Macroeconomics SSEMA 1 Students will explain and describe

Macroeconomics SSEMA 1 Students will explain and describe the means by which economic activity is measured by looking at gross domestic products, consumer price index and the unemployment rate

Economic Growth § Economic Growth- is a sustained rise in the country’s production of goods and services. It results from investment in human and physical capital, research, and technology. 1. Rise and Fall- it steadily rises as an economy reaches its peak and falls when we enter a recession, it increases as an economy recovers again. 2. Standard of Living- a good indicator of the wealth within a country.

What is GDP? § Gross Domestic Product (GDP)- is a measure of a nation’s economic output and income produced within a country’s borders. 1. Nominal GDP- this does not account for price increases (inflation) over time 2. Real GDP- this accounts for price increases (inflation)growth is measured in the percentage of change from one year to the next How do you measure GDP? 1. GDP= C+I+G+Xn 2. C= consumer spending 3. I= investments 4. G= government spending 5. Xn= imports - exports

Real and Nominal GDP Nominal and Real GDP Year 1 Nominal GDP Suppose an economy‘s entire output is cars and trucks. This year the economy produces: 10 cars at $15, 000 each = $150, 000 + 10 trucks at $20, 000 each = $200, 000 Total = $350, 000 Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350, 000. Year 2 Nominal GDP In the second year, the economy’s output does not increase, but the prices of the cars and trucks do: 10 cars at $16, 000 each = $160, 000 + 10 trucks at $21, 000 each = $210, 000 Total = $370, 000 This new GDP figure of $370, 000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP. Year 3 Real GDP To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1: 10 cars at $15, 000 each = $150, 000 + 10 trucks at $20, 000 each = $200, 000 Total = $350, 000 Real GDP for Year 2, therefore, is $350, 000

Inflation and Consumer Price Index § Consumer Price Index (CPI) - is the measurement that shows how the average price of a standard group of goods “Market Basket” changes over time. § Calculating CPICost of Market Basket in the year ---------------------- X 100= CPI Cost of Market Basket in base year Lets do an example- 1000/950 X 100= ? ?

What do we do with CPI? § Understanding CPI- the number over 100 represents inflation, if inflation and GDP grow equally than GDP is flat. § Growth in GDP- If the GDP is 6% and inflation 4% than GDP growth is 2%. § Inflation- when prices rise and the amount we buy with the same money decreases. § Stagflation- when prices rise but the economy does not grow with it, High inflation hurts workers.

Effect of Inflation on Americans § Purchasing Power- workers lose the ability to buy the same goods they were once capable of buying. § Savings- if you put money in the bank and the interest rate in savings is lower than inflation you lose money. § Cost of Living Adjustment- if your income is not set to rise with inflation you are a fixed income person, high inflation can hurt you more than anyone else.

What is a business cycle? § Business Cycle- is the period of expansion followed by contraction in an economy. 1. Four Main Phases of a Business Cyclea. Expansion- period of steady long term growth of real GDP b. Peak- when the economy stops rising, the GDP has its peak c. Contraction- a decline in real GDP, a long period of contraction is called a Recession and a very long decline is called a Depression. d. Trough- lowest point, real GDP stops falling.

What affects a Business Cycle? § 1. Business Investments- when the economy is good business invest in physical and human capital, creating new jobs. The exact opposite occurs during a recession. § 2. Interest Rates- when interests rates are low companies can borrow and invest, creating new jobs. When interests rates are high the exact opposite occurs. § 3. Consumer Expectations- consumer confidence in a good economy leads to spending, lack of confidence has the opposite effect. § 4. External Shocks- Wars, Natural disasters, oil supply, worldwide financial collapse- will cause the economy to slow down or collapse.

Can we forecast a Business Cycle? § Three Indicators- Stock Market, Real Estate Market (Home sales) and Interest Rates. § Key Business Cycles in American History 1. Great Depression of 1929 - GDP down a third and unemployment 25% (TROUGH) 2. 1970’s- OPEC oil embargo caused prices triple led to recession until 1984. (RECESSION) 3. 1992 -2000 - real GDP grew every year, economy was booming. (EXPANSION)

What is Aggregate Demand? § Aggregate Demand- is the total number of goods and services that all people in an economy are willing to buy. 1. The Aggregate Demand Curve slopes downward 2. When prices are low people buy more increasing the Real GDP, prices are high people buy less, decreasing Real GDP

What is Aggregate Supply? Aggregate Supply- total number of goods and services all producers in an economy are willing and able to make. Two Aggregate Supply Curves 1. Short Run Aggregate Supply Curve- this measures a individual market which can react faster than the economy as a whole. (GENTLY SLOPING CURVE UPWARD) 2. Long Run Aggregate Supply Curve- the total amount that any economy can produce remains constant, a country’s Real GDP is limited by its resources. (STRAIGHT LINE)

Labor Force in the United States § Labor Force- is all non-military people that are employed or unemployed 1. Employed- must be 16 or older and meet the following requirements a. worked at least one hour within the last week for pay b. worked 15 or more without pay in a family business c. Had a job but did not work due to illness, vacation, weather, labor disputes. 2. Unemployed- 16 or older who are not employed but is actively looking for work in the past month.

Education and Income § Learning Effect- the idea that education increases productivity and results in higher wages. § Screening Effect- completing college tells an employer the worker is intelligent and committed.

Education and Income

Skilled vs. Unskilled Workers § Unskilled Labor- requires no education or special training, lowest paid jobs. 1. Wal-Mart Employee Semi-Skilled Labor- some education and training 1. Fork-Lift Operator Skilled Labor- specialized skills and training 1. Mechanics, Plumbers, Electricians Professional Labor- advanced skills and education 1. Teachers, Lawyers, Doctors

Labor Force in the United States § Frictional Employment- happens when people are temporarily between jobs or are about to enter the job market for the first time. § Seasonal Unemployment- happens when the job market changes with the calendar 1. Lifeguards § Structural Unemployment- a mismatch between a workers skills and the job. 1. New technology replacing certain skills § Cyclical Unemployment- when the economy experiences a downturn with decreased demand, reduces national spending and income. 1. Airlines- people travel less=less money for airlines=loss of jobs for airline workers

How does employment effect the economy? § Unemployment Rate- the percentage of the labor force that is unemployed. 1. How do we get the percentage? Unemployment Rate= number of people looking for work ----------------------number of people in the labor force Lets do a test one= 50 k employed and 3 k unemployed? ? ? Importance of the Unemployment Rate- a number between 4%6% is considered healthy, anything higher and we’re in trouble.

Poverty in America § Poverty Line- the line the government sets as the lowest you can earn with a family of four. § Poverty Rate- % of people who live below the poverty line. § Causes of Poverty 1. Lack of Education 2. Location 3. Family Structure 4. Job Shifts (Skills) 5. Racial and Gender Discrimination