Domain 3 MACROECONOMICS What is Macroeconomics Macroeconomics the

Domain 3: MACROECONOMICS

What is Macroeconomics? Macroeconomics • the study of the large economy as a whole, the big picture. • Instead of analyzing one consumer, we analyze everyone. • Instead of analyzing one business we study all businesses. Copyright ACDC Leadership 2015 2

Why study the whole economy? Macroeconomics was born during the Great Depression, when the economy had a 25% unemployment rate. Macro was created to: 1. Measure the health of the whole economy. 2. Guide government policies to fix problems. Copyright ACDC Leadership 2015 3

Domain 3. 1 Macroeconomic Measurements Copyright ACDC Leadership 2015 4

For all countries there are three major economic goals: 1. Promote Economic Growth 2. Limit Unemployment 3. Keep Prices Stable In this unit we will analyze how each of these are measured. Copyright ACDC Leadership 2015 5

Goal #1 Promote Economic Growth How does a country measure economic growth? 6

How do we know how well the economy is doing? • Economists collect statistics on production, income, investment, and savings. • This is called National Income Accounting. 7

The most important measure of growth is Gross Domestic Product (GDP) is • the dollar value of all final goods and services produced within a country’s borders in one year. Qualifying Factors of GDP: • Dollar Value measured in dollars, not units • Final Goods does not include the value of Intermediate Goods. • One Year annual economic performance 8

GDP Measures Productivity How do you use GDP? 1. Compare to previous years to identify rate of growth 2. Compare policy changes to find out if a new policy works 3. Compare to other countries to determine if we should be more productive. Which 15 countries have the highest GDP? Copyright ACDC Leadership 2015 9

World GDP Distribution How the world would look if a country’s size was equal to its GDP: Copyright ACDC Leadership 2015 10

Copyright ACDC Leadership 2015 12

How can you measure growth from year to year? % Change in GDP = Year 2 - Year 1 X 100 Mordor’s GDP in 2014 was $4000 Mordor’s GDP in 2015 was $5000 What is the % Change in GDP? Transylvania’s GDP in 2014 was $2, 000 Transylvania’s GDP in 2015 was $2, 100 What is the % Change in GDP? 13

Does GDP accurately measure Standard of Living? Standard of living can be measured, in part, by how well the economy is doing… But it needs to be adjusted to reflect the size of the nation’s population. GDP Per Capita (per person) • GDP divided by the population. It identifies on average how many products each person produces. GDP per capita is the best measure of a nation’s standard of living. Copyright ACDC Leadership 2015 14

Most Populated Countries Copyright ACDC Leadership 2015 15

GDP Per Capita Copyright ACDC Leadership 2015 16

Why Some Countries Have Higher GDP 1. Economic System Productivity Capitalist countries have historically had more economic growth. – – Capital (like robots) can produce more than people Countries with more capital, can produce more products than countries without a lot of capital. 2. Property Rights 3. Capital (ex: machinery, tools, man-made resources) • India has over a billion people (human resources) but relatively few capital resources and therefore a lower GDP than the U. S. • Japan has few natural resources but a high GDP 4. Human Capital (Knowledge) 5. Natural Resources Ex: Syria has a lower GDP because it is mostly desert. Copyright ACDC Leadership 2015

What is NOT included in GDP? 1. Intermediate Goods • Production Resources used to make final goods don’t count. 18

What is NOT included in GDP? 2. Non-Production Transactions Financial Transactions • Ex: Stocks, bonds, Real estate Used Goods • Ex: used cars, stuff you buy on Craig’s List 3. Non-Market and Illegal Activities Examples: (paid and Unpaid) • • Copyright ACDC Leadership 2015 Stay at home Mom Hobbyist Black Markets Illegal Drugs 19

Ways to Calculate GDP: 1. Expenditures Approach -Add up all the spending on final goods and services produced in a given year. 2. Income Approach -Add up all the income that resulted from selling all final goods and services produced in a given year. Adding up how much was spent on goods and services and how much income was earned should generate the same number Copyright ACDC Leadership 2015 20

Expenditures Approach Four Components of GDP = C + I + G + (X-M) 1. Consumer Spending 70% of U. S. GDP Purchases of final goods by private individuals. Ex: $5 Sandwich at Subway 2. Investment 15% of U. S. GDP Businesses spending tools and equipment. Ex: Walmart buys self checkout machines 3. Government Spending 20% of U. S. GDP Ex: School, tanks, but NOT transfer payments 4. Net Exports (X) – Imports (M) Ex: Value of 3 Ford Focuses minus 2 Hondas

Calculating GDP Copyright ACDC Leadership 2015 22

Included or Not Included in GDP? For each situation, identify if it is included in GDP then identify the category C, I, G, or Xn 1. $10. 00 for movie tickets 2. $5 M Increase in defense expenditures 3. $45 for used economics textbook 4. Ford makes new $2 M factory 5. $20 K Toyota made and sold in Mexico 6. $10 K Profit from selling stocks 7. $15 K car made in US, sold in Canada 8. $10 K Tuition to attend college 9. $120 Social Security payment to Bob 10. Farmer purchases new $100 K tractor Copyright ACDC Leadership 2015 23

Included or not Included in GDP? GDP=$7, 125, 010 1. $10. 00 for movie tickets 2. $5 M Increase in defense expenditures X $45 for used economics textbook 4. Ford makes new $2 M factory X $20 K Toyota made and sold in Mexico X $10 K Profit from selling stocks 7. $15 K car made in US, sold in Canada 8. $10 K Tuition to attend college X $120 Social Security payment to Bob 10. Farmer purchases new $100 K tractor 24 Copyright ACDC Leadership 2015

2008 Audit Exam

2007 FRQ Copyright ACDC Leadership 2015 27

2007 FRQ Copyright ACDC Leadership 2015 28

Income Approach Adds up all income earned from producing goods and services 1. Labor Income Purchases of final goods by private individuals. Ex: $5 Sandwich at Subway 2. Rental Income earned from property owned by individuals 3. Interest Income Interest earned from loaning money to businesses 4. Profit Money businesses have after paying all their costs These are called FACTOR PAYMENTS. Labor earns wages, land earns rent, capital earns interest, and entrepreneurship earns profit. Copyright ACDC Leadership 2015 29

Copyright ACDC Leadership 2015 What are some problems with using GDP to measure the nation’s standard of living? 30

Video: Robert Kennedy GDP Speech 31

Nominal GDP vs. Real GDP 32

Which is the most popular movie of all time? What is the problem with this method? Nominal Box Office Receipts Copyright ACDC Leadership 2015 33

Which is the REAL most popular movie of all time? REAL Box Office Receipts (adjusted for inflation) Copyright ACDC Leadership 2015

The Problem with GDP • If a country’s GDP increased from $4 Billion to $5 Billion in one year, is the country experiencing economic growth? • Did the country definitely produce 25% more products? • Did inflation cause the data to be misleading? What is Inflation? A rising general level of prices EX: If apples are the only thing being produced Year 1: 10 apples at $1 each; GDP = $10 Year 2: 10 apples x $1. 25; GDP = $12. 50 Copyright ACDC Leadership 2015 GDP is rising, but the country is worse off! 35

Real vs. Nominal GDP • GDP measured in current prices. • It does not account for inflation from year to year. Real GDP • GDP expressed in constant, or unchanging, dollars. • Real GDP adjusts for inflation. REAL GDP IS THE BEST MEASURE OF ECONOMIC GROWTH! Copyright ACDC Leadership 2015 36

Real vs. Nominal GDP Example 2008 10 cars at $15, 000 each = $150, 000 10 trucks at $20, 000 each = $200, 000 Nominal GDP = $350, 000 2009 10 cars at $16, 000 each = $160, 000 10 trucks at $21, 000 each= $210, 000 Nominal GDP = $370, 000 The GDP in year 2008 shows the dollar value of all final goods produced. The nominal GDP in year 2009 is higher which suggests that the economy is improving. But how much is the REAL GDP? How do you get it? 2009 10 cars at $15, 000 each = $150, 000 10 trucks at $20, 000 each= $200, 000 REAL GDP = $350, 000 Copyright ACDC Leadership 2015 Use 2008 Prices. The Real GDP for 2009 is the same as 2008 after we adjust for inflation. 37

Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices. Copyright ACDC Leadership 2015 38

20012 Exam

Econmovies Episode 5: Cars

The Business Cycle 41

The Business Cycle The national economy goes up and down like a roller coaster over time Real GDP Inflation Unemployment Peak Real GDP Trough Full Employment Recession (Contraction) Recovery (Expansion) Time A recession is 6 month period of decline in Real GDP. (If really bad…then depression)42 Copyright ACDC Leadership 2015

REVIEW 1. 2. 3. 4. 5. 6. 7. 8. 9. Define Macroeconomics What are 3 economic goals for all countries? Identify the 3 key parts of the definition of GDP How do we use GDP? Identify what is NOT included in GDP List the 4 components of GDP Define Inflation Explain difference between Nominal & Real GDP Explain Real GDP per Capita Copyright ACDC Leadership 2015