Macroeconomics SBIT #1

Macroeconomics

• the study of the behavior of the economy as a whole, this can be of the regional, national, or global economy

• Used by governments and industries to predict trends, identify economic growth, and improve economic performance

Three Economic goals of nations

• Steady economic growth - measured using GDP (gross domestic product)

• Stable prices - measured using inflation/CPI (consumer price index)

• Full employment - measured using employment numbers that get released each month by the Department of Labor

GDP

The dollar value of all final goods, services, and structures produced within a country’s borders during a 1-year period, measures a country’s total output

What does GDP tell us?

Year-to-year GDP data is used to tell us if a country’s economy is growing or shrinking

GDP growth

an economy creates more jobs and more business opportunities

GDP reduction

jobs and more business opportunities become less plentiful

Ideal GDP growth rate

between 2% and 3%

GDP formula

GDP = C + I + G + (X - M)

C in GDP formula

consumer spending (household purchases) on final goods

I in GDP formula

business investment spending on capital investments, production processes, new employees

G in GDP formula

government spending on goods and services

X - M in GDP formula

net exports, also shown as X_n, net exports = exports - imports

GDP per capita

GDP per person, reflects each person’s share of GDP

Things not included in GDP

• Second hand sales (ex. A used car)

• Intermediate products (things used in production)

• Non-market transactions (ex. babysitting)

• Financial transactions (ex. Buying or selling stock)

• Underground economy (ex. Selling illegal drugs)

Inflation

A sustained rise in the level of prices generally or a sustained decrease in purchasing power

Consumer Price Index (CPI)

Measures the yearly cost of a shopping cart full of things Americans tend to buy in a year (a “market basket”)

Inflation rate

The rate of change in prices over a set period of time

Demand-Pull inflation cause

• Results when total demand rises faster than the production of goods and services, happens when income increase

• “More money chasing the same amount of goods”

Cost-Push inflation cause

• Results when increases in the costs of production push up prices

• Inputs like labor, land, capital, and management go up (ex. Shipping costs, wages, etc.)

Wage-Price Spiral inflation cause

• Begins with increased wages

• Higher production costs for businesses

•  Higher prices for products

• Demands by workers for higher wages

Target rate of inflation

2%

Decreasing Value of Dollar - inflation impact

• The dollar is worth less than it was previously, so it takes more money to buy things than before

• People on fixed incomes are hit harder because they don’t receive wage increases

Increasing Interest Rates - inflation impact

• Borrowing money on  variable interest loans becomes more expensive to keep up with the rest of inflation

• Credit card payments rise, consumers buy less items that require borrowing like houses and cars

Decreasing Real Returns on Savings - inflation impact

If the inflation rate is higher than your interest rate in your savings account or bond, you can lose money that you are trying to save

Creeping inflation

Small rate of inflation over a long period of time

Hyperinflation

A rapid, uncontrolled rate of inflation in excess of 50% per month

Civilian Labor Force

• Employed: Full-time, part-time, temporary leave, past week

• Unemployed: Do not work but make effort to find work

• Underemployed: Only find part-time, high skill & low $ (not in profession)

Discouraged workers

Want to work but have stopped looking, not included in civilian labor force

Others excluded from labor force

Full-time students, unpaid homemakers, retirees, active military, people 15 yrs and younger, people in hospital or jail

Unemployment rate

The percent of people in the labor force who want a job but are not working

Unemployment rate equation

Unemployment rate = (# unemployed/# in labor force) * 100

Unemployed qualifications

• Jobless

• Looking for a job

• Available for work

Frictional unemployment

• “Temporarily unemployed” or being between jobs

  • Ex. high school or college graduates looking for jobs, individuals that were fired or quit and are looking for a better job

Structural unemployment

• Changes in the structure of the economy make some jobs/skills obsolete

• Workers will have to be retrained for a new job

  • Ex. VCR repairman, carriage makers, auto assemblers laid off as robots take over production

• Outsourcing: a business hires an outside company (usually overseas) to manufacture its product because it’s cheaper = workers lose their job

Cyclical unemployment

• Unemployment that results from economic downturns (recessions)

• As demand for goods and services falls, demand for labor falls and workers lose jobs

  • Ex. steel workers laid off during recessions, restaurant owners layoff waiters after months of poor sales due to recession

Seasonal unemployment

• Due to time of year and the nature of the job

  • Ex. lifeguards in winter, Santas in Jan-Oct