Economic Freedom Freedom Index Economic GrowthGDP Economic StabilityCPI Economic Equity Gini Index Economic Efficiency Hard to measure MSBMSC Macroeconomic Goals Full Employment ID: 782526
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Slide1
Macroeconomics
Slide2Broad Social Goals
Economic Freedom-
Freedom IndexEconomic Growth-GDPEconomic Stability-CPIEconomic Equity- Gini IndexEconomic Efficiency - Hard to measure MSB=MSC
Slide3Macroeconomic Goals
Full Employment
Price Stability
Economic Growth
Slide4Phases of the Business Cycle
Slide5What causes fluctuations in output?
Irregular
innovation that sparks investment i.e. microchip, internet & railroad
Productivity changes-result in unexpected changes in resource availability.Monetary factors – too much money and to too little Political events- 9/11, war, peaceFinancial Instability- financial bubbles and bursts Short run stickiness in prices prevent the economy from adjusting rapidly to shocks. Most effected by business cycles: consumer durable goods and capital goods. Nondurable consumers
goods
are somewhat insulated from the cycles.
Slide6Slide7Economic Indicators
Leading Indicators
Avg
wkly hrs, manufacturing Avg wkly initial claims for unemployment Building permitsStock prices, S& P 500Money Supply, MM2Interest rate spread, 10-yr Treasury bonds less federal funds
Index of consumer expectation
Lagging Indicators
Avg duration of unemploymentManufacturing and trade inventoriesCommercial loans
Ratio of consumer debt to personal income
Change in labor cost per unit of output, manufacturing
Short term Interest rates
Slide8The Circular Flow of Resources,
Goods, Services and Money Payments
Slide9Circular Flow with Government
Slide10GDP
Gross Domestic Product
,
is the market value of all final goods and services produced in a country in a given time period
GDP=
C+I+G+Nx
30% Goods
70% Services
Slide11Consumer Spending (C)
Spending by households on goods and services such as food, rent, medical expenses and so on but does not include new housing. 2/3 of GDP
10% durable goods
30% nondurable goods
60% services
Slide12Gross Investment (I)
Spending by business on machinery, factories, equipment, tools.
All construction-includes residential construction b/c they earn income if they are rented.
Changes in inventory
Slide13Gross Investment
Gross Investment – (all investment-even replacement of broken equipment) Net investment plus depreciation
Net investment is the added capital
If gross is less than depreciation net investment is negative ex. Great Depression.Depreciation- capital used up in a year
Slide14Slide15Gross Investment
Changes in inventory- count all goods that were produced even though it might not have been sold.
Inventories can increase, or decrease
increase in inventory producing more than it sold but counted.“draw down inventories” means sold more output than it produced (sold stuff from last year already counted)
Slide16Net Exports (Nx or X-M)
Spending by people abroad on US goods and services (exports) minus spending by people in the US on foreign goods and services (imports)
Slide17Government Spending (G)
Spending by all levels of government on goods and services. Includes spending on the military, schools, and highways.
Slide18Not included in GDP
Secondhand Sales
Illegal activities
Transfer payment Financial transactionsIntermediate Goods
Intermediate good: meat, bun, lettuce, tomato
Slide190 5 10 15 20 25 30
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United Kingdom
Japan
United States
Switzerland
GLOBAL PERSPECTIVE
The Underground Economy as a Percent of GDP
Source: The Journal of Economic Literature, 2000
Slide20Slide21Slide22Slide23Slide24Slide25Two ways of computing GDP
Aggregate expenditures approach
AE=GDP=C+I+G+(X-M)
Factor income approachGDP=Y=wages +interest +rent + profitsY=C+S+TProduct Market
Resources Market
Slide26Why do we have inflation, and why is inflation a problem?
Increase in the average price level over time.
Mostly a monetary problem but other reasons exist.
Slide27Price Stability
Inflation
A rise in the general level of prices (1970s)
Deflation A decline in the general level of prices (Great Depression)
Slide28Worst Inflation on Record
Germany Aug. 1922-Nov. 1923
Inflation Rate 1,020,000,000,000%
Before 1920, one mark would buy a full meal for 2By Nov. 1923, a foot high stack of 50M mark notes to feed one couple.German prices rose at the rate of 41 percent per dayHungary Aug. 1945- 1946
381,000,000,000,000,000,000,000,000,000
%
Octillions
x-mas price index
Slide29Measurements of inflation
Two ways to estimate prices
Directly by constructing price indexes
Consumer Price Index (CPI)Producer Price Index (PPI)Indirectly by computing the implicit price deflator (the most inclusive index).GDP Price Deflator
Slide30Price index for groceries
Market basket (in base year of 1960)
1 dozen eggs
2 chickens3 pounds hamburger Other things a typical family might buyPrice of basket =$100 in 1960Price of basket = $200 in 1970
Slide31Calculations of Price changes
CPI=
cost of market basket
current-year cost of same market basket in base-year Price Change = Change in CPI Beginning CPI
X 100
X 100
CPI overstates or understates real GDP?
Slide32Price index
The market basket does not change so any difference must be due to prices.
Price indexes however miss
Substitution effectNew goodsQuality changesDiscount storesChanges in products over time
Slide33Slide34Slide35Slide36Slide37Measuring Short-Run Economic Growth
is to measure fluctuation in output
We measure increases in the quantity of goods and services produced in the economy.
Fluctuations in output are caused by greater or lesser utilization of the existing capital stock. We are actually measuring changes in real output because of more or less labor applied to the existing level of technology and plant equipment.
Slide38Price Index
Current year cost
Base year cost
Base year always indexed at 100CPI and GDP Price deflator are both examples of a price indexNominal – values that increase or decrease with price levelReal – adjust for price changes X 100=
Slide39Implicit price deflator
Estimate real GDP by determining what people buy now using base year prices
Changes in consumption patterns or new goods are reflected in the deflator unlike the CPI.
Slide40Implicit price deflator
X 100
GDP deflator =
Nominal GDP
Real GDP
Ratio of current year prices to some base year
P deflator of 200 means that a current year price is twice its base year.
Slide41Converting nominal GDP to
real
GDP using a price index
X 100
(In year 1)
index
Slide42Have cars gotten cheaper?
Real Output Growth
Real GDP growth =
(real GDP yr 2 - real GDP yr 1) real GDP yr 1
(Output)
Elwood Haynes in his first car in 1894- $2,000
REVAi/G-Wiz i
electric car -
£9,995
x100
Slide43Real GDP per Capita
Real GDP per Capita =
year 1 real GDP
population in Yr 1
Slide44GDP and economic welfare
GDP ignores:
changes in heath and life expectancy
leisure time (early retirement)environmental qualitypolitical freedom and social justice
Slide45Why do we have unemployment, and why is unemployment a problem?
Many reason for unemployment
Unemployment means that society has fewer products because workers are not working.
Imposes social and psychological costs on society
Slide46Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical
Unemployment
Seasonal Unemployment
Other Employment Concepts
Natural Rate of Unemployment
Full Employment
Slide47Frictional Unemployment
Workers voluntarily changing jobs; and by temporary layoffs.
Example: quit your job to look for a better one because you hate your boss.
Slide48Structural Unemployment
Workers whose skills are not in demand by employers.
Example: typists that lack computer skills
Slide49Cyclical Unemployment
Unemployment caused by an insufficient aggregate demand; recession.
Slide50Full Employment
When the economy experiences only
frictional
and structural unemployment.Or Full employment occurs only when there is no cyclical unemployment. Full employment is less than 100% . Unemployment Map
Slide51Definitions of Employed, Unemployed
and Unemployment Rate
Employed = everyone currently working, including part-time workers
Unemployed = people looking for work or temporarily laid off from work
Unemployment Rate(UR) =
Labor force(LF) = employed + unemployed
Labor force participation rate (LFPR) =
# of unemployed
X 100
labor force
# in labor force
X 100 adult population
Slide52Employed, Unemployed, Not in labor force
People who have stopped looking are not counted as unemployed.
People are not consider part of the labor force if under the age of 16, not looking for work (house wife or retired) or institutionalized.
Unemployed includes people who are actively looking for work.
Slide53Problems with the measurement
Discouraged workers –persons who have given up looking are no longer counted as unemployed.
Underemployed workers- people who are working part time but would like full time or who holds a job that requires a lower skill level than they possess.
Different groups experience different levels of unemployment rates
Slide54Programs to Reduce Unemployment
Frictional
Job information
Employment servicesStructural Educational subsidiesJob training/ RetrainingWage Subsidies/ Employment Tax CreditsPublic Services EmploymentCyclical Fiscal Policy Monetary PolicyPublic Service EmploymentWage Subsidies/ Employment Tax Credit
Slide55What determines economic growth?
Growth depends on:
Number of workers
The education and training of workers The technological advances The amount of machinery &technology labor has to work withThe basic material resourcesTrade
Slide56Long Run Economic Growth
refers to changes in the productive capabilities of the economy through changes in amount of plant and equipment and technology
Slide57How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?
Decisions of the Federal Reserve Bank determine the amount of money in the economy.
The amount of money in the economy determines the level of economic activity.
Monetary policy
Slide58Which government policy affects output, growth, unemployment and inflation?
Government policy decisions on taxes and spending affects the level of economic activity.
Fiscal policy
Slide59Deficit/Surplus/Debt
Tax Revenue – Government Spending=
Deficit
– negative balance government must borrow.Or Surplus – positive balanceDebt- The total accumulation of the deficits the Federal government has incurred through time. Total amount owed. US securities: Treasury bills, Treasury Notes, Treasury Bonds and US Saving Bonds
2008
2012
$15,574,428,564,198.34
$10,852,628,401,130.22
Slide60A Trillion Dollar
1 Million Dollars
$10,000
Slide61100 Million Dollars
1 Billion Dollars
1 Trillion Dollars
Slide62National debt
is the sum of all securities issued by the US Treasury
US Debt
Slide63US Deficit / Surplus
Slide64US Deficit / Surplus
Slide65Slide66Slide67Slide68Medicare 17% Medicaid 9%
ACA Subsidies 1%
SS 24% Unemployment
Slide69Slide70Special Interest
Pork Barrel Spending
the politicians win political favor with a small group of highly valued local constituents by spending on projects that cannot others wise be economically justified. Logrolling trading votes to secure favorable outcomes can either diminish or increase in economic efficiency.