2 Domain FocusSSEMA1 The student will illustrate the means by which economic activity is measured.
3 Domain FocusSSEMA2 The student will explain the role and functions of the Federal Reserve System.
4 Domain FocusSSEMA2 The student will explain the role and functions of the Federal Reserve System.
5 SSEMA1 The student will illustrate the means by which economic activity is measured. a. Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports. b. Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. c. Explain how economic growth, inflation, and unemployment are calculated. d. Identify structural, cyclical, and frictional unemployment. e. Define the stages of the business cycle, as well as recession and depression. f. Describe the difference between the national debt and government deficits.
6 MacroeconomicsReminder- Macroeconomics= the study of the behavior and the decision making of entire economies
8 Gross Domestic Product Gross= totalDomestic= produced anywhere in the 50 states, by anyoneProduct= final goods and services
9 Total amount of final goods and services produced in a country What does GDP measure?Total amount of final goods andservices produced in a countryin one year.(Measure of Output)
10 Gross Domestic Product Gross Domestic Product (GDP)- the dollar value of all final goods and services produced within a country’s borders in a given yearDollar Value- the total of the selling prices of all goods and services produced in a country in one calendar yearFinal Goods and Services- products in the form sold to consumersIntermediate goods- used in the production of final goodsProduced within a country’s borders- includes cars produced in the U.S. by a Japanese automaker
11 Are there any cool formulas you can give us relating to this interesting concept? GDP=C+I+G+(X-M)
12 Expenditure Approach C= consumption spending I= investment spending (think consumers)72%I= investment spending(think businesses investing in themselves)15%G= government spending17%(X-M)= difference between exports and imports-4%
13 Expenditure ApproachExpenditure Approach (output-expenditure approach)Estimate the annual expenditures or amounts spent on four categories of final goods and servicesConsumer goods and servicesDurable goods- goods that last for a relatively long time (refrigerators, cars, etc.)Nondurable goods- goods that last a short period of time (food, light bulbs, etc.)Business Goods and servicesGov’t goods and servicesNet exports or imports of goods and servicesAdd together the amounts spent on all four categories to arrive at the total expenditures on goods and services produced during the year
19 Limitations of GDPGDP does not take into account certain economic activitiesNonMarket Activities- goods and services that people make or do themselvesThe underground economy- black market and illegal goods, legal informal transactionsNegative Externalities- unintended economic side effectsQuality of life
20 Problems associated with GDP Slow to calculateDoes not count everything (it’s an estimate)Inflation can distort the figureReal vs. Nominal
21 Nominal Versus Real GDP Nominal GDP- GDP measured in current pricesReal GDP- GDP expressed in constant, or unchanging prices
22 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 = $200,000Total = $350,000Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350,000.In the second year, the economy’s output does not increase, but the prices of the cars and trucks do: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.10 cars at $16,000 each = $160,000+ 10 trucks at $21,000 each = $210,000Total = $370,000Year 2 Nominal GDP10 cars at $15,000 each = $150,000+ 10 trucks at $20,000 each = $200,000Total = $350,000To 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 pricesfrom the base year. So we calculate the real GDP for Year 2 using the prices from Year 1:Year 3 Real GDPReal GDP for Year 2, therefore, is $350,000
23 Economic GrowthEconomic growth is measured by finding real GDP per capita (real GDP divided by the total population)Real GDP per capita is considered the best measure of a nation’s standard of living.The basic measure of a nation’s economic growth rate is the percentage change of real GDP over a given period of time
24 Per Capita GDPGDP divided by a country’s population
25 Other Income and Output Measures GDP is the primary measure of outputGross National Product (GNP)- the annual income earned by U.S. owned firms and U.S. citizensDepreciation (the loss of the value of capital equipment that results from normal wear and tear) is not taken into account
26 Aggregate SupplyAggregate Supply- the total amount of goods and services in the economy available at all possible price levelsEconomists add up the total supply of goods and services produced for sale in the economy (GDP)Calculate the price level (the average of all prices in the economy)As the prices of most goods and services change, the price level changes.Firms respond by changing their output (real GDP)Prices rise- production increasesPrices fall- production decreases
28 Aggregate DemandAggregate Demand- the amount of goods and services in the economy that will be purchased at all possible price levelsLower price levels means greater purchasing power for households; falling prices increase wealth and demandHigher price levels causes purchasing power to decline; reduction in the quantity of goods and services demanded
30 AS/AD EquilibriumAggregate Supply/Aggregate Demand Equilibrium= AS/AD EquilibriumAny shift in aggregate supply or aggregate demand will have an impact on real GDP and on the price level
31 Aggregate Demand and Aggregate Supply Lesson Factors that shift an AD CurveChanges inConsumer SpendingInvestment SpendingGovernment SpendingNet Export SpendingIncreases in Aggregate Demand increase real GDP and the price levelDecreases in Aggregate Demand decrease real GDP and price level
32 Aggregate Demand and Aggregate Supply Lesson Factors that shift an AS CurveChanges inThe prices of inputs (land, labor, capital, and entrepreneurship)ProductivityTechnologyGovernment RegulationsIncreases in Aggregate Supply increase real GDP and lower the price levelDecreases in Aggregate Supply decrease real GDP and raise the price level
34 Business CyclesBusiness Cycles- a period of macroeconomic expansion followed by a period of contractionBusiness cycles are not minor ups and downs- they are major changes in real GDP above or below normal levels
36 Phases of a Business Cycle Expansion- a period of economic growth as measured by a rise in real GDPEconomic Growth- a steady, long-term increase in real GDPPlentiful jobs, a falling unemployment rate, and business prosperityPeak- the height of an economic expansion, when real GDP stops rising
37 Phases of a Business Cycle 3. Contraction- a period of economic decline marked by falling real GDPUnemployment rate risesRecession- a prolonged economic contraction- generally lasts from 6 to 18 monthsDepression- a recession that is especially long and severe; high unemployment and low factory outputStagflation- a decline in real GDP combined with a rise in the price level4. Trough- the lowest point in an economic contraction, when real GDP stops falling
38 What affects Business Cycles? Business cycles are affected by 4 main variables1. Business InvestmentWhen the economy is expanding businesses invest heavily in new plants and equipmentWhen firms decide they have expanded enough or demand falls they cut back on investment spending2. Interest Rates and CreditWhen interest rates are low households and firms borrow more moneyWhen interest rates climb, investments and job growth dries up
39 What affects Business Cycles? 3. Consumer ExpectationsFears of a weakening economy can cause consumer confidence to fall- people begin saving their money; the opposite is also true4. External ShocksNegative External Shocks- Disruptions in the oil supply, wars that interrupt normal trade relations, droughts that severely reduce crop harvestsPositive External Shocks- discovery of a large deposit of oil or minerals, a perfect growing season
40 Business Cycle Forecasting Leading Indicators- key economic variables that economists use to predict a new phase of a business cycleStock MarketInterest RatesManufacturers new orders of capital goodsEconomic Ups and Down- key words Business Cycle
41 Business Cycles in American History The Great Depression- the most severe economic downturn in the history of industrial capitalismJohn Maynard Keynes- The General Theory of Employment, Interest, and MoneyEconomies could fall into long-lasting contractionsGovernment intervention might be needed to pull an economy out of a depression
44 Types of Unemployment Frictional Unemployment Occurs when people change jobs, get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasonsStructural UnemploymentOccurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemploymentSeasonal Unemployment (DO NOT NEED TO KNOW for EOCT)Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedulesCyclical UnemploymentUnemployment that rises during economic downturns and falls when the economy improvesWorksheet 13-1
48 What is “unemployed”?People available for work who made a specific effort to find work in the past month and who during the most recent survey week, worked less than one hour for pay or profit.Also people who worked in a family business without pay for less than 15 hours a week.
49 How is unemployment measured? It’s an important indicator of the health of the economy.Bureau of Labor statistics polls sample of population to determine how many are employed and unemployed.Unemployment rate is the percentage of nation’s labor force that is unemployed.It is only a national average – it’s doesn’t reflect regional trends.
50 Full EmploymentThe level of employment reached when there is no cyclical unemployment (no one out of work because of downturn in the economy – everyone who wants a job has one)4-6% unemployment is “normal”.
51 LimitationsFigures don’t count those who have become frustrated and stopped looking for work (have to have looked for work in the past 4 weeks)If you have a part time job you are considered employed even if you would rather have a full time job – took this one because it’s all you could find.
52 The Effects of Rising Prices Inflation- a general increase in pricesPurchasing power- the ability to purchase goods and services, is decreased by rising pricesPrice level - the relative cost of goods and services in the entire economy at a given point in time
53 Degrees of Inflation Creeping inflation Galloping inflation Range of 1-3%Galloping inflationCan go as high as %HyperinflationOut of controlIn range of 500%Doesn’t happen often – last stage before monetary collapse. (WW II – Hungary and Germany)
54 Causes of InflationThe Quantity Theory- too much money in the economy leads to inflation; inflation can be tamed by increasing the money supply at the same rate that the economy is growing.The Cost-Push Theory- inflation occurs when producers raise prices in order to meet increased costsLeads to wage-price spiral- the process by which rising wages cause higher prices and higher prices cause higher wages
55 Causes of InflationThe Demand-Pull Theory- inflation occurs when demand for goods and services exceeds existing suppliesWage-price spiral – self-perpetuating spiral – higher prices force workers to ask for higher wages. Producers try to recover this by raising prices, which forces workers to ask for higher wages….
56 Effects of InflationPurchasing PowerThe dollar will not buy the same amount of goods that it did in years past.Interest RatesWhen a bank's interest rate matches the inflation rate, savers break even. When a bank's interest rate is lower than the inflation rate, savers lose money.IncomeIf wage increases match the inflation rate, a worker's real income stays the same. If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful.
57 Price IndexesPrice Index- a measurement that shows how the average price of a standard group of goods change over timeConsumer Price Index (CPI)- a price index determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumerMarket Basket- a representative collection of goods and servicesInflation Rate- the percentage of change in price level over time
58 Calculating the CPI Price index = cost today X 100 cost in base year Price index is current value of a “basket” of goods and service divided by cost of same basket in base year and then multiplied by 100.Mixed basket of goods used because prices can go up or down for reasons that have nothing to do with inflation.Having a large group of representative items helps eliminate the effect of some product’s price dropping while others tend to be on the rise.Base year can be any year.Price index for the base year will always be 100.Index values over 100 indicate inflation.Index values under 100 indicate deflation.
59 Calculating Inflation To determine the inflation rate from one year to the next:Take the CPI for year A and subtract the CPI for year BMultiply by 100
61 Debt v. DeficitDemonstration Lesson- Should We Worry about the National Debt?
62 Questions for You What is the national debt? What caused the national debt?Where does the government get the money when it wants to spend more than it takes in?What is a budget deficit?What is a budget surplus?
63 Budget Deficits and the National Debt Balanced Budget- a budget in which revenues are equal to spendingThe federal budget is almost never balancedBudget Surplus- a situation in which the government takes in more than it spendsBudget Deficit- a situation in which the government spends more than it takes in
64 The National DebtNational Debt- the total amount of money the federal government owes to bondholdersThe U.S. government is viewed as stable and trustworthy and can borrow money at a low interest rate
65 The difference between DEFICITS and DEBT Deficit- the amount of money the government borrows for one budget yearDebt- the sum of all government borrow up to that time that has not been repaid
67 b. Explain the government’s taxing and spending decisions. SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth.a. Define fiscal policy.b. Explain the government’s taxing and spending decisions.
69 Fiscal PolicyActions taken by the Federal Government to influence the economy (business cycles).
70 How do they do it? Taxation (revenue) Spending (expenditures) -transfer payments-
71 How/When/WhyIf the economy needs a “boost” the Federal Government might:_______________ taxes._______________ spending.
72 How/When/WhyIf the economy needs to be “cooled off” the Federal Government might:_______________ taxes._______________ spending.Demo Lesson - How Can Changes in the Federal Government’s Budget Stabilize the economy?
73 Understanding Fiscal Policy Fiscal policies are used to achieve economic growth, full employment, and price stability.Federal Budget- a plan for the federal government’s revenues and spending for the coming yearLists expected incomeShows how much money will be spent
74 Understanding Fiscal Policy Fiscal Year- a twelve-month period that can begin on any date (October 1-September 30 for the Federal Government)
75 Fiscal Policy and the Economy Expansionary Policies- fiscal policies, like higher spending and tax cuts, that encourage economic growthUsed to raise the level of output in the economyEncourage growthGovernment spending increases aggregate demand
76 Fiscal Policy and the Economy Contractionary Policies- fiscal policies, like lower spending and higher taxes, that reduce economic growthUsed when demand exceeds supply to slow the growth of the economy (GDP)Used to slow or prevent inflationLeads to a decrease in aggregate demand which leads to lower prices
77 Limits of Fiscal Policy The government cannot change spending for entitlementsDifficult to know the current state of the economy (GDP)Even more difficult to predict future economic performance
78 Keynesian EconomicsJohn Maynard Keynes- The General Theory of Employment, Interest, and MoneyComprehensive explanation of economic forcesTold economists and politicians how to get out of economic crises and how to avoid themFocused on the economy as a wholeProductive Capacity- the maximum output that an economy can produce without big increases in inflationDemand-Side Economics- the idea that government spending and tax cuts help an economy by raising demand
79 Keynesian EconomicsKeynesian Economics- a form of demand-side economics that encourages government action to increase or decrease demand and outputFiscal policy should be used to fight periods of recession/depression and periods of inflationAdvocated the use of expansionary and contractionary fiscal policiesMultiplier Effect- the idea that every one dollar of government spending creates more than one dollar in economic activity
80 SSEMA2 The student will explain the role and functions of the Federal Reserve System. a. Describe the organization of the Federal Reserve System.b. Define monetary policy.c. Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth.
81 Federal Reserve Act of 1913 Created the Federal Reserve System Composed of 12 independent regional banksCould lend money to other banks in times of need
82 Structure of Federal Reserve System Board of Governors- the seven-member board that oversees the Federal Reserve SystemAppointed for staggered 14 year terms (keeps members from being pressured politically)President picks a chair for a 4 year term from the board of governors
83 Structure of the Federal Reserve System Federal Reserve Districts- the twelve banking districts created by the Federal Reserve Act (one Federal Reserve Bank is located in each district)All nationally charted banks are required to join the FedMember banks own shares in the Fed and therefore gives the system of high degree of political independence
86 Monetary PolicyThe actions the Federal Reserve (Central Bank) takes to influence the level of GDP and the rate of inflation in the economy.
87 How Do They Do It? Tools of the FED Open Market Operations Discount Rate (Fed to Banks)Federal Funds Rate (bank to bankReserve RequirementsOpen Market Operations Simulation
88 Tools of the Federal Reserve Open Market Operations- the buying and selling of government securities to alter the money supplyBond Purchases - In order to increase the money supply, the Federal Reserve Bank of New York buys government securities on the open market.Bond Sales- When the Fed sells bonds, it takes money out of the money supply.Discount Rate (Federal Reserve to Bank)- the interest rate that banks pay to borrow money from the Federal Reserve
89 Tools of the Federal Reserve Federal Funds Rate (bank to bank)- the interest rate that banks pay to borrow money from each otherReserve Requirement- the amount of money that a bank must keep on hand; set by the Federal Reserve
90 Fiscal and Monetary Policy Tools Fiscal policy toolsMonetary policy tools1. increasing government spending2. cutting taxesExpansionary tools1. open market operations: bond purchases2. decreasing the discount rate3. decreasing reserve requirementsContractionary tools1. decreasing government spending2. raising taxes1. open market operations: bond sales2. increasing the discount rate3. increasing reserve requirements
91 How/When/WhyIf the economy needs a “boost” the Federal Reserve might: _______________ bonds. _______________ interest rates. _______________ reserve requirements.
92 How/When/WhyIf the economy needs to be “cooled off” the Federal Reserve might: _______________ bonds. _______________ interest rates. _______________ reserve requirements.