Unit 5-Macroeconomics

What is Macroeconomics?

The study of entire economies.

Why is economic growth important?

Allows for a country to:

• Increase the standard of living

• Compete in the global market

• Increase domestic resources (gov services)

-Increased tax base

What does GDP measure?

Gross Domestic Product (GDP): dollar value of all final goods and services produced within a country during a given year.

• Dollar value = total cash value of sales

• Final goods/services = In the form sold to consumers.

• National borders = only domestic goods/services.

What is the equation to calculate GDP?

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

C: Personal consumption expenditures

I: Gross investment

G: Gov purchases of goods & services

(X - M): Exports - Imports

What happens when a country imports more than it exports?

This led to a trade deficit triggering unemployment.

Nominal vs Real GDP?

Nominal GDP: measured in current prices

Real GDP: adjusted for inflation

What are the limitations of GDP?

Non-Market Activities: services people do for themself.

• Mowing the lawn

Underground Economy: Transactions not reported to the government.

• Black market

• Gamebling.

Negative Externalities: Unintended economic effects that are not subtracted from GDP measurements

Quality of Life: Increasing GDP doesn’t necessarily make life better or reflect general well-being.

What is the business cycle?

Economic fluctuations

What are the 4 “phases’ of the business cycle? What does each one mean? Graph?

1) Recovery/Expansion:

• Increase in GDP = Economic Growth

2) Peak

• Height of expansion

3) Contraction

• Decrease in GDP

4) Trough

• Lowest point

Recession vs. Depression

Recession: Prolonged economic decline

Depression: An especially long recession

4 things that “influence” the business cycle

1) External Factors

• Inventions, technology, wars, COVID

2) Public Expectations

• Producers and consumers

3) Business Investment

• Lack of investment

4) Government Actions: Access to Money and Credit

• Monetary and Fiscal Polices.

What is the “unemployment rate”?

Who is or isn’t counted as “unemployed”?

Unemployment Rate: % of people in the civilian labor force who are unemployed.

• Discouraged workers: stop looking

• Underemployed: “wasted resources”

Unemployed: Jobless, looking for a job, available to work.

• people with a job, disabled, or retired.

What is “Full Employment”?

• Some unemployment is normal & healthy part of an economy

• 4-6 % = employment

What are the 4 different types of unemployment?

1) Frictional

• people who have left their job to look for another.

• New to the workforce or re-entering.

2) Seasonal

• Regular fluctuations in jobs

• Holiday, school year, harvest seasons.

3) Structural

• Unemployment that occurs as a result of changes in tech or the way the economy is structured

4) Cyclical

• Resulting from recession or economic downturn: layoffs.

What is inflation?

• Increase in prices across an economy

• Reduce the purchasing power of the dollar

• Too much money in circulation

• More demand than supply

What is the target inflation rate in the US?

2 %

What is the Consumer Price Index (CPI) used for?

Measures price of the market basket of typical consumers

What is the “market basket”?

Representative collection of goods and services.

What are the effects of inflation on wages?

On purchasing power?

On savings?

1) Reduce purchasing power of the dollar

2) Decrease value of real wages

3) Interest rates

4) Savings and Investing

5) Production costs

What is “stagflation”?

Why is it “the worst of both worlds”?

• Stagflation = stagnant growth (low output, high unemployment) + high inflation (rapidly rising prices)

• Together, it reduces purchasing power through rising costs and limits income.

What are two economic impacts of tariffs?

• Increase the cost of living for consumers

• Raise production costs for businesses

What is the “poverty threshold”?

The lowest income that a family needs to maintain a basic standard of living

• $15,000

What is the “poverty rate”?

% of people living in poverty

According to the documentary Inequality for All, what is the leading cause of income inequality for middle-class Americans?

• Caused a decline in labor unions

• Weaken middle class purchasing power