January 26, 2015

1. Begin AP Macroeconomics

2. Intro Notes: Macro

3. AP Micro Final and Qtr 2 Grades

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Unit 1: Measuring Economic

Performance

Vocab: Ch. 23, 24, 26Unit 1 Exam: 2/9 &

2/102

• Macroeconomics is the study of the large economy as a whole (the “Big picture”)

Macroeconomics Intro

• Macroeconomics was born during the Great Depression (Government didn’t really know how to fix a depressed economy with 25% unemployment.)

• Macroeconomics used to:1. Measure the health of the economy.2. Guide government policies to fix economic

problems.

The Business Cycle

The study and control of business cycles are the heart of macroeconomics.

The economy experiences ups and downs over time.

The business cycle represents these economic fluctuations.

The current state of the economy reflects the phase of the business cycle the economy is in.

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Real GDP

Macroeconomic Indicators

Macroeconomic Indicators: Statistics that measure the health of the economy. Business cycles are defined in terms of output. Other variables follow this movement of output. Contractionary/Recession: Two consecutive quarters (6 months) of negative

growth in Real GDP. Contractionary/Recession: Output decreasing, unemployment rising,

inflation decreasing. Inflation: General increase in prices in goods & services (dollar has less

purchasing power.) Severe recession is called a depression. Unemployment Rate rises during recessions. Trough: Point at which output starts to increase (GDP at lowest point) After trough, economy goes into recovery/expansion: Output increasing,

Unemployment decreasing, inflation increasing. Peak: Point at which output starts to decline (GDP at highest point.)

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The Business Cycle:Macroeconomic Indicators

Employment Act of 1946 established 3 major goals for economy:

1. Full Employment (when most of labor force is working)

2. Price Stability (A situation in which prices in an economy don't change much over time)

3. Economic Growth (When economy produces increasing amounts of goods/services over time)

How does the government measure these? Macroeconomic Indicators: Statistics that indicate the current status of the

economy

1. Measuring Employment: Unemployment Rate

2. Measuring Price Changes: Price Index (CPI- Consumer Price Index) measures changes in price of goods and services.

3. Measuring Short-Run Economic Growth: Measure fluctuations in output by measuring increases/decreases in quantity of goods and services produced using GDP (Gross Domestic Product: The dollar value at market prices of all FINAL goods and services produced during specific period.

Real GDP is the GDP adjusted for changes in prices of goods. The business cycle refers to the ups and downs as measured by the indicators.

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January 29, 2015

1. Review Lesson 1-1 and the Circular Flow Model.

2. Lesson 1-2: Gross Domestic Product3. HW: Activities 2-1 and 2-2

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Gross Domestic Product

GDP is the dollar value of all final goods and services produced in an economy during a given period.

It only includes output exchanged in markets (i.e.. No illegal goods/services)

GDP only includes FINAL goods and services. GDP measure production, so financial transactions hat do not

represent production are not counted. Expenditures Approach-Add up all the spending on final goods and

services produced in a given time period. Income Approach-Add up all the income that resulted from selling all

final goods and services produced in a given time period. Both ways generate the same amount since every dollar spent is a

dollar of income. Also, there are leakages from and injections into the flow which happen

through government, financial institutions, and international trade. Leakages: Savings, imports, taxes. Injections: Investments, exports, government spending.

GDP

GDP is sum of the purchases of goods and services from all buyers (households, firms, government, consumers in other countries) in an economy.

Expenditures Equation:

GDP= C + I + G + Xn

1. C: Consumer Spending: Largest component at about 2/3

2. I: Investments -When businesses invest in their own business OR output produced and not sold (Unplanned Inventory)

3. G: Government Spending

4. Xn: Net Exports -Exports (X) – Imports (M)

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January 29, 2015

1. Review HW: Activities 2-1 and 2-22. Lesson 1-3: Inflation3. HW: Activity 2-3

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A Little More GDP…USA: $16.8 Trillion

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Calculate the GDP of Tannerville

1. $10.00 for movie tickets2. $5M Increase in defense expenditures3. $45 for used economics textbook4. Ford builds new $2M factory5. $20K Toyota made in Mexico6. $10K Profit from selling stocks7. $15K car made in US, sold in Canada8. $10K Tuition to attend college9. $120 Social Security payment to Bob10.Farmer purchases new $100K tractor

1. $10.00 for movie tickets2. $5M Increase in defense expendituresX $45 for used economics textbook4. Ford makes new $2M factoryX $20K Toyota made in MexicoX $10K Profit from selling stocks7. $15K car made in US, sold in Canada8. $10K Tuition to attend collegeX $120 Social Security payment to Bob10.Farmer purchases new $100K tractor

GDP=$7,125,010

How can you measure GDP growth from year to year?

% Change in GDP

=Year 2 - Year 1

Year 1X 100

• Country X’s GDP in 2007 was $4000• Country X’s GDP in 2008 was $5000• What is the % Change in GDP?• 25%• Country Y’s GDP in 2007 was $2,000• Country Y’s GDP in 2008 was $2,100• What is the % Change in GDP?• 5%

Nominal vs. Real GDP

Nominal GDP: Economic value expressed in monetary terms

Real GDP: Nominal value adjusted to remove effects of price level changes (inflation or deflation) over time.

Real GDP takes out effects of price changes and allows focus to be ONLY on changes in output.

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February 4, 2015

1. Lesson 2-4: Continue Inflation and Price Index

2. Unit 1 Macro Exam now Tuesday, Feb. 10 and Wednesday, Feb. 11

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Inflation What’s a dollar worth? Inflation: A rise in the overall level of price level. Deflation: The opposite Not all goods increase in price during periods of inflation. Anticipated Inflation: Level of price increase is expected by consumers. Unanticipated Inflation: Level of price increase is unexpected by consumers. Remember, GDP is a measure of economic performance based on OUTPUT! SINCE GDP IS A DOLLAR VALUE, WE NEED TO CONVERT NOMINAL GDP TO

REAL GDP TO REALLY MEASURE ECONOMIC GROWTH BASED ON OUTPUT! 1st step in converting nominal values to real values is to create a PRICE

INDEX. Price Index: Compares total cost of fixed goods (market basket) in different

years. Price changes over time are measured by comparing prices of a market basket of

goods each year to the prices of same market basket in a selected year call the base year.

A price index is used to measure price changes in an economy (measures inflation ) Price Index Formula:

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CPI

Consumer Price Index (CPI): A statistical estimate of the level of prices of goods and services (market basket: list of roughly 300 items) bought for consumption purposes by households.

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle

insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians'

services, eyeglasses and eye care, hospital services) RECREATION (televisions, toys, pets and pet products, sports equipment,

admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone

services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts

and other personal services, funeral expenses).

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Converting Nominal GDP to Real GDP

Real GDP = Nominal GDP/(Price Index/100)

Output Growth Formula: See Board

Real GDP per capita: See Board

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GDP Deflator

A measure of the level of prices of

all domestically produced, final goods and services in an economy.

The GDP deflator is another measure of price inflation.

It is calculated by dividing nominal GDP by real GDP and multiplying by 100.

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The Costs of Inflation

3 Types of costs on society that result from inflation:

1. Show Leather Costs: The cost, in time and energy of efforts intended to counteract the effects of inflation. 

2. Menu Costs: Costs incurred by firms to change their prices

3. Unit of account costs: Purchasing power of dollar has changed on consumer.

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Real vs. Nominal GDP Example

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2008

10 cars at $15,000 each = $150,00010 trucks at $20,000 each = $200,000Nominal GDP = $350,000

200910 cars at $16,000 each = $160,00010 trucks at $21,000 each= $210,000Nominal GDP = $370,000

The GDP in year 2008 shows the dollar value of all final goods produced.

The nominal GDP in year 2009 is higher which suggests that the economy is improving.

But how much is the REAL GDP? How do you get it?

Use 2008 Prices.

The Real GDP for 2009 is the same as 2008 after we adjust for inflation.

200910 cars at $15,000 each = $150,00010 trucks at $20,000 each= $200,000REAL GDP = $350,000

Real GDP “deflates” nominal GDP by adjusting for inflation in terms of a base year prices.

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Does GDP accurately measure standard of living?28

Standard of living (or quality of life) can be measured, in part, by how well the economy is doing…

But it needs to be adjusted to reflect the size of the nation’s population.

Real GDP per capita (per person) Real GDP per capita is real GDP divided by the

total population. It identifies on average how many products each person makes. Real GDP per capita is the best measure of a

nation’s standard of living.

Measuring Unemployment

How well are we achieving the goal of full employment? 60,000 household survey. 3 categories: Employed, Unemployed, Not in Labor Force. LF = E + U Official Population Categorization Labor Force Participation Rate (LFPR)- measures % of total

population available to produce. Unemployment Rate (UR)- Proportion of the labor force that is

unemployed. UR differs by age, race, ethnicity, duration, etc. Discouraged Workers UR is underestimated when there are discouraged workers. Underemployed workers: People working part time but would like full

time OR people who hold a job that they are over-qualified for (Could be more productive elsewhere.)

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Types of Unemployment

UR does not provide information about why people are unemployed… 4 types:

1. Structural: Mismatches between job seekers and job providers (Unemployed lack certain new skills as technology advances- new structure of economy changes demand for labor)

2. Frictional: People temporarily between jobs or searching for first job.

3. Seasonal: Agriculture, Winter and Summer resort jobs, etc. (DOES NOT AFFECT UR)

4. Cyclical: Downturn in economy = less demand for labor (natural phase of business cycle)

5. THERE WILL ALWAYS BE FRICTIONAL AND STRUCTURAL UNEMPLOYMENT!

6. CYCLICAL EXISTS DURING CONTRACTIONARY PERIOD OF BUSINESS CYCLE- THIS IS THE PRIMARY TYPE OF UNEMPLOYMENT MACRO POLICY MAKERS ADDRESS

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February 12, 2014

1. Wrap-Up Unemployment? NRU2. Review yesterday’s practice FRQ’s3. Time for: Macro Unit 1 Practice Exam or

Unit I Study Guide4. Survey

Unit 1 Vocabulary Due TomorrowUnit 1 Exam (MC) Tomorrow

Unit 1 Exam (FRQ) Friday

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Unemployment Wrap-Up

Full Employment: Something less than 100 percent employment of the labor force.

It occurs when there is no cyclical unemployment. 

Frictional and Structural unemployment still exist.

Natural Rate of Unemployment (NRU): When the economy is producing its greatest potential output.

The NRU occurs when the number of skilled job seekers equals the number of job vacancies requiring those skills: This is full employment!

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