intro to economics - macroeconomics
TRANSCRIPT
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Macroeconomic Basics
Dr. Katherine Sauer
A Citizens Guide to Economics
ECO 1040
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Overview:
I. Economic FluctuationsII. GDP
III. Inflation
IV. Unemployment
V. Government Policy
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I. Economic Fluctuations
Economic activity is not constant.
Chart from chapter 15 in the Brief Principles of Macroeconomics textbook
by Greg Mankiw.
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The Parts of a Business Cycle:
RGDP
GrowthRate
(%RGDP)
0
+
-
time
expansion
peak
slowdown
contraction recovery
trough
expansion
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The US economy has had mostly expansions andslowdowns.
- troughs at positive growth
It has had very few contractions and recoveries.
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A recession is 2 consecutive quarters of falling Real GDP.
- contract for 2 quarters
A depression is a severe recession.
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The Recent Recession:
Part 1: Housing Bubble Burst
Part 2: Financial Sector
Part 3: Financial System Seizes Up
Part 4: Recession Spreads Internationally
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Key Facts about Economic Fluctuations
1. They are unpredictable and varied.
- describing them after the fact is easy, predicting
them is not
2. Many macroeconomic variables fluctuate together.
- different amounts, different directions
3. As output falls, unemployment rises.
4. Fluctuations occur in both the short run and long run.
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II. Gross Domestic Product (GDP)
An economy is measured by the value of the goods andservices it produces.
Gross Domestic Product
is the market valueof all final goods and services
produced
within a countrys borders
in a given time.
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2010 GDP
Source: IMF
Rank Country GDP (millions of USD)
World 61,963,429 European Union 16,106,896
1 United States 14,624,184
2 China 5,745,133
3 Japan 5,390,8974 Germany 3,305,898
5 France 2,555,439
6 United Kingdom 2,258,565
7 Italy 2,036,687
8 Brazil 2,023,528
9 Canada 1,563,664
10 Russia 1,476,912
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GDP has 4 components:
Consumption (C) = spending by households on goods and
services
Business Investment (I) = spending by firms on capital
equipment, inventories, and structures
Government Spending (G) = spending on goods and
services by local, state, and federal government
Net Exports (NX) = value of exportsvalue of imports
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There are 2 types of GDP: Real and Nominal
Nominal GDP = the production of goods and services
valued at current prices
Real GDP = the production of goods and services
valued at base year prices. (adjusted for inflation)
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GDP Growth (aka economic growth):
Economic growth is measured by the percent change in
RGDP over a time period.
%RGDP = RGDP2RGDP1 x 100
RGDP1
Economic growth can be negative.
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GDP is calculated quarterly by the Bureau of
Economic Analysis. www.bea.gov
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GDP is a decent measure of economic well-being.
Explain:
GDP per capita tells us more about economic well-
being than GDP does.
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Using GDP as a measure of social progress has its
problems.
1. unpaid economic activity
2. environmental issues
3. value judgments
4. leisure
5. distribution of income
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III. Inflation
Inflation is an increase in the overall price level.
The inflation rate is the percent change in the price level.
formula:
Inflation Rate = Price Level Year 2Price Level Year 1 x 100
Price Level Year1
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The Consumer Price Index is a way to measure theprice level
It measures changes in the overall cost of the goods and
services that a typical household buys
Compiled monthly by the Bureau of Labor Statistics.
www.bls.gov
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BLS has classified all expenditure items into more than
200 categories, arranged into eight major groups:
43.4
15.3
15.7
6.3
6.4
5.7
3.7 3.4
Contents of the Basket
Housing
Transportation
Food and Beverages
Education andCommunicationMedical Care
Recreation
Apparel
Other Goods and Services
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Source: Bureau of Labor Statistics
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Calculate the inflation rate for December 2010:
inflation December 2010 =
219.179218.803 x 100218.803
= 0.17%
= 0.2% (typically round to 1 decimal place)
Calculate the inflation rate from January 2000 to December 2010:
inflation Jan 2000 to December 2010 =
219.179168.8 x 100
168.8
= 29.8%
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Inflation is a normal occurrence in an economy.- some inflation is just fine
- high inflation erodes purchasing power
It is usually the job of the central bankto keep inflation
under control.
In general, if a countrys economic growth rate is faster
than its inflation rate, then inflation isnt very harmful.
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Deflation is actually quite harmful to an economy.
- consistently falling prices lead consumers to delaypurchases
- firms see a reduction in sales and cut back on
production and employees
- consumers fear job losses and so delay purchases
- the cycle is very hard to break
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IV. Unemployment
A person is unemployed if they are available to workand are actively seeking work, but cannot find a job.
-just because a person doesnt have a job, doesnt
mean they are unemployed
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Start with the entire population, then omit:
children (age < 16)
institutionalized
active military
Children and institutionalized persons are not eligible to
work.
Active military personnel are often excluded forstatistical reasons.
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Of the remaining population, some people voluntarilychoose not to be employed:
- retirees
- stay-at-home caregivers
- full-time college students- other
These types of people are not unemployed. They arecategorized as not in the labor force.
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The Labor Force is the total number of workers in the
economy, whether they are employed or unemployed.
Labor Force = number employed + number unemployed
The labor force is not a fixed number of people.
- It increases with the long-term growth of the
population.
- It responds to economic forces and social trends
- Its size changes with the seasons.
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The unemployment rate is the percentage of the labor
force who are actively seeking employment.
unemployment rate = people looking for work x 100people in the labor force
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In January 2010, the US civilian labor force had153,353,000 people in it. Of this, 14,842,000 were
unemployed. Calculate the unemployment rate:
U = # unemployed x 100 =# labor force
U = 14,842,000 x 100 =
153,353,000
= 9.7%
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The unemployment rate is never zero.
Some unemployment is normal for an economy.
- Even if a job exists and a person exits with matching
skills, it takes time for the person to find the job and go
through the hiring process. (frictional unemployment)
- As an economy grows and changes, some jobs become
obsolete and new industries are created. When a personloses a job due to a fundamental change in the structure
of the economy, it takes time for them to get retrained
for the new jobs. (structural unemployment)
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The rate of unemployment that an economy normally
experience is called the natural rate of unemployment.
- different countries have different natural rates
of unemployment
- depends on the structure of the labor market
- minimum wage laws- hiring/firing laws
- unemployment benefits
When the economy goes into a recession andunemployment rises above the natural rate, that is the
bad kind of unemployment. (cyclical unemployment).
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V. Government Policy
Fiscal Policy is when the government taxes or spends
money.
Explain the recent stimulus bill.
Spending:
Taxes:
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In reality, fiscal policy might not be a good answer to a
recession.
Three requirements for successful fiscal policy:1.
2.
3.
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Monetary policy refers to the actions undertaken by the
Federal Reserve, specifically the raising and lowering ofinterest rates.
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Summary:
The economy fluctuates in the short and long run.
GDP, Inflation, and Unemployment are three basic
indicators of the health of the economy.
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What did you learn today?
Please explain 2 concepts from todays class.