Transcript ch. 12 notes GDP, Inflation, Unemployment

GDP
Business Cycles
Economic Growth
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High stock prices -Lots of speculation (buying
on the margin) in the stock market because it
was doing so well
Technology improve farming and price of
crops dropped
Drought
Ordinary people went into debt for the first
time to by consumer goods & stocks
Industries had inventory surpluses
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Average wage dropped from 55 cents per
hour to 5 cents per hour
Unemployment shot to 35%
Toledo, Ohio – unemployment was 80%
Wasn’t just a U.S. depression, became
worldwide because of decrease in trade from
U.S.
Poor economic conditions in Germany led to
the rise of Adolf Hitler
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Stock market was the main economic
indicator
Motivated economists to devise ways of
measuring and predicting economic
performance
Originally thought economy would regulate
itself – Adam Smith
Great Depression changed that
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Social Security Act of 1935
Unemployment insurance
FDIC
Minimum Wage
Securities and Exchange Commission
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To check-up
on the
economies
vital signs to
see if we are
meeting our
goals
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Inflation
Employment
GDP growth
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Full employment
Stable prices
Economic growth
 Bill Clinton
 George Bush Sr.
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Gross Domestic Product (GDP) – most
important (since 1991)
Monitor Prices – are they rising?
 1%, 2%, 3%, more???
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Also look at other Leading Economic
Indicators which measure the financial well
being of the public
Each indicator is not accurate by itself
Look at all, get a good idea of what’s cookin’
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Average weekly hours in manufacturing
Average weekly initial claims for state
unemployment insurance
New orders for consumer goods and
materials
Prices of 500 common stocks
Contracts and orders for plant and equipment
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New building permits
Vendor performances, companies reporting
less deliveries
Net change in inventories on hand/or order
Index of consumer expectations
Interest rate change US Treasury less federal
funds
Money supply
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Gross Domestic Product – real output
 The dollar value of all final goods and services produced
within a country’s borders in a given year
 Dollar value – total of the selling prices of all goods and
services produced in a country in one calendar year
 Final goods and services – products in forms sold to
customers
▪ Not those used in the production of the final good
 Better measure of American economic activity as it
directly affects Americans in terms of labor, goods, and
services consumption
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House constructed in 1982 – counted in 1982,
not when it is resold years later
Lumber, nails, sheet rock would not be
counted in 1982 – only the final price of the
house
Real estate fees would be counted
Cars assembles in Ohio by Toyota
Not cars assembled in Brazil by GM
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GDP = C + I + G + EX –IM
 C = Personal Consumption (Household Spending)
 I = Business Investment or spending
 G = Government expenditures (purchases)
 EX = net export spending
 IM = net import spending
(Note import spending is subtracted when
calculating GDP.)
Reported three times for each fiscal quarter.
Called first, second, and third
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Sector of the economy
 Household
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Definition
 Expenditures made by the household sector on
goods for personal use
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Examples
 TV sets, telephones, clothes, lamps, cars
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Sector of the economy
 Business
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Definition
 Expenditures made by the business sector on
goods used in producing other goods; also
includes business goods
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Examples
 Tools, machines, factories
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Sector of the economy
 Government purchases
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Definition
 Expenditures made by federal, state, and local
governments
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Examples
 Paper, pens, tanks, planes
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Sector of the economy
 Foreign
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Definition
 Expenditures made by foreigners for American-
made goods
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Examples
 Cars, wheat, computers
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Sector of the economy
 Foreign
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Definition
 Expenditures made by Americans for foreign-
made goods
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Examples
 Cars, radios, computers
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Increase our productivity
Get the most out of our scarce resources
Technology
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Can’t measure things you do by yourself
 Lawn mowing, babysitting, cooking dinner
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Black Market Activities
 Illegal drugs, weapons, stolen cars
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Trades with friends
 Pokemon cards
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Externalities
 Clean environment
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Does not measure quality of life
 Divorce, health, crime, personal safety
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A.K.A. – standard of living
 The dollar value of all finished goods and services
available per person
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GDP/population
This is not how much a person makes in a
year
Have to look beyond the numbers – just
because the economy is doing well does not
mean the society is
 Intermediate goods
 Goods used in production of final goods
 Durable goods
 Goods that last for a relatively long time such as
refrigerators, cars, and DVD players
 Nondurable goods
 Goods that last a short period of time, such as food, light
bulbs, and sneakers
Nominal GDP
 GDP measured in current prices
Real GDP
 GDP expressed in constant, or unchanging, prices
Gross National Product
 The annual income earned by U.S. owned firms
and U.S. citizens
Depreciation
 The loss of capital equipment that results form
normal wear and tear
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Methods to predict business cycles
 Statistical Series
▪ Leading economic indicators – statistical series that
turns down before the economy turns down, and turns
up before the economy turns up
▪ LEI = composite index
 Macroeconomic Modeling
▪ Econometric modeling – mathematical expression used
to describe how the economy is expected to perform in
the future
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Changes in the money supply
Changes in business investments, residential
construction, and government spending
Politics
Innovation
Dramatic changes to supply
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Peak
 Height of an economic expansion when real GDP stops rising
 Marked by a booming economy, full employment, inflation
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Contraction
 Period of economic decline marked by falling real GDP
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Trough
 The lowest point in an economic contraction, when real GDP stops
falling
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Expansion
 Period of economic growth, measured by a rise in real GDP
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Recession
 Two consecutive economic quarters where GDP decreases
 Human Costs – purchase less, political instability, increase crime
 Very severe recession where there are large
numbers of people out of work, acute shortages,
and excess capacity in manufacturing plants
 1929 - 1939
 1837 - 1849 - Jackson kills the bank
 After WW II we have had short recession periods
and longer expansion periods
Measuring Economic Growth
 We can use GDP to measure standard of living, which
relates to material goods.
 We cannot use it, however as a complete measure of
people’s quality of life.
Saving and Investment
 Income that is not used for consumption is called saving.
 The proportion of disposable income that is saved is called
the savings rate.
Technological Progress
 Technological Progress is an increase in efficiency
gained by producing more output without using
more inputs.
 Causes of Technological Progress
Scientific Research
Innovation
Scale of the Market
Education and Experience
Natural Resource Use
Top 1%
Next 19%
Bottom 80%
1983
33.8%
47.5%
18.7%
1898
37.4%
46.2%
16.4%
1992
37.2%
46.6%
16.3%
1995
38.5%
45.4%
16.1%
1998
38.1%
45.3%
16.6%
2001
33.4%
51.0%
15.5%
2008
Top 1%
Next 19%
Bottom 80%
1983
42.9%
48.4%
8.7%
1989
46.9%
46.5%
6.6%
1992
45.6%
46.7%
7.7%
1995
47.2%
45.9%
7.0%
1998
47.3%
43.6%
9.1%
2001
39.7%
51.5%
8.8%
2008