Unit 3: Microeconomic Concepts

Unit 3: Macroeconomic ConceptsThe Impact of Economics on the American Economy

Micro vs. MacroWhats the difference?

Micro studying economic behavior and decisions in small units individuals, households, etc.

Macro studying economic behavior and decision making in an entire economy ex. Nation, state, etc.Measuring the EconomyWe look atOverall levels of incomeEmploymentPrices

These data sources can provide a picture of the overall economy

Why do you think this is?What Impacts our Measurements?Spending and production decisions made in the Resource (Factor) and Product MarketsDriven by households, business, and government

Remember Circular Flow????Gross Domestic Product (GDP)The primary tool to measure the size of an economy

GDP is the total market value of all goods and services produced within a country in a given time period.

Lets break down its componentsParts of GDPMarket Value GDP uses market prices for goods and services discounted prices are not consideredFinal Goods only final goods are used in calculations (not intermediate goods). the value of a loaf of bread would be counted while the flour to make the bread would notthis avoids double countingParts of GDP (continued)Produced within a country means ALL goods produced within U.S. borders are counted even those by foreign companies.

goods produced by American companies outside U.S. borders are NOT counted

ex. Kias produced in Georgia are counted, but iPhones produced in China are notParts of GDP (continued) in given time period can be quarterly or yearly, but exact beginning dates are used from year to year.

ex. GDP for 2013 began at 12:00 am on January 1 and ended at 11:59 on December 31GDP Measures Economic GrowthReal GDP is used to measure growth from one time period to the next

Nominal GDP uses current prices to determine market valueReal GDP adjusts prices for inflation to determine market value

Why is adjusting for inflation necessary for comparison?Calculating GDP Using the Expenditure ApproachExpenditure Approach calculated by totaling transactions in the

Product Market where goods and services are purchased

GDP = C + I + G + Net Exports (X-M)

GDP = C + I + G + (X-M)C = Consumer Spending on Goods (durable and non-durable) & services

I = Business Investment in capital goods

G = Government Spending

(X-M) = Total Exports Total Imports give you net exportsCalculating GDP Using the Income ApproachCalculated by totaling all transactions in the Factor Market

Income payments for land, labor, and capital acquired in the market (ex. Rent, wages, interest on loans, etc.)Economic GrowthGDP Growth = Outward shift of Production Possibilities Curve

Economic GrowthInfluences on GDPAggregate Supply- the total amount of goods and services in the entire economy available at all possible price levels.

Simply add them all up for a total (aggregate) and calculate an average price (called price level)

Tells us all the goods available at various price levels

Aggregate Supply Curve

AS curve illustrates relationship between prices and output supplied (seen in GDP)Influences on GDP (cont.)Aggregate Demand- the amount of goods purchased at all possible price levels

This is driven by the collective behavior of consumers in an economy

Aggregate Demand CurveAs Price Levels increase, demand for goods and services decreases (change in quantity impacts GDP)

Equilibrium in the Macro Intersection of AS & AD is an ideal economyWhat effect would shifting Demand or Supply have on GDP?

Causes of Shifts in AS and ADBusiness Investment

Increases lead to more jobs AD & the GDP increases (economy grows)Causes of Shifts in AS and ADConsumer ExpectationsConsumer confidence effects the economyWhen good things are expected to happen, consumer confidence grows

spending increases, AD & economy (GDP) growsCauses of ShiftsInterest Rates (the cost of borrowing money)

Low rates = business investment grows and creates jobs & people borrow more $ to buy and do

AD and economy (GDP) growsCauses of ShiftsExternal Shocks impact ASNegative wars, droughts, trade disputes, natural disasters cause AS & economy (GDP) shrinks

Positive new discoveries of resources, record crop production due to perfect weather conditionscause AS & economy (GDP) grows

Factors Impacting GDP & Economic GrowthUnemployment refers to people who do not currently hold a job, but are actively seeking one.Means we are inefficient using one of our major factors of production Point of Underutilization in Production PossibilitiesFactors Impacting GDP & Economic GrowthInflation Increase in average Price Level of all goods and services AD is increasing faster than ASEffects:Decline in Purchasing Power of the dollarReal Wages Decline because they grow slower than the Inflation Rate (IR)Interest Rates IncreaseLoss of $ in Savings InvestmentsIncreased Production Costs

Factors Impacting GDP & Economic GrowthTypes of InflationDemand-Pull Inflation occurs when increased AD pulls prices higher

Cost-Push occurs when costs for factors of production increase and pushes prices higherFactors Impacting GDP & Economic GrowthDeflation has opposite effect

Hyperinflation Inflation Rate (IR) is several hundred % vs. normal rate that is (1% to 3%)

Stagflation occurs when there is both a RISING Price Level and a DECREASE in Real GDPTypically comes with rising unemploymentHow We Measure TheseConsumer Price Index (CPI) measurement of inflation using a fixed group of productsMarket Basket is the name we give those productsUsed to determine a Base Year that is given a CPI of 1001982-84 is the current Base Year time periodTwo ways to calculate it: See board

CPI CalculationCalculating Inflation RateUnemploymentUnemploymentThree (Four) TypesStructuralCyclicalFrictional(Seasonal)

See Graphic Organizer & ArticleThe Business Cycle

The Business CycleA graph that illustrates the relationship between real GDP and time.

Y-axis Real GDP

X-axis timeFour Parts of the CyclePeak the highest point of real GDP between the end of an economic expansion and beginning of an economic contraction

Contraction phase in cycle when real GDP is declining> 6 months (two quarters) is recessionIf long/sustained, it is depressionFour Parts of the CycleTrough the lowest point of real GDP between the end of a contraction and beginning of a recovery

Recovery - when real GDP becomes positive after a period of negative real GDPRecovery lasts until real GDP reaches the previous level at peakCalled expansion/prosperity after the previous level is achievedBusiness Cycle Graph ActivityOn your provided paperLabel Y-Axis as Real GDPLabel X-Axis as TimeDraw the Business Cycle on your graph as big as possible, but leave room for labelsOn the back of the paper write the definitions for peak, trough, contraction, expansion, and recoveryBusiness Cycle GraphAnswer these questions: Why do you think the expansion on your chart is divided between a recovery and prosperity? How do you find the start of prosperity?How long must a contraction last before it can be considered a recession?

Business Cycle GraphLabel the following economic indicators on your graph:

CPI CPI

Unemployment Unemployment

Real GDP Real GDP

Business Cycle GraphClosing discussion questions:Monetary Policy is the Federal Reserve Banks power to increase or decrease the supply of money in the economy. They can do this by increasing or decreasing interest rates.If the FED is worried about inflation, what would they want to do about the supply of money in the economy?Would they raise or lower interest rates to do this?

Business Cycle GraphFiscal Policy is the power of Congress to increase or decrease taxes and increase or decrease government spending.When the government is worried about inflation should they increase or decrease government spending?Should they increase or decrease taxation?The Federal Reserve and Monetary PolicyThe Federal Reserve BankCreated in 1913 to instill trust in the nations banks

Bankers Bank Lender of the Last Resort Loans $ to banks, especially to struggling banks

The FEDPublic featuresCreated by Congress and can be dissolved by Congress

Has a Seven Member Board of Governors plus a Chairman and Vice-ChairmanNominated by the President and confirmed by the SenateMembers are part of the Federal Open Market Committee (FOMC)B.O.G. -14 Year term/Chair & Vice-Chair 4 year term

The FEDPublic FeaturesThe Fiscal Agent for the U.S. government its the governments bankHolds its securities BondsRegulates the nations money supply

U.S. Currency is a Federal Reserve Note backed by the assets of the FEDIts profits are transferred to the U.S. treasuryOver $75 billion each yearThe FEDPrivate FeaturesIt is decentralized with 12 district banks serving different regions of the country

Each of the 12 is organized as a private corporation and is self-financedMakes money through interest on securities it holdsGets payments for check clearing services

Board of Directors for each of the 12 banks has 2/3 of its members by privately controlled member banks

The FEDNY Federal Reserve Bank President is always a member of the FOMC4 of the other Presidents serve as voting membersThese 4 serve on a rotating basis

Five of the 12 district bank presidents serve as voting members of the Federal Open Market Committee

FED District Banks

Goals of the FEDPromote Price Stability

Promote Full EmploymentNo cyclical unemployment

Economic GrowthHow does the FED Meet these Goals?MONETARY POLICY

Refers to tools of the Federal Reserve to meet these goals

These tools impact the FED Funds Rate the % rate banks charge one anotherTools of Monetary PolicyOpen Market Operations Most Common ToolBuying and selling bonds/securities

Selling bonds reduces money supply

Buying bonds increases money supply

Open Market OperationsIndividuals & banks use $ to buy bondsIncreases the FED Funds Rate - Less $ is available for spending and/or lendingSelling bonds increases the $ supplyDecreases the FED Funds Rate

Tool #2Change the DISCOUNT RATESecond most commonIts the interest rate that the FED charges banks on the money that they borrowRaising the rate makes it more expensive to borrow money less $ in economy & increases FED funds rateLowering more $ (opposite effect)Tool #3Change the RESERVE REQUIREMENTLeast Common Tool% of deposits banks must keep on hand (in reserve) & cant loan outRaising % allows banks to lend less $ & increases FED funds rateEx. If bank has $10,000 & a reserve requirement of 10% -- it can only lend out $9,000

What if the requirement was changed to 20% - how much of the $10,000 could the bank lend?Summary of Monetary PolicyTight Money uses tools to decrease money supply fights inflation

Loose Money - uses tools to increase money supply fights deflation or contraction in the economyGovernment and Fiscal PolicyFiscal Policy - the power of the government to use government spending and taxation policies to influence economic activity.

Fiscal Policy GoalsPrice Stability

Full Employment

Economic GrowthFiscal Policy ToolsTaxation & Government SpendingOccurs at federal, state, and local levels

Typically proposed by the executive branch (ex. President) and legislature (ex. Congress) writes a bill to address the action

Bills often have many projects added on to it in order to get it passed & become a law

Many laws have clauses that allow additional taxes/spending without adding new laws

Tool #1: TaxationMany taxes grow with the economy automatic stabilizersIncome Tax is a Progressive Tax because tax dollars paid increase as salary increasesTax collection increases with inflation in salariesTax collection decreases with deflation in salariesSales Tax dollars collected also increase when prices of products increaseUse of TaxesTax increases = less consumer net income & spending declinesRaising taxes is a Contractionary Tool

Tax decreases = more consumer net income & spending increasesLowering taxes is an Expansionary ToolTool #2: Government SpendingGovernments can increase or decrease spending to influence the economyMore spending increases government investment more workers & businessesLess spending decreases government investment less workers & businesses

What kind of fiscal tool was the New Deal supposed to be?

Why cant the government keep spending more to keep the economy growing?Debt vs. DeficitWhat is the difference between a government budget deficit and government debt?Debt vs. DeficitDeficits occur when government spending exceeds its revenue in their annual budgetoccurs in one yearOpposite would be a SurplusBalanced budget occurs when expenses = income

Debt the compilation of all deficits plus interest owedgrows over many yearsGovernment DebtWhy doesnt the government cut back all its spending so we can get out of debt?

United States Debt