Macroeconomics-the study of the entire economy or one of it’s principal sectors

**The overall levels of income, employment, & prices are determined by the spending and production decisions of households, businesses, government, and net exports.

Ways of Measuring Economic Activity

1) GDP-total dollar value of all final goods & services produced within a country during one calendar year.

• Output-Expenditure Model = -Personal Consumption Expenditures (C) -Gross investments (I) -Government Purchases of Goods & Services (G) -Exports-imports (X-M) [C + I + G + (X-M)]

Nominal v Real GDP

• Nominal GDP-current price measure

• Real GDP-Adjusted for price changes

**Real GDP is important because it allows economist to determine if production has decreased and is not determined by purchasing power of dollar**

Limitations of GDP

• Timeliness of Data• Nonmarket Activities-transactions that do not involve money

or are not recorded • Underground economy• “Goods” and “Bads”-those things that make society better or

worse

2) Inflation-an increase in overall prices that results from rising wages, an increased money supply, & increased spending

-Consumer Price Index (CPI)-measure of the avg. change overtime in price of fixed group of products (market basket).

-CPI= ($ of basket for year / $ of base year basket) X 100 ex. Current basket-$7000, base yr. basket-$4000 = (7000/4000) X 100 = 175

Inflation Rate-monthly or yearly % of change in prices

-IR= [(CPI Year B – CPI Year A) / CPI Year A] X 100

Ex. [(Yr. B-145 – Yr. A-140) / Yr. A] X 100 145-140=5/140=40 X 100 =3.57

-1-3% = low to moderate inflation rate

Stagflation-period of slow economic growth along with inflation

Effects of Inflation…

1) Purchasing power of $ = ↓2) Value of Real Wages = ↓3) As $ increase interest rates = ↑4) Saving & Investing = ↓5) Production Cost = ↑

Economic Growth-economy produces increasing amounts of goods & services over the long term

Requirements:1) Natural resources2) Human Resources3) Capital Resources4) Entrepreneurship

Aggregate Demand- total demand for final goods and services in an economy at a given time. (AD)

Aggregate Supply- total amount of goods and services (real output) produced and supplied by an economy over a period of time. (AS)

Economic ChallengeUnemployment v Employment

BLS identifies employed as being 16 or older & during the survey week• Worked for pay at least one hour• Worked w/out pay in a family business for at least 15

hours, or• Have jobs but didn’t work as a result of illness,

weather, vacation, etc.

Unemployment Rate=# of unemployed/labor force x 100

Types of Unemployment

• Structural-unemployment as a result of changes in technology• Cyclical-unemployment as a result of recession and

economic downturns• Frictional-unemployment that occurs because workers

moved from one job to another

Phases of the Business Cycle

•Contraction- slowdown of the economy• Trough- when the economy hit rock bottom (usually

recession)• Expansion-when the economy starts to grow again•Peak-when the economy is at its best

Influences on the Business Cycle

• Business Investment• Money-credit• Public Expectations• External Factors

Predicting the Business Cycle

• Leading Indicators- indicator that predicts economy…changes in building permits, order in capital goods

• Coincident Indicators-indicator that tells about the economy today, like personal income

• Lagging Indicator-indicator that month after downturn or upturn like use of consumer credit

Recession-two consecutive quarters of economic downturn

Depression-prolonged recession

Federal Deficits and Debt

Budget Deficit-the amount that government expenditures exceed revenues in any one given year. (can have surplus)

National Debt-the total amount of money the federal government has borrowed to cover its budget deficits over the years

Federal Reserve System

• “Acts” as the central bank of the U.S.• Organized on district and national levels, & is composed of

12 district Federal Reserve Banks

Monetary policy-used by Fed to promote economic growth & stability

1) Easy money-low interest rates-used during recession-expands the money supply & increase AD

2) Tight money-higher interest rates-contracting money supply-used during periods of inflation

Tools Used by the Federal Reserve

• Reserve Ratio-amount of deposits that a bank must keep “on reserve” (funds must not be lent-highest 10%)

• Discount rate-interest rate on loans made to banks by FED (rise in rate is a contractionary monetary policy) (lowering rate is an expansionary monetary policy)• Open market operations-buying & selling bonds

Fiscal Policy- taxing, spending, and borrowing policies used to achieve desired economic performance

In achieving economic security and growth, the government engages in …

1) Expansionary fiscal policy (demand side)-gov. should increase spending on goods and services or reduce taxes to increase AD during recession & high unemployment

-has a Mulitiplier Effect-Used during Great Depression

Problems -Debt from borrowing-Increase interest rates

2) Contractionary fiscal policy-Used in times of inflation the gov. decrease spending on goods & services or increase taxes to decrease AD

3 Basic types of Taxes used by the Government

Taxes provide the government with revenue & influences behavior

1) Progressive –tax that takes a higher % of taxes from those who make more• based on fairness

2) Proportional tax – tax where same % is taken at all income levels •Hurts lower socio-economic levels•Called “Flat Tax”

3) Regressive tax – tax that takes a larger % from lower income individuals• sales tax

Sources of Government Revenue-individual income tax-corporate income tax-Social security-Federal insurance Contribute Act (FICA)-property tax-sales tax

Tools of Fiscal Policy

-Marginal tax rates -Tax incentive-Government spending-Transfer payments

International Finance

Individuals, businesses and governments trade goods and services to increase wealth, and to acquire goods and services that they don’t produce

-Comparative advantage – to produce a good or service at a lower opportunity cost than some other producer (economic basis for specialization & trade)

Comparative advantage shows…-trade benefits all who participate-increases competition-increases variety available to consumers-disseminates new technologies/production methods-increase training

Absolute advantage – Producing more units of a good or service than some other producer, using the same quantity of resource

Balance of Payment vs Balance of Trade• Balance of Payment-Funds received by a country and

paid by a country for all international transactions (goods, services, physical, & financials assets) in a given year. (express in monetary figures.)•Balance of Trade-part of balance of payment acct. that

deals only with imports and exports of goods (merchandise or “visibles”)

*Balance of Trade=(imports-exports)*

When… -exports > import=surplus -imports < exports=deficit

Trade Barriers-gov. actions that are designed to protect domestic industry & job from foreign competition

1) Tariff-a tax on imports2) Quotas-limit on the number of a good that may be imported3) Embargoes-impose certain conditions before granting consent4) Standards-minimal level of quality to be met5) Subsidies-financial assistance granted for the purpose of promoting business

Trading Blocks

• EU-European Union•NAFTA-North American Free Trade Assoc.•ASEAN-Assoc. of SE Asian Nations•MERCOSUR-Common Market of the South (Latin Am.)•WTO-World Trade Org.• IMF-International Monetary Fund World Bank

Arguments for free trade…

• Keeps jobs in the U.S.• National Security• We don’t want money leaving U.S • Other nations don’t treat their worker fairly• Other nations export but don’t import

Arguments for free trade…• Improve standard of living for both U.S. and

trading partner

Exchange Rate-the price of one nation’s currency in terms of another country’s currencyThe USD/ 1 unit -convert one unit of the foreign currency to the US currency. The Units/ 1 USD convert one unit of the US currency to the foreign currency.

Currency Code USD/1 Unit 1 Unit/ USD

Canadian Dollar

CAD

EURO EUR

British Pound GBP

Japanese Yen JPY

Exchange rate change because of demand & supply • If demand for a nation’s currency rises faster than the

supply of its currency in foreign exchange markets= value of that nations currency will appreciate (rise) , leading to more expensive exports

• If supply rise faster than demand, value of a nation’s currency will depreciate (fall)