1. Unit Two Macroeconomic Tools

2. Circular Flow See the chart on the board A little more detail

3. Functions of Gov’t A. Allocation B. Redistribution of Income C. International Trade Regulation D. Stabilization

4. A. Allocation 1. Produce public goods, like schools or roads 2. Encourage merit goods like seat belts or air bags 3. Discourage the production of negative external effects like pollution

5. B. Redistribution of Income 1. Transfer payments: direct $ from the government without expecting a product 2. Indirect policies: Corporate Welfare, and the purchase of goods and services

6. C. International Economic Policy 1. Trade and Tariff policies 2. Currency Exchange policies

7. D. Stabilization 1. Fiscal Policy: Using taxes, spending and borrowing to stabilize the economy 2. Monetary Policy: Using the money supply and interest rates to stabilize the economy

8. Macroeconomic goals of stabilization 1. Growth 2. Full Employment 3. Stable Prices

9. Economic Growth 1. Defined as an increase in real per capita income. Real means adjusted for inflation. Per capita means for each person. 2. Measured by the Gross Domestic Product or GDP

10. GDP The Gross in GDP means that depreciation has not been deducted Domestic means only that which is produced in the US by US companies Product refers to goods and services produced for use in one year

11. GDP The GDP for the US this year is estimated to be $10,371,000,000,000 There are two ways of measuring the GDP: 1. Expenditure 2. Income

12. GDP by Expenditure GDP= C + I + G + (X-M) C= Consumption or what consumers spend on goods and service I = Investment in capital goods G= Government expenditures on goods and services X-M= Exports - Imports

13. GDP by Income National Income NI = C + S + T C= Consumption S = Savings T = Taxes

14. Full Employment Full employment is measured by the unemployment rate; the lower unemployed the closer we are to Full Employment Unemployment Rate = # of unemployed / Work Force

15. Workforce The work force includes all those working It excludes the retired, children 15 and under, “house-spouses”, students, the disabled.

16. Types of Unemployment A. Frictional: or natural People changing jobs People graduating from college or high school People moving with a spouse for a new job B. Structural: Where skills don’t match the jobs available

17. Unemployment Rate August 2002 8,100,000 / 142,000,000 = 5.7%

18. CPI Consumer Price Index Measures price stability, mostly measures inflation Uses a market basket of goods to compare prices from one month or year to the next Can be used to compare or adjust incomes from one year to another.

19. Base Year 1984 Cost of a Market Basket of Goods= $1,823 $1,823 / 1,823 = 1.00 or an index of 100

20. August 2002 Cost of a market basket of goods= $3294 $3,294 / $1,823 = 1.807 or 180.7

21. Using the CPI When we use the CPI to adjust prices or wages for inflation, the result is a “real” price or wage, instead of just the nominal price or wage.

22. The Formula To compare a price from “back in the day” to prices today, we use this formula: Old Price / old CPI x new CPI = Real Price Examples: Prices at the end of WWII Movie:.60 /.18 x 1.807 = Eggs:.85 /.18 x 1.807 =