Chapter 12

1. Low unemployment2. Stable prices3. Continuous growth

Macroeconomics uses a series of tools, signals and indicators to measure and track these areas

Economic Growth needs a few things:1.Population: source of

workers• Small workforce means

less productivity2.Capital: investment

• Productivity depends on available equipment and land

• Yet investment is not free—money must be saved today to be spent for tomorrow

Ideas: innovation • Unpatented ideas can be replicated endlessly

for free while new buildings cost money

• New methods & products, ways of organizing and conducting business lead to advancement

• Stanford economist Paul Romer said, “Economic growth springs from better recipes, not just more cooking.”

National income accounting – collects statistics on production, income, investments, and savings

Used to determine value of the economy• The most important measure is GDP• If an individual’s earnings are his/her income, then a country’s income would be GDP

Gross Domestic Product – dollar value of all final goods and services produced within a country’s borders in a given year

If only final goods count, then Intermediate goods don’t

Includes goods made IN the states by a foreign company but does not include goods made by American companies in foreign countrieshttp://www.youtube.com/user/mjmfoodie#p/u/27/yUiU_xRPwMc

http://www.economist.com/content/all_parities_china

* Size is denoted by a country’s share of global GDP, thus richer countries are bigger.

Economists estimate the total of all the money spent on stuff

1. consumer spending 2. business investment 3. government spending 4. net exports or exports of goods

and services minus our imports

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

Combination of two categories of goods that we consume• Durable goods – last for a relatively long

time (refrigerator, car)

• Non-durable goods – last for a short period of time (pencil, shoes)

• http://economix.blogs.nytimes.com/http://www.visualeconomics.com/average-american-spends-on-entertainment/

Adding up all the money spent on stuff

• When a firm sells something they receive income

• Every sale is income to someone• Provides a more accurate measure because it calculates how much the country is making, not just spending Together these two approaches provide a significant measure of GDP

Measurements must be as accurate as possible, but differ based on what year’s prices are used

Nominal GDP – “current” use the current year’s prices to calculate

Real GDP – allows for distortion of prices, constant or unchanging priceshttp://www.youtube.com/user/mjmfoodie#p/u/26/29S7FzI7s7g

Non-market activities – things people do for themselves (cutting their own grass)

Underground economy – production and income never recorded (markets for drugs, weapons, etc)

Negative externalities – unintended side effects • Cutting a forest—paper counts, lack of a forest doesn’t

Quality of life – additional goods and services do not necessarily improve life (no value judgments)• How quantifiable is standard of living?

Gross National Product – takes away income earned by foreign firms and foreign citizens located in the U.S.•Depreciation – loss of value of capital

(wear and tear on equipment) gives us Net National Product

Need to remember Need to remember GDP, GNP & NNP GDP, GNP & NNP (depreciation)? (depreciation)?

GDP: “Whazzup son, where you at?”• Location—within a country’s borders

GNP: “Yo homes,where you from?”• Origin—nation of residence

NNP (depreciation): “What it is?”• Value of a good over time

Aggregate Supply – total supply • Add up total supply of goods

and services produced across the economy

Calculate the price level • average of all prices in the economy

Aggregate Demand – amount of goods and services that will be purchased at all price levels

Period of expansion followed by a period of contractions

Major changes in real GDP above or below normal levels

http://www.youtube.com/user/mjmfoodie#p/u/24/jGP-vPEHRRE

1. Expansion – growth, rise in GDP, lots of jobs, business prosperity

2. Peak – When GDP stops rising, height of economic expansion

3. Contraction – period of decline marked by falling real GDP, unemployment rising

4. Trough – “bottomed out” lowest point in real GDP

GDP falls for two consecutive quarters•6 months of contraction = recession

Prolonged economic contraction

Marked by rising unemployment, fall in consumer confidence, decrease in spending and investment

Long and severe recession = depression

High unemployment Low factory output Stagflation – decline in real GDP

with an increase in inflation

*unable to accurately predict length of cycles

Business investment

Interest rates and credit

Consumer expectations

External shocks• For instance, in 1973, US citizens found themselves waiting

in long lines just to obtain gas for their cars because countries in the Middle East imposed an oil embargo against the United States. In 1979, the United States stopped shipping grain to the USSR after the Soviets invaded Afghanistan.

1. frictional – people take time to find a job

2. seasonal – affected by weather, holidays school

3. structural – worker’s skills do not match available jobs

4. cyclical – aligned with the business cycle

5 causes of structural unemployment1) Technology: makes jobs obsolete (ipods)2) Resources: new energies replace old ones

(coal -> gas, gas -> electricity)3) Consumer demand: consumer’s habits

change based on tastes and trends dictating demand for labor (make more Snuggies!)

4) Globalization: companies outsource or expand to foreign markets (telemarketers)

5) Education: lack of skills and knowledge can keep someone from working (drop outs)

Unemployment is a clue to the health of the economy.

Census helps to identify the unemployment rate.

Made up of people 16 or older have a job or are actively looking for full time work• What does this leave out?

Add up number of employed and unemployed people = Labor Force

Divide the number of unemployed people by the total labor force

Multiply that figure by 100.

Adjusted for seasonal unemployment

Full employment is not attainable in a market economy.

Underemployed – people who are over qualified for a job they are working.

Discouraged workers – stopped searching for employment – do not count in the unemployed rate

Inflation – general rise in prices

Price Index – measurement that shows how the average price of a group of goods changes over time

CPI – Consumer Price Index – determines the price of a standard group of good each month with what the same good cost previously

Market Basket – representation of goods and services (p339)

CPI = current price X 100base period cost

$360 X 100 = 180 $200

Children play with worthless blocks of

German currency in post-World War I Germany

Hungarian man shovels currency into the gutter,

after prices doubled every fifteen hours, 1946

Quantity Theory – too much money in the economy

Demand- Pull – demand for goods/services exceeds existing supplies

Cost- Push – producers raise prices to meet increased costs

Purchasing power declines• PPP = (purchasing power parity) or how much of something your money buys; the buying power of your money

• when gas costs more every day, your dollar buys less of it

Income is decreased• Hurts people on a fixed

income (retirees)

The country of Zimbabwe has experienced one of the most severe occurrences of hyperinflation in history

The most recent move of their central bank took twelve zeros off of their exchange rate• This means that $1=roughly Z$1trillion

“Teachers reported the printing of bank notes from millions to billions and then trillions skewed their pupils' sense of numeracy, making them fail to grasp the realities of numbers.  On one geography field trip, students scoffed at being told granite rocks swept over Zimbabwe by ancient glaciers were 700 million years old. That time frame seemed insignificant.  Back then in 2008, 700 million Zimbabwe dollars bought a loaf of bread.”

http://finance.yahoo.com/news/Visitors-snap-up-100-trillion-apf-3558543127.html