GOAL OF EVERY SOCIETY?
• Provides better goods and services
• Increases wages and standard of living
• Allows more leisure time
• Economy can better meet wants.
GOAL #2: Limit unemployment
WHAT IS UNEMPLOYMENT?
• The unemployment rate
-The percent of people in the labor force who WANT a JOB but are not working.
(Unemployment rate = #Unemployed/#in labor force X 100)
LABOR FORCE
• Who is in the labor force?
- Anyone above 16 years old.
- Able and willing to work
- Not institutionalized (Jails hospitals
- Not full time student
- Not retired.
THREE TYPES OF UNEMPLOYMENT
9. Frictional unemployment
• "Temporarily Unemployed" or being between jobs
• Individuals are qualified workers with transferable skills but aren't working.
• High school or college graduates looking for jobs
• Individuals that are fired or are looking for another job.
2. Seasonal unemployment
• This is a specific type of frictional unemployment which is due to the time of
year and the nature of the job,
• These jobs will come back but don't go year 'round.
EX. Lifeguards
3. Structural unemployment
• Changes in the structure of the labor force to make some skills obsolete.
• Workers DO NOT have transferable skills and these jobs will never come back.
• Workers must learn new skills to get a job.
• The permanent loss of these jobs is called "creative destruction"
Technological unemployment
• Type of unemployment where automation and machinery replace workers causing unemployment.
• Auto assemblers in Toyota factories that are replaced with robots.
CYCLICAL UNEMPLOYMENT
• Unemployment that results from economic downturns (recessions)
• As demand for a good or service falls, demand for the labors falls and workers are fired.
NATURAL RATE AND FULL EMPLOYMENT
• Two types of the 3 types of unemployment are guaranteed to happen.
- Frictional
- Structural.
• Together they make up the natural rate of unemployment (NRU)
• We are at full employment if we have only the natural rate of unemployment.
• This is the normal amount of unemployment we SHOULD have
- The number of job seekers = the number of job vacancies.
• Full unemployment = No cyclical unemployment
• Economists generally agree that an unemployment rate should be around 4 and 6% which equals full employment
CRITICISMS OF THE UNEMPLOYMENT RATE
What is wrong with the unemployment rate?
• It misdiagnose the actual unemployment rate because of the following.
•Discourages job seekers
- Some people are not longer looking for a job because the have given up.
•Part time workers
- Someone who wants more shifts but can't get them is still considered
employed.
• Race and age inequalities
- Hispanics - 5.6% in january
- Black - 8.9% for january
- Teenagers - 15.3% in January
• Illegal labor
- Many people work under the table.
GOAL #3 LIMIT INFLATION
Country and Time-
Zimbabwe, 2008
Prices rose at 76,000,000,000%
What is inflation?
• Inflation is rising general level of prices.
• Inflation reduces the purchasing power of money.
• Ex. It takes $2 ti buy what is $1 back in 1982.
• When inflation occurs, each dollar of income will buy fewer goods than before.
HOW IS INFLATION MEASURED?
The government tracks the prices of the same goods and services each year.
• This "MARKET BASKET" is made up of about 300 commonly purchased goods
• Inflation Rate % changes in prices in 1 year.
• They also compare changes in prices to a given base year. (Usually 1982)
• Prices of subsequent years are then expressed as a percentage of the base year.
• Ex.
- 2005 inflation rate was 5.4%
- U.S. Prices have increased 98.3% since 1982
- In bolivia the percentage was 50,000 percent
• This is called hyper inflation
INFLATION: GOOD OR BAD?
Helped or hurt by inflation?
10. A man who lent out $500 dollars to a friend in 1960 and is still waiting to get paid back.
11. A tenant who gets charged $850 a month
12. An elderly couple living offa fixed retirement of $2000 a month
Make a T-Chart
Hurt by Inflation Helped by Inflation
Lenders - people who lend money Debters - people who borrow money
People with fixed incomes A business where the price of the product increases faster than price of resources.
Savers
CONSUMER PRICE INDEX
The most commonly used measurement of inflation for consumers
How it works:
• The base year is given an index of 100
• To compare, each year is given the index # as well.
CPI = Price of market basket X 100
Price of market basket in base year
Market Basket Base year 2009 Base Year 2010 Base Year 2011
2009 $40 $100 $80 $40
2010 $50 $125 $100 $50
2011 $100 $250 $200 $100
• 1997 Market basket:
• Movie is $6 and Pizza is $14
- Total: $20
CPI VS GDP DEFLATOR
The GDP Deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.
GDP = Nomial GDP X 100
Deflator Real GDP
• An increase in the price of goods produced by government will show up in the GDP Deflator but not the CPI
• The GDP Deflator includes only those goods and services produced domestically. Since imported goods are not part of GDP they do not show up on the GDP deflator.
RPOBLEMS OF THE CPI
Substitution biased
• As prices for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.
- Result: CPI may be higher than what consumers are really paying.
New Products
• The CPI market basket may not include the newest consumer products.
-Result: CPI measures prices but n
No comments:
Post a Comment