econ

Macroeconomics

The study of the economy as a whole, including inflation, unemployment, and GDP.

Gross Domestic Product (GDP)

Total market value of all final goods and services produced within a country in one year.

If a couch was made in Mexico and sold in the US, does it count in GDP?

No; it’s counted in Mexico’s GDP because it wasn’t made domestically.

Formula for GDP

GDP = C + I + G + (X - M); C = Consumption, I = Investment, G = Government Spending, X = Exports, M = Imports.

Intermediate Goods

Goods used to make final products; not included in GDP to avoid double-counting.

Why are second-hand sales not in GDP?

They were already counted when first sold.

Why isn’t household production in GDP?

It’s unpaid and not part of the market economy.

Why isn’t the underground economy in GDP?

Illegal or unreported transactions are not recorded officially.

Why aren’t financial transactions in GDP?

Buying/selling stocks and bonds doesn’t reflect new production.

Sell used car to friend — GDP?

No

Buy new TV at Best Buy — GDP?

Yes

APS builds a new high school — GDP?

Yes

Wash your own car — GDP?

No

Buy lemonade from kids — GDP?

No

Economic Growth

Increase in real GDP over time; measured by percent change in GDP.

Business Cycle

The ups and downs of the economy over time; has four phases.

Expansion Phase

GDP increases, inflation rises, unemployment falls.

Contraction Phase

GDP decreases, inflation falls, unemployment rises.

Peak vs Trough

Peak = highest GDP; Trough = lowest GDP before recovery.

Recession vs Depression

Recession = short-term decline in GDP; Depression = long, severe downturn.

GDP decreases and prices rise

Stagflation

Business investment and GDP

Investment increases GDP by raising production.

Effect of low interest rates

Borrowing increases, spending increases, GDP increases.

Expectations of a strong economy

Spending increases, GDP rises.

Effect of hurricanes and rebuilding

GDP rises during rebuilding due to increased spending.

Unemployed

Actively looking for work but not currently employed.

Frictional Unemployment

Between jobs or entering the workforce.

Seasonal Unemployment

Job tied to a season; ends when season ends.

Cyclical Unemployment

Job lost due to economic downturn.

Structural Unemployment

Skills no longer match job market needs.

Moved to California, no job yet

Frictional

Laid off due to low demand

Cyclical

Lost job after holidays

Seasonal

Replaced by self-checkout

Structural

Unemployment Rate Formula

(Unemployed ÷ Labor Force) × 100

Labor Force =

Employed + Unemployed

Full Employment Rate

4% to 6% unemployment

Discouraged Worker

Someone who stopped looking for work

Underemployed

Working part-time or below skill level when full-time work is desired

Inflation

General increase in prices over time

Consumer Price Index (CPI)

Tracks prices of a fixed set of goods over time

COLA

Cost-of-Living Adjustment — raises income to match inflation

Prices rise — purchasing power?

Purchasing power decreases

Market Basket

Set of goods used to measure CPI

Effects of Inflation

Hurts savings, fixed incomes, and creates uncertainty

Demand-Pull Inflation

Too much demand, not enough supply — prices rise

Cost-Push Inflation

Higher production costs — prices rise

Wage-Price Spiral

Wages rise → prices rise → wage demands rise again

Stagflation

Inflation with stagnant or falling GDP

Fiscal Policy

Government's use of taxes and spending to influence the economy

Who sets fiscal policy?

Congress and the President

Goals of Fiscal Policy

Grow the economy, reduce unemployment, control inflation

Why slow economic growth?

To prevent inflation

Budget deficit

Spending is greater than tax revenue

Budget deficit and national debt

Deficits add to national debt; surplus reduces it

Tools of fiscal policy

Government spending and taxation

Policy during recession

Expansionary — increase spending, cut taxes

Policy during inflation

Contractionary — cut spending, raise taxes

Goal of expansionary policy

Increase GDP, reduce unemployment

Goal of contractionary policy

Slow GDP growth, control inflation

Federal Reserve System

U.S. central bank; has 12 district banks

Role of the Fed

Manages money supply, sets interest rates, stabilizes economy

Fed action during recession

Increase money supply to boost spending

Fed action during inflation

Decrease money supply to slow spending

How should Fed adjust interest rates in recession?

Lower them to encourage borrowing

How should Fed adjust rates in inflation?

Raise them to slow spending

Who controls the money supply?

The Federal Reserve

Fed funds rate lowered — effect?

Inflation increases, unemployment decreases

Fed funds rate raised — effect?

Inflation decreases, unemployment increases