Economy - Structure of economic life and activity in an area Macroeconomics – study of the whole economy, theories, predictions, events and policies

Macroeconomic “Body” and the Human Body Cells perform functions linked to the operation of the body Cells die off and are replaced Blood circulates thru the body providing nutrients Economic units perform different functions to operate the whole economy Units die off and are replaced Money circulates thru the economy providing incentives Expectations If you expect to feel better then you will Economic expectations and action fuel results Indicators Temperature, pulse rate, blood pressure Unemployment rate, inflation rate, capacity utilization In both economics and medicine there are differences of opinion Medical people have labs and controlled experiments. Economists only have the one patient: U.S. Knowledge in both improves over time as each views the performance and results of their patients

Gross Domestic Product (GDP) – market value of all final goods produced in a year in a country (not financial transactions) Final goods vs intermediate goods Expenditures vs income

Expenditures :GDP = C+I+G+Xn Consumption (C) 65% Investment (I) 15% I = In + Ir In = Net (new) investment Ir = Replacement investment Government Purchases (not transfer payments) (G) 20% Net Exports (Xn) = Exports (X) – Imports (Im) 0%

Income: GDI = GDP Wages and salaries – 72% Rent – 9% Interest – 10% Profits – 9

Circular Flow Real GDP = Nominal GDP adjusted for inflation Real Per Capita GDP = Real GDP/Population

Shortcomings Doesn’t include home production Value of a years worth of home production is $134,121 Doesn’t measure quality or leisure Doesn’t reflect purpose – alcohol, tobacco and guns Doesn’t include the underground economy Illegal activities Tax avoidance Environmental damage Doesn’t include second hand sales, transfer payments and financial transactions

Unemployment – people looking for a job but can’t find one Types Frictional – between jobs or new entrants Lack of information Structural – skills and available jobs don’t match Lack of Skills Cyclical – due to business cycles Contractions – lack of demand Seasonal – due to seasons Measures Labor Force = employed + unemployed Unemployment Rate = Unemployed/Labor Force CNAP = Civilian Noninstitutionalized Adult Population Discouraged worker has stopped looking for a job Labor Force Participation Rate = Labor Force/CNAP

Inflation – increase in the average price level Purchasing Power – amount of real goods that can be purchased Price Index Market Basket – representative goods and services Base Year – cost of those goods in year 1 Price Index – cost of goods in a future year as a percentage of the base year PI = Cost of Today Basket/Cost of Base Year Basket x 100 CPI – specific group Problem Consumers don’t always buy the same thing People buy different things New goods are introduced GDP Deflator – measures all new goods Types Anticipated – expected inflation Unanticipated – unexpected inflation Creditors lose and debtors gain COLAs – cost of living adjustments Real Interest Rate = Nominal Interest Rate – Anticipated Inflation Rate Deflation – decline in the average level of prices

Economic Growth – Long term increase in the GDP

Business Cycles (fluctuations) Phases Peak – highest level of economic activity Contraction – GDP is declining Recession – declining GDP for 6 months Depression – major slowdown Trough – lowest level of economic activity Expansion – increasing GDP Reasons External shocks – come from outside the borders War OPEC Oil price increases 911 Internal shocks Weather Labor unions go on strike Business investment – IPO’s of the 1990’s Innovation and inventions – new and better products and ways of producing them Government spending and taxation Money supply Spending by Households and Businesses