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23
An Introduction to Macroeconomics
.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Performance and Policy
• Real GDP – measures the value of final goods and services within a nation’s borders during a year
• Nominal GDP - $ value of goods and services produced in a nation’s borders using their current price during year of production
LO1 23-2
Unemployment
• You must be willing and able to work – actively looking for a job
• The current unemployment rate in the US is 5.8 % - in Texas the rate is 5.2
Inflation
• Inflation is an increase in overall level of prices
• September 2014 inflation rate has been calculated to be 1.7%
• Inflation reduces the family’s purchasing power of savings – basically $1 of goods would cost $1.02 in September
Modern Economic Growth
• Standard of living measured by output per person – GDP Per Person (per capita)
• No growth in living standards prior to Industrial Revolution due to the fact that as the economy grew, so did the population
LO3 23-6
Modern Economic Growth
• Output per person rises
• Not experienced by all countries but a growth rate of 2% annually doubles the average citizens income every 35 years and again 35 years after that. (Rule of 70)
Global Perspective
LO3 23-8
•All currencies are changed into US dollars•GDP is divided by population•Purchasing power parity adjusts for price differences between countries
Savings and Investment• Saving = current consumption is less than
current output
• Investment = resources are devoted to increasing future output
• Financial investment – assets, stocks bonds, etc.
• Economic investment is creation/expansion of business enterprise**Key***Investment is limited by the amount of saving
LO4 23-9
Uncertainty, Expectations, and Shocks
• The future is uncertain and this changes behavior - expectations affect investment
• Shocks - What happens is not what you expected
• Demand shocks – unexpected change in demand for g or s – economists believe these cause short run fluctuations in GDP
• Supply shocks – unexpected change in supply of g and s
LO5 23-10
Uncertainty, Expectations, and Shocks
• Demand shocks and flexible prices
• Price falls if demand is low
• Sales are unchanged
• Production levels and unemployment levels would be constant – only the price changes
LO5 23-11
Demand Shocks
Cars Per Week
Pri
ce
DMDL
DH
900
$40,000
$37,000
$35,000
Flexible Prices
LO5 23-12
Demand shocks and sticky prices
• Prices are inflexible
• Adjusting production is very expensive because companies operate at lowest cost and produce constantly at optimum output
• Maintain inventory – store extra product but can cause a revenue issue if maintained too long
• Sales fall, unemployment rises, production falls
Demand Shocks
Cars Per Week
DMDL
DH
700 900 1150
$37,000
Fixed Prices
Pri
ce
LO5 23-14
Sticky Prices• Many prices are sticky in the short run
– this leads to fluctuations in GDP and employment over the course of a business cycle
• Consumers prefer stable prices and producers know this
• Firms want to avoid price wars
• Coke and Pepsi
LO5 23-15
Long Run Flexibility of Price
• All prices are flexible in the long run
• Firms adjust to the unexpected and there are permanent changes in demand