Transcript Macroeconomics

Macroeconomics
Gross Domestic Product (GDP)Chapter 12-Page 301
GDP=C+I+G+X
• $value of all final goods and services
produced within a country’s borders in a
given year
• Real GDP-adjusted for inflation; most
important way to measure economic health
& used to form fiscal and monetary policy
• Nominal GDP-gives info on current
production & prices; not adjusted for
inflation
C+I+G+X
• C=consumer sector-household, individual, & family
purchases, i.e. groceries, rent, books, anything you
buy
• I=investment sector by business; capital goods
such as factories & tools (which factor of
production?)
• G=government sector-local, state, federal; goods
& services such as national defense, hospital care,
etc.
• X=net exports; exports minus imports, aka foreign
sector-goods sent & received from abroad
Economic Indicators
• GDP
• CPI=consumer price index; used to
measure inflation over time thru market
basket (commonly purchased items-400
random items consumers buy)
• Unemployment Rate=# of people looking
for work over number of people in labor
force
Inflation/ Deflation
• Inflation=increase in average price of goods and
services bought by average consumer (when prices
go up we get less for our money) Economists use
this so they can figure out if increase in GDP is
caused by rising prices or how much is caused by
real increase in how much we produce and
consume
• Deflation=decrease in average price of goods and
services; if prices go down we get more for our
money
Stagflation
• Stagflation=increases in prices but
economy isn’t growing
• High inflation hurts wage earners
unless their contracts include a costof-living adjustment
Fiscal and Monetary
Policy
• Fiscal policy=government use of spending
and taxes to achieve a strong, stable
economy
• Monetary policy=decisions the Federal
Reserve makes about money and banking
(1-open-market operations 2-adjusting
reserve requirements 3-raising or lowering
discount rate to banks)
4 Types Unemployment
• Structural=skills of labor force do not
match what employers need or new
technology enters market
• Frictional=people in between jobs; looking
for a better job
• Cyclical=downturns in economy due to
changes in business cycle
• Seasonal=jobs during specific seasons of
year or dependent on the weather
AD and AS
• Aggregate demand= total amount of goods &
services that all people in economy are willing to
buy (curve slopes downward)
• When prices are low, people will buy more,
increasing nation’s real GDP and when prices are
high, people will buy less, decreasing the nation’s
real GDP
• Aggregate supply-total amount of goods &
services that all producers in an economy are
willing & able to make
Recession
• Recession=real GDP declines for 6
months or more
• Economic downturns=some kind of
shock to economic system such as
natural disaster, war, or sudden rise
in taxes or interest rates (AD curve
shifts to left in these times)
Business Cycles
• Business cycles=up and down stages of economy
• 12/08-our GDP has been decreasing for 2
consecutive quarters (we have been in a recession
since last December according to economists;
over 10 million jobs have been lost)
• Expansion
• Peak
• Contraction (recession)
• Trough
National Debt/Government
Deficits
• National debt=amount of money owed by
federal government; this occurs when
government borrows money
• Government deficit occurs when we spend
more than what we take in from taxes;
deficit comes from budget needed for
government which comes from tax
revenues
Federal Reserve
• Federal Reserve=bank’s bank
established in 1913
• FOMC=federal open market
committee; regulates money supply
by buying & selling government
securities aka bonds-this process is
known as open-market operations
Fed
• A bond is a document issued by gov’t for which
you pay a certain price now in exchange for higher
fixed amount, called face value, later
• Bond usually “matures” or pays its face value in 5,
10, or 20 years. (How many of you have
grandparents that have bought you a savings
bond? They give you a $100 savings bond for your
birthday that they paid $50 for. Eventually you
can cash it in for $100, but you have to be patient
and make sure it has matured!)
Bonds
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Bonds do not pay a fixed interest rate, so the less you pay for a
bond right now, the higher the interest rate you will earn when
bond matures to its face value in 10-20 years
When economy is in a recession, the Fed will buy bonds or
securities itself; the money it pays for the bonds goes into banking
system, so it increases money supply
When banks have more money to lend, they lower the interest
rates; consumers will borrow more money to buy cars, houses, &
businesses enabling them to borrow more money to make capital
investments
These increases in consumer spending & business investment
increase the GDP, promoting economic growth
If economy is growing too fast, Fed will sell bonds; this money paid
to the Fed for bonds it taken out of circulation; Fed has
decreased money supply
Absolute and
Comparative Advantage
• Absolute advantage=ability to produce a
good or service with greater efficiency
than its partner in trade
• Comparative advantage=ability to produce
a good or service with greater efficiency
and at a lower opportunity cost than other
nations
Specialization
• Specialization-nations ability to produce
good or service most efficiently and then
trade for those items they are not able to
produce easily or can’t produce at all
• Trade barriers=government actions
designed to protect domestic industries
and jobs from foreign competition
More on Trade
• Tariff=any tax on imports-this is a trade barrier
• Embargoes=laws that cut off imports/exports to
specific countries
• Balance of trade=difference between value of its
imports & value of exports (trade surplus/trade
deficit)
• NAFTA=North American Free Trade Associationeliminated trade barriers between Canada, U.S.,
and Mexico
International Trade
• Free trade=international trade that is not
subject to government regulation
• Protectionism=use of protective tariffs or
other trade barriers b/t nations to favor
domestic industries
• Trade barriers protect national security,
infant industries (new businesses),
protection of jobs, standard of living,
specialization, fairness
EU/ASEAN-Chapter 17section 2
• European Union=27 nations in Europe who
share currency (Euro)-helps member
nations in Europe with trade
• ASEAN=Association of Southeast Asian
Nations-10 nations (Brunei, Indonesia,
Malaysia, Phillipines, Singapore, Thailand,
Cambodia, Laos, Myanmar (Burma), &
Vietnam-this has helped eliminate most
tariffs in this trading region
WTO/GATT-Chapter 17page 453
• GATT (General Agreement on Tariffs and
Trade)=international trade agreement to
reduce tariffs & expand world trade
• WTO (World Trade Organization)=
1995 to ensure compliance with GATT & to
negotiate new trade agreements & to
resolve trade disputes
Exchange Rates-Chapter
17-Section 3
• Exchange rates=value of a foreign nation’s
currency in relation to your own currency
• When $ is strong (appreciates)-imports increase
(cheaper to buy), travel abroad is cheaper for
American tourists, U.S. exports decline, & U.S.
trade deficit increase
• When $ is weak (depreciates)-U.S. exports
increase & price of exports go up, travel abroad is
more expensive for tourists (example-Euro=$.70),
U.S. imports decline, price of imports increases,
foreign investment in U.S. businesses increases
Money-Chapter 10-Page
243 (page 258-M1, M2)
• Money=medium of exchange or store of value
(back in the day people used to barter before
there was $$$$)
• Currency=coins & paper bills
• Money has 6 characteristics-durability,
portability, divisibility, uniformity, limited supply,
acceptability
• ATM/debit cards
• FDIC=Federal Deposit Insurance Corporationinsures your money in a bank up to $100,000 per
account (the amount has recently changed)
More about $$$$$
• Banks will happily loan you $$$$ to
buy a home; this loan is called a
mortgage (house note) the principal,
but you must pay back more than you
borrowed 
• This is called interest & there are 2
types-simple & compound
Compound Interest-page
261-Chapter 10-Section 3
• Look at chart-page 261
• Credit cards allow you to buy with a little
piece of plastic that you are responsible to
pay back later  (If you don’t pay entire
balance you will pay them higher rates of
interest for convenience of using their
piece of plastic)
Types of Savings• Savings account at your bank
• CD (certificates of deposit) pays a higher
interest rate than a savings account at your bank
• Stocks=a piece of paper that allows you to “own” a
part of a corporation
• Bonds=IOU issued by corporation or by
government-you buy bond & you buy right to
receive fixed amount of money at a future date
(think back to that savings bond grandpa or
grandma gave you for your birthday)
Labor Unions
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Collective bargaining
Arbitration
Mediation
Craft unions
unions