Macroeconomics

Define macroeconomics

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

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

3 Macroeconomic goals

1. Steady economic growth

2. Stable prices

3. Full employment

Steady economic growth

Measured using GDP - Gross Domestic Product

Stable prices

Measured using Inflation/CPI (Consumer price index)

Full employment

Measured using unemployment numbers that get released each month by the Department of Labor

Define Gross Domestic Product (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 if a country’s economy is growing or shrinking

What does it mean if GDP is growing?

An economy creates more jobs and more business opportunities

What does it mean if GDP is declining?

Jobs and business opportunities become less pleniful

What is ideal GDP growth?

Between 2% and 3%

What is the formula for GDP?

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

C?

Consumer spending (household purchases) on final goods

I?

Business investment spending on capital investments, production process, new employees

G?

Government spending on goods and services

(X-M)?

Net exports

X?

Exports

M?

Imports

GDP per capita

GDP per capita (per person) - Reflects each persons share of GDP

Not included in GDP

• Second Hand Sales (Ex.Used car)

• Intermediate products (Ex.Flour for a cake)

• Non-market transactions (Ex. Summer job babysitting)

• Financial transaction (Ex. Buying or selling stocks)

• Underground economy (Ex. Illegal gambling, illegal drugs, etc)

What is 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 but in a year (a “market basket”)

What is the inflation rate?

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

Demand-pull

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

• “More money chasing the same amount of goods”

Cost-push

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

• Inputs like labor, land, capital, and management go up like shipping costs, wages, etc

Wage-Price Spiral

• 1. Begins with increased wages, which leads to,

• 2. Higher production costs for businesses, which leads to,

• 3. Higher prices for products, which leads to,

• 4. Demand by workers for higher wages

Target rate of inflation

2%

Decreasing value of the dollar

• 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 hard because they do not receive wage increases

Increasing interest rates

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

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

Decreasing real returns on savings

• 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

What is creeping inflation?

Small rate of inflation over a long period of time

What is hyperinflation?

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

Deflation

A decrease in the general level of goods and services

Is deflation good or bad for the economy?

Very bad

• Businesses make less profits

• Workers getting laid off

• Workers buy less stuff

• Other businesses lose money and then people get laid off

Nominal GDP

Is GDP measured in current prices. It does not account for inflation from year to year

Real GDP

Is expressed in constant, or unchanging, dollars. Real GDP adjusts for inflation

Which is the best measure of how the economy is doing?

Real GDP

Employed

• Full-time

• Part-time

• Temporary leave

• Past week

Unemployed

Do not work but make effort to find work.

Underemployed

• When a person has a job but it does not fully use their skills or desired hours

• Only find part-time

•  High skill & low $ (not in profession)

Who is not included in the civilian labor force?

• Discouraged workers

• Full-time students

•  Unpaid homemakers

•  Retirees

•  Active military

•  People 15 yrs and younger

•  People in hospital or jail

Discouraged workers

Those who want a job but are not actively searching for one because they believe there are no jobs available for them

Others who are excluded when measuring the labor force are:

• 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.

Formula for calculating unemployment

(Number of unemployed individuals/civilian labor force) x 100%

The qualify as unemployed you must be

1. Jobless

2. Looking for a job

3. Available for work

Types of unemployment

Frictional, Structural, Cyclical, Seasonal

Frictional Unemployment (Think movement and switching)

• “Temporarily unemployed” or being between jobs. 

Example of Frictional Unemployment

• High school or college graduates looking for jobs.

• Individuals that were fired or quit and are looking for a better job.

Structural Unemployment (Think structure house long term)

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

• Structural unemployment is longer-term based on changes to labor needs.

• Workers will have to be retrained for a new job.

Example of Structural Unemployment

• VCR repairman

• Carriage makers

• Auto assemblers laid off as robots take over production

Outsourcing (Structure unemployment)

A business hires an outside company (usually overseas) to manufacture its product because it’s cheaper = workers here lose their jobs

Cyclical Unemployment (Think cycle gos and comes short term demand)

• Unemployment that results from economic downturns (recessions).

• Cyclical unemployment is more short-term based on market cycles

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

Example of Cyclical Unemployment

• Steel workers laid off during recessions.

• Restaurant owners layoff waiters after months of poor sales due to recession.

Seasonal Unemployment

• Seasonal unemployment: due to time of year and the nature of the job. 

Example of Seasonal Unemployment

• Lifeguards in winter

• Santas Jan-Oct.

Business Cycles Definition

The fluctuation in economic activity that an economy experiences over a period of time

How many phases are their?

4

1. Contraction Phase

A nations real GDP is decreasing

Indicators of Contraction

GDP: Falling

Unemployment: Rising

Inflation: Could have inflation or possibly deflation

Recession

6 months (2 or more consecutive quarters) of declining real GDP

2. Trough

The lowest point of the contraction

Trough factors

Highest unemployment

Lowest production

Turning point because after a trough, recovery/expansion begins

3. Expansion Phase

A period when a nations real GDP is increasing and the economy is growing

Indicators of Expansion

GDP: Rising

Unemployment: Falling

Inflation: Usually rising slightly

4. Peak

The highest point of the business cycle, when economic growth stops increasing before a contraction begins

The peak is also known as

Economic Boom

Prosperity

Aggregate demand

The total of goods and services that consumers, businesses, government and foreign purchases will buy at each and every price level

Aggregate demand in other words

The total amount of goods and services in the economy at all levels

Aggreate supply

The total amount of foods that producers will provide at each and every price level

Increase in aggregate demand =

Expansion phase

Decrease in aggregate demand =

Contraction phase

Why business cycles occur

Business decisions

Changes in interest rates

Consumer expectations

External issues

Business decisions

Companies decide to hire, fire, expand, or reduce production

Changes in interest rate

Higher intrest rates reduce spending and investments, while lower rates increase them

Consumer expectations

If people expect the economy to improve, they spend more, if they expect problems they spend less

External issues

Events like wars, natural disasters, pandemics, or global financial crises can affect the economy