Economics Unit 4

GDP (Gross Domestic Product)

the total monetary or market value of all finished goods and services produced within a country’s borders in a specific time period, usually quarterly or anually

if GDP is up…

unemployment is down, consumer spending is up, domestic businesses are thriving, foreign trade is up, inflation is down

if GDP is down…

unemployment is up, consumer spending is down, domestic businesses are hurting, foreign trade is down, inflation is up

inflation

a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy

inflation is EXPECTED

why is inflation bad?

money has no value except when society gives it value. capitalism requires confidence, if the purchasing power of $1 dropped, prices are increasing and that $1 has less value.

capitalism requires confidence, when confidence drops, so does spending. When spending drops, businesses suffer therefore they raise prices and the purchasing power of $1 drops

inflation rate for US

about 3%

unemployment rate

the number of unemployed people as a percentage of the labor force

government response to GDP falls or when inflation is too great

economic policy, an attempt to right a perceived wrong

examples: decisions on government spending, taxation, redistribution of wealth, controlling the supply of currency

most common reactions: electing a new president= new tax policy and distribution of wealth, and war which equals defense spending

FIAT

Faith In And Trust: currency issued by a government that is not backed by a physical commodity like gold or silver, but rather by the government's decree and the public's faith in it. 

ex the US dollar

Richard Nixon

in 1971, Nixon suspended the conversion of US currency into gold

federal reserve

a central, regulatory network of banks charged with 3 main jobs:

Control the amount of currency in circulation

provide other banks with loans

set interest rates

it is a privately owned corporation therefore its in business to make money

job 1 Control the amount of currency in circulation

too much currency in circulation means inflation. when it is determined more currency is needed in circulation, the Fed buys Govt savings bonds from the govt and puts more currency into circulation

when less currency is needed the Fed cashes in bonds for profit

job 2 provide other banks with loans

we deposit money in banks with faith (FIAT money) it will be there when we try to withdraw it. Banks must keep a base percentage of cash on hand to conver accounts

Businesses sometimes require banks to borrow cash from the fed to meet that minimum

the fed charges interest in order to make profit

job 3 set interest rates

when the economy is down, spending needs to be stimulated

lower interest rates: more people take out loans for big purchases, more businesses take out loans for expansion, more jobs, more spending, more production

sometimes spending gets out of control and needs to be restricted (people and businesses can get over extended on loans and debt), so the feds job is to raise interest rates to curb the bad spending

how does the federal reserve make money

loaning money to other banks, selling shares in the fed to other banks, encourgaes banks to be a partner in the fed, you invest in the fed by investing in other banks which links the fed to the banks and the people

who runs the fed?

board of governers in Washington DC, nominated/appointed by the president, confirmed by the Senate for a 14 year term, reports to the House of representative annually

2 are the chairman and vice chairman of the board

5 are sitting presidents from the feds branch banks

7 must come from a cross section of industry and agriculture

after their term, theyre out forever

Coming out of World War 2 we are

1 of the 2 superpower countries

capitalism vs socialism

democracy vs communism (Red Scare)

mission becomes containing the spread/influence of USSR

We use our WW2 victory to establish a perimeter around Soviets

Coming out of WW2: Retreat of Colonial Powers

English, French, Dutch, German, Japanese empires collpase

We realize our main vulnerability is the Balkans leading down to the Middle East, Middle East has the oil we need for economic expansion

Coming out of WW2: Recongnition of Israel

Sympathy for the Jewish people at an all time high

numerous debates and internatinoal negotiations held

1948 Israel created as a Jewish homeland and recongnized by the US

1950s-1960s: Middle East

We partner with Iran (most Western friendly)

in 1953, US helps establish a secular govt in Iran

Revolution leaves Mohammad Reza Pahlavi as monarch/ “Shah”

US establishes vast military depot in Iran to control the region

We fund the Iranian military and help them rule the region

1950s-1960s: The rest of Middle East is angry

because of Israel, Oil producing nations decide to force an economic embargo on the US, Middle East cuts off oil

But the US are firm partnes with Iran so we get some of the oil

Meanwhile in the Far East and Southeastern Asia

From our bases in Japan, we monitor Soviet expansion

China becomes communist in 1949, they have good relations with soviets

Korea becomes the first Cold War conflict (proxy war)

North Korea vs South Korea (really US vs Russia via China)

Asia in the 1950s-1960s: Far East and Southeast Asia

After the stalemate in Korea Vietname is next

China backs N Vietnam as French withdraw

We back South Vietnam (another proxy war, really the US vs USSR)

Late 1960s we are stretched thin

we are depleted fighting wars in Korea and Vietnam, supporting WW2 allies against Soviets in Europe, rebuilding Germany and Japan, helping Israel fight to maintain their new country, supporting Iran to control the Middle East

Late 1970s: Baby Boomers

Baby boomers come of age. (born in the late 40s and early 50s)

they watch the American Govt spread us too thin

oil embargoes are a recurring threat/reality

the war machine iscosting far more than ever expected

the government tries everything (raise taxes, lower taxes, freeze prices, limit spending, increase spending)

this makes matters worse because people lose confidence

Late 1970s: Hope and promise of post WW2 is gone

Inflation is out of control, Unemployment is higher than ever

In 1979 the Shah of the Iranina government is removed and installs a fundamental religious gov

Americans see WW3 as inevitable, no hope

1980s: Ronald Reagan is elected

People are living way beyond their means: crazy loans, predatory lending practices, production swithces to manufacturing

Production and manufacturing is now based in Japan and Europe

Inflation is at its highest

TILL THIS POINT THE FEDERAL RESERVE HAS DONE NOTHING, ONLY THE GOV

1980s: Ronald Reagan and Trickle Down Economics

Ronald appoints new chariman of Fed to fix inflation, interest rates go way up and the Fed buys tons of gov bonds and pulls cash out of the economy

End of 1980s

Trickle Down Economics fails but the Fed does their job and inflation is under control by 1991 but GDP is still down.

Bill Clinton enters office and works with The Fed to raise GDP and keep inflation in check, tax breaks and subsidies go to the middle class and small businesses