Transcript ch 11 national economy

The National Economy
Economic Performance
Economic Growth
Economic Challenges
Macro-Economics
• Macro means BIG
• In economics this term refers to topics
that deal with an individual nation or
international topics and events
• GDP is one of the main indicators used
in macro-economic studies
• Word to know= Aggregate (TOTAL or
SUM)
Aggregates
• Aggregate simply means TOTAL
• Aggregate expenditure= the sum or
total of all consumption (C), Investment
(I), Government purchases (G), and net
exports (X) minus (-) the value of
imports (M)
• C+I+G+(X-M)=GDP
Aggregate Income
• Adds up the average income earned during
the year by those that produce the output
• Calculated by adding the value added to a
product at each stage of production or by just
the final selling price of a product
• Value added= firm’s selling price minus the
cost of intermediate products (say wood and
screws for a shelf)
GDP vs GNP
GDP
GNP
Gross Domestic Product
Gross National Product
Total amount of goods
or services
produced IN a
nation during a
given period- usually
a year
The total market
value of all the
goods and
services
produced BY a
nation during a
specified period.
Double Counting
?- with all this adding and subtracting,
how do we avoid counting something
twice--- or more?
A- that is where value added comes in
and using final vs intermediate goods.
Intermediate vs. Final Goods
•
•
•
•
•
Final Goods
Manicure
Bread
Cruise Missiles
New Factory
Dresses
Intermediate Goods
• Window glass for
new automobiles
• Wood for a new
house
• Screws, metal for
missiles
• Cloth for a new
dress
Calculating the GDP
GDP= C+I+G+(X-M)
• C= Consumer is the final buyer
• I= Investments (purchase of capital goods by
businesses)
• G= Government purchases
• X = Exports (items sent out of the USA)
• M = Imports (items brought into USA)
Your Turn…
• In the USA the…
–
–
–
–
–
–
Consumer spending was - $3 billion
The government spending was – $1.5 billion
Business Investments totaled $1 billion
Imports totaled – $2 billion
Exports – $1.5 billion
WHATS THE GDP?
$5 BILLION
Real vs. Nominal GDP
• Nominal GDP - Inflation (CPI) is not
factored in…
– Why is this a bad thing???
– What if GDP increased 4.5% - YIPEE – what a
great economy we have…
– BUT – at the same time inflation went up by
4.5%
– This means…NO ECONOMIC GROWTH
Real vs. Nominal GDP
• Which of these is the most
accurate?
REAL GDP
• To find Real GDP you take the
Nominal GDP and subtract the
CPI this gives you Real GDP.
NGDP – CPI = RGDP
How does the government
calculate the CPI
• “Market Basket”
• Includes these things…
–
–
–
–
–
–
–
–
Housing – 40%
Food / Beverages – 6%
Transportation – 17%
Medical Care – 6%
Apparel – 5%
Recreation – 5%
Education / Communication – 5%
Other – 16%
Current Year /
Base Year
-1
= CPI
CPI Calculation
• Pack of Hot Dogs in 1999 – $1.50
• Pack of Hot Dogs in 2006 – $2.20
2.20 / 1.50 - 1 = ________%
Economic Indicators
• GDP
• CPI
What does all of this mean????
It goes back to the Business Cycle…
Business Cycle
Remember the stages of the business cycle:
Growth, Peak, Recession, Trough,
Recovery, Growth
How does this cycle relate to unemployment rates?
 A peak means that the economy is doing very well and the
unemployment rate is at its LOWEST level
 A trough means that the economy is doing poorly and the
unemployment rate is at its HIGHEST level
Calculating it all together
• In 2003 the
Nominal GDP
was
2,200,000,000
• In 2006 the
Nominal GDP
WAS
2,800,000,000
• Divide and
subtract 1 to get
the Nominal
Growth Rate
(NGR)
• In 2003 the CPI
was $2,000
• In 2006 the CPI
was $2,200
• Divide and
subtract 1 to get
Inflation
NGR – Inflation = REAL GDP
One more time…
• What is GDP?
–The GDP of a country is
defined as the market
value of all final goods
and services produced
within a country in a
given period of time.
What does the GDP not include?
• So glad you asked…
– The GDP does not take into account:
• Items produced in households
– Examples: Childcare, meal preparation, house cleaning, and
home repair
• Underground Economy (Black Market)
– Drug Lords do not report their earnings, neither do 15 yr old
babysitters
– Officials guess that its about 7.5 % of the GDP ($750 billion)
• Depreciation
– The value of capital resources that are used up, or become
obsolete
Consumption
• Consists of the purchase of final goods
and services by households during the
year.
• What do you consume?
– Durable Goods
• Goods that last at least 3 years
• TV, Chair, Bike, etc.
– Nondurable Goods
• Things that will be consumed in the near future
• Soap, Milk, Hair Gel, etc.
Inflation
• Inflation – sustained levels in the increase
of the average price level
• Hyperinflation – Extremely high inflation
• Deflation – average price levels are
declining
• Stagflation – inflation combined with high
unemployment
Sources of Inflation
• Demand-Pull Inflation (PRICE GOES UP)
– Prices are going up because demand is up
– Think about the determinants of demand (increased
income, consumer tastes, etc.)
• Cost-Push Inflation (SUPPLY GOES DOWN)
– Prices are going up because there is a decrease in
aggregate supply (total supply)
– Think about it - when there is less of something,
the price is higher…this could eventually lead to
what ______________________?
WHICH IS THE LESSER OF THE TWO EVILS?
Unemployment
•Do you know anyone
who has lost their
job? Not quit, but
actually lost their job.
Unemployment
• Review: What is considered a “healthy”
unemployment rate?
– 4% - 5%
• Review: Is it possible to have full
employment? (0% unemployment)
– NO!
• Review: When GDP goes up, what will
happen to unemployment?
– Go Down
Unemployment
• Types of Unemployment
– Frictional Unemployment
• Definition: the time required to bring together
the worker and the job opening
• Example: When a college student graduates
and takes a summer to look for the “perfect”
job, they would be considered frictionally
unemployeed
Unemployment
• Types of Unemployment
– Structural Unemployment
• Definition: Job-seekers do not have skills to
demanded for a job
• Example: I want to be a bus-driver, however
the opening requires a CDL, I have a class C
driver’s license.
• Note: this is more serious because the
unemployed individual may have to get
additional retraining – BEFORE – the get hired.
Unemployment
• Types of Unemployment
– Seasonal Unemployment
• Definition: Unemployment is dictated by the
time (season) of the year.
• Example: An individual who is a ski-instructor in
Virginia will look for work in the summer.
Unemployment
• Types of Unemployment
– Cyclical Unemployment
• Definition: Unemployment is increased due to a
recession.
• Example: USA enters a recession and Ford
closes a factory, 780 people would experience
cyclical unemployment
• Note: Cyclical Unemployment is directly tied to
the business cycle
Unemployment
• Full Employment
– Definition: the absence of cyclical
unemployment
– Means that the business cycle is at a ____.
• Underemployment
– Definition: People who are working parttime, when they need full-time work; and
people who are overqualified for their
current job.
Relationship between GDP and
Unemployment
• As GDP increases, unemployment
decreases b/c more workers are
needed when the nation increases
output.
• Remember the business cycle, GDP
and employment rates are connected
The Government’s Role
• 2 Govt policies for increasing GDP
• Demand-side Economics~ focuses on
shifting the aggregated demand cure to
promote employment and price stability
• Supply-side Economics~ focuses on
shifting the aggregate supply cure
rightward through tax cuts or other
incentives to increase production
And now… a short history lesson
• Before WWII our economy experienced
many peaks and troughs
• The worst troughs (depressions) were
between 1873 and 1879 (80 bankrupt
railroads and the near complete shut
down of the steal industry), depression
of the 1890’s (18% unemployment) and
1929 – the 1930’s (Great Depression)
Economic Cause of the Great
Depression…
• Decrease in aggregate demand- a left-ward
shift in the aggregate demand curve
• Why this happened- stock market crash, poor
business expectations, bank failures,
decrease in consumer spending, decline in
the nation’s money supply and trade
restrictions
• Real GDP fell 27%, price levels fell 26%, and
unemployment rose to 25.2% (highest EVER)
A shift in US Economic Policy
• Pre-Great Depression= Laissez-fairerecessions/depressions of the business cycle
are unfortunate, but necessary
• The severity of the Great Depression
stimulated new thinking
• John Maynard Keynes- aggregate demand is
unstable, so the government should intervene
to stimulate it- led to reforms of the New Deal
Stimulating Aggregate Demand
• How- Increase spending
• Directly- govt increases it’s spending
• Indirectly- cut taxes to stimulate
consumer spending
• Either would lead to a federal budget
deficit (spending exceeds revenue)
• This is Demand-side economics!
US Fiscal Policies WWII Era
• Fiscal policy= government spending and
taxes
• WWII- increased production of war goods led
to increased GDP and decreased
unemployment
• Employment Act of 1846- made the gov’t
responsible for fostering maximum
employment, production and purchasing
power
1950’s – 1960’s
• 1950’s- economy prospered without
government fiscal policy interference
• 1960’s “Golden Age of Keynesian
economics”- economies around the
world were “on a roll” with modest
inflation, low unemployment rates and
healthy growth
Great Stagflation 1973 - 1980
• This is a contraction in the economy’s
aggregate output combined with inflation
• Causes- increased govt spending, price
ceilings on wages and prices (Nixon), crop
failures around the world, OPEC cut supplies
• Real GDP dropped $40 billion, price levels
increased 20% unemployment climbed to
8.5%
Why not just use Keynesian
Policies?
• They would decrease unemployment,
but increase inflation
• New approach (since 1980)= Supplyside economics
• Cutting taxes would stimulate aggregate
supply
• It worked, BUT the federal deficit grew
to all-time highs
What About Today?
• During the 1990s- govt started to increase tax
rates
• Bush 1 and Clinton both did this to the point
where there was a budget SURPLUS
• Expansion of the US economy from 1980s1990s was the longest on record
• Now we are in a recessionary period that
began in March 2001
Poverty, Jobs and
Unemployment
• Poverty is higher in homes with no workers
than in those with at least one
• Homes headed by unemployed females are
15 times more likely to be poor
• NM, MS, LA had highest birthrates to
unmarried mothers and the highest poverty
rates in 2001
• Poverty is directly linked to unemployment
high unemployment = high poverty
Income Assistance
• Anti-poverty programs allow children
(the largest group) to increase
consumption possibilities
• Unplanned results
– Increased income = reduced benefits
– Long-term dependence = reduced skills
– Cycle of poverty
Reforms to the Welfare System
• 1996
• Limits recipients to 5 years total
• Education, training, job search, take
paid or unpaid positions
• Childcare services
• Welfare to work transitions periodsrecipients can keep some benefits