MACROECONOMICS UNIT 5

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MACROECONOMICS

UNIT 5


MACROECONOMICS


Macroeconomics looks at the big picture, the
performance of our economy as a whole.


It measures various symptoms of how healthy
or sick the national economy is.


The measurements are called economic
indicators.


The main indicators are the gross domestic
product (GDP), the consumer price index (CPI),
and the unemployment rate.

GROSS DOMESTIC PRODUCT


Gross Domestic Product is the total market
value of all goods and services produced in a
nation over a specific time period, usually a
year.


GDP is equal to the total number of all
consumer spending, business investment,
government spending, and net exports.


GDP= C + I + G +
Xn

GROSS DOMESTIC PRODUCT


Xn

= exports


imports


Why do we subtract our imports from our
exports?


The money other countries spend on our
economy adds value to our economy, while the
money we spend on goods imported from other
countries takes money out of our economy.

GROSS DOMESTIC PRODUCT


If a nation’s GDP increases, you can tell that the
economy is growing unless the increase is due to
inflation, or an increase in prices.


To get an accurate measurement of how much an
economy is growing, you need to find the
real GDP

by using a price index to adjust for inflation.


A nation’s rate of economic growth is the
percentage change in its real GDP from one year
to the next.

UNITED STATES GDP GROWTH RATE

UNITED STATES GDP

INFLATION AND THE CONSUMER PRICE INDEX


Inflation refers to an increase in the average price
of goods and services bought by the average
consumer.


When prices go up, we get less for our money, so
that we may be spending more without actually
buying more than we did before.


Economists need to know how much of an
increase in GDP is caused by rising prices, and
how much is caused by a real increase in how
much we produce and consume.

INFLATION AND THE CONSUMER PRICE INDEX


A measure of inflation is the consumer price index
(CPI)


To calculate, economists add up the total price of
a “market basket” of typical items bought by an
average family in a month.


They compare this total price to the total price of
the same items during a base period, usually a
year before.


They divide the current total cost by the previous
total cost and multiply the result by 100 to get a
percentage.

CONSUMER PRICE INDEX


CPI =
cost of today’s market basket

x 100



cost of market basket in previous year

-

For example, if the market basket cost $960 in
2009 and $1,000 in the year 2011, the
inflation

rate

would be calculated:

1000

X 100 = 1.04 X 100 = 104

960


CONSUMER PRICE INDEX


If you give the base year CPI a standard value, or
index, of 100, then the increase from 100 to 104
represents a 4% increase in the CPI.


If the GDP increased 4% in the same period, then
we know that the increase was due only to
inflation and that the real GDP, after adjusting
inflation, remained the same.


If, on the other hand, the GDP increased 6%,
with an inflation rate of 4%, then the real GDP
rose 2%.

INFLATION AND THE CONSUMER PRICE INDEX


Inflation occurs when the money supply in an
economy increases too quickly.


Governments often increase the money supply
in order to encourage consumer spending and
promote economic growth.

UNEMPLOYMENT


Another key indicator of an economy’s health is its
unemployment rate.


An economy with a low unemployment rate is
usually healthy and growing.


More workers means more production and more
consumption.


Only those people actively looking for jobs and are
able to work are counted.


Economists classify four different types of
unemployment.

TYPES OF UNEMPLOYMENT


Structural unemployment



Frictional unemployment



Seasonal unemployment



Cyclical unemployment

STRUCTURAL UNEMPLOYMENT


Occurs when skills of the labor force do not
match employer’s needs.


Some skills become obsolete.


Advances in technology have replaced workers
in some sectors of our economy.


Today, many workers have gone back to school
to learn new skills needed in the marketplace.

FRICTIONAL UNEMPLOYMENT


Some people are unemployed because they are
waiting on a job that better suits their specific
skills or education level.


People in the work force that are in between
jobs
.


CYCLICAL UNEMPLOYMENT


Occurs because of a downturn in the economy
-

the business cycle.


Economies go through cycles of good times and
bad times, growth and recession.


During times of growth, companies hire workers
and production increases.


If consumer demand goes down, however,
companies cut production, which results in the
loss of many jobs.

SEASONAL UNEMPLOYMENT


Affects mainly people whose jobs depend on
the weather.


Some people do seasonal jobs and are
unemployed part of the year.


Other may have two seasonal jobs to avoid
career burnout.

AGGREGATE SUPPLY & DEMAND


Aggregate demand (AD) is the total amount of goods and
services that all people in an economy are willing to buy.


When prices are low, people will buy more, increasing the
nation’s real GDP.


When prices are high, people will buy less, decreasing the
nation’s real GDP.


Aggregate supply is the total amount of goods and services
that all producers are willing and able to produce.


Individual markets can adjust quickly to changes in demand
by lowering prices.


It takes longer for the average price of all goods and services
in an economy to change.

THE BUSINESS CYCLE


Graphic Organizer Activity



Using either EOCT book, draw and label the
stages of the business cycle on a full size sheet
of blank paper.


Label the following
-

expansion, peak,
recovery, trough, and contraction.


Place an “X” on your business cycle where you
think we are today

THE BUSINESS CYCLE

RECESSIONS & DEPRESSIONS


Economic downturns have always been a part of
the history of our country.


During downturns, the aggregate demand curve
shifts to the left.


When demand falls for ALL goods and services, it
is not so easy for ALL producers to lower their
prices.


Firms will lower production and will need fewer
workers.


This leads to an increase in the
unemployment

rate

and
real GDP
declines.

RECESSIONS &
DEPRESSIONS


When real GDP declines for 6 months or more, an
economy is considered to be in a
recession.


Typically, recessions will continue until prices
across the economy start to fall,


Eventually, demand and production will begin
increasing again. This is called a recovery.


If the recession lasts for an extended period of
time or if the decrease in real GDP is severe, the
economy is considered to be in a
depression
.

RECESSIONS & DEPRESSIONS

Are we in a recession now?

BUDGET
DEFICITS

& THE NATIONAL DEBT


The federal government creates a budget for each
fiscal year. It also collect taxes in many forms to
pay for all the programs and services provided.


The President collaborates with Congress to create
our nation’s
fiscal policy
-

tax and spend.


If the government spends more money than it
collects in tax revenues, it will have a
budget

deficit
.


With budget deficits, the government must borrow
money to cover expenses. This adds to the
national debt
.

BUDGET DEFICITS AND THE NATIONAL DEBT


Just like a private citizen who borrows money
from a bank, the government must pay interest
in its loans as well.


Today, an ever growing amount of tax dollars
must be spent toward simply paying the
interest on the national debt.


These large interest payments (debt service)
hinder the amount of GDP growth we can
achieve.