How can these factors be controlled? Number of workers Their education and training Technological...

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Unit 2

Transcript of How can these factors be controlled? Number of workers Their education and training Technological...

Page 1: How can these factors be controlled?  Number of workers  Their education and training  Technological advances  Available machinery and labor.

Unit 2

Page 2: How can these factors be controlled?  Number of workers  Their education and training  Technological advances  Available machinery and labor.

I. Macroeconomic Questions

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Why does output fluctuate? How can these factors be controlled?

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What determines economic growth? Number of workers Their education and training Technological advances Available machinery and labor Material resources How can we encourage the development of

these?

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Why do we have unemployment, and why is it a problem?

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Why do we have inflation, and why is inflation a problem?

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Which government policy affects output, growth, unemployment and inflation?

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How do changes in the amount of money in the economy affect output, growth, unemployment and inflation?

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How do domestic economic activities affect other countries and our trade?

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A. U.S. Economic Goals The Employment Act of 1946

◦ Full Employment◦ Price Stability◦ Economic Growth

The Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act )◦ Unemployment rate of 4%◦ 0% inflation rate

II. Measuring Macroeconomic Goals

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B. Measuring Employment Civilian unemployment

◦ 60,000 households are surveyed Groups people (age 16+) into categories:

◦ Employed◦ Unemployed◦ Not in the labor force (too old to work, unable to

work, choose not to work)

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Unemployment Rate (UR)

UR = number of unemployed x 100 labor force

Labor Force Participation Rate (LFPR)

LFPR = number in labor force x 100 adult population

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C. Measuring Price Changes – Price Indexes Consumer Price Index (CPI)

◦ Measures changes in the prices of a “Market Basket” – about 400 goods and services commonly bought by consumers.

◦ Items the average consumer spends more money on are given more weight (than items consumers spend comparatively less on)

The Producer Price Index◦ Measures changes in prices of consumer goods

before retail Gross Domestic Product (GDP) Price Deflator

◦ Most inclusive – takes into account all goods and services produced

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How to construct a price index◦ Select a time period for the base year◦ Prices of any subsequent period are a percentage of

the base period (the base is set at 100)

Formula to measure price change from the base period:

CPI = weighted cost of base period items in current year prices x 100 weighted cost of base period items in base year prices

Rate of change:

Price Change = change in CPI x 100beginning CPI

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D. Measuring Short-Run Economic Growth Fluctuations in output (short-run economic

growth) Gross Domestic Product (GDP) is used to

measure this.

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How is GDP measured?◦ Add up the value of expenditures on final (sold to the

end user) goods and services.◦ These are divided into four categories:

Consumption (C) - spending by households on goods and services

Investment (I) – spending on capital equipment, inventories, and structures.

Government purchases (G) – spending on goods and services by all levels of government

Net exports (NX) – value of exports minus value of imports (imports must be subtracted because C,I, G purchases include expenditures on all goods, foreign and domestic, and the foreign component must be removed to only spending on domestic production remains)

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◦ What goods/services are NOT counted? Spending on stocks and bonds. Spending on welfare, social security, etc. Sale of illegal drugs Household production (ex. When homeowners clean

their houses) Intermediate goods – goods produced by one firm to be

further processed by another firm

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GDP: Is it counted and where? (Consumption, Investment, Government, Net Exports, Not counted)◦ You spend $7.00 to attend a movie.◦ A family pays a contractor $100,000 for a house he

built for them this year.◦ An accountant pays a tailor $175 to sew a suit for her.◦ The government increases its defense expenditures by

$1,000,000,000.◦ The government makes a $300 Social Security

payment to a retired person.◦ You buy GM stock for $1,000 in the stock market◦ A homemaker works hard caring for her spouse and

ten children.◦ Ford Motor Co. buys new auto-making robots.◦ You buy a new Toyota that was made in Japan◦ You pay tuition to attend college.

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GDP must be adjusted for price changes before Short-run economic growth can be measured

◦Real GDP – has been adjusted for price changes◦Nominal GDP – has NOT been adjusted for price

changes

Real GDP in Year 1 =

nominal GDP x 100 price index

Real output growth in GDP from year to another =

(real GDP in Year 2 – real GDP in Year 1) x 100 real GDP in Year 1

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To understand the impact of output changes, we look at real GDP per capita.

Real GDP per capita = Year 1 real GDP population in Year 1

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A. Historical background High inflation rates of the late 1960s and

1970s led to the severe recession of the early 1980s.

Impact on Monetary policy - Alan Greenspan’s time as the chair of the Federal Reserve revolved around controlling inflation.

III. Inflation

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B. Anticipated Inflation Level of inflation people expect to occur and

have built into their economic decisions Economic costs of high levels

◦ Boot Leather costs People running around trying to avoid losses from the

declining value of money Ex) In 1985 the inflation rate in Bolivia reached almost

8,000%. The value of the peso changed daily. One day 25 million pesos was worth $50 (US). Within a few days, 25 million pesos was worth $27 (US).

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(Cont - Economic costs of high levels)◦ Tax Distortions

Raises the tax burden on income earned from savings Example

You invest $10 in stock in 1990. You sell the stock for $50 in 2000. You have earned a capital gain of $40, which you must

include in your income taxes. BUT, the $10 in 1990 had more purchasing power than it

does in 2000. $10 in 1990 might be equivalent to $20 today. So your Real Gain is only $30.

◦ Confusion and Inconvenience Ex) it is difficult for investors to determine which firms

are successful

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C. Unanticipated Inflation The level of inflation that is not expected. Economic Costs

◦ People have not adjusted earnings and expenditures for this level of inflation.

Who is hurt?◦ Savers, people on fixed incomes

Who is helped?◦ Borrowers with fixed interest rates

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Contestant Gain/ Hurt

Reasoning

Priscilla (homeowner/worker)

Mayor

Peter (store owner)

Theresa (auto worker/union member)

Jerry (real estate developer)

Elmer (retiree)

Mr. Sad Class (teacher)

Lucy (high school senior)

Bernie (bank president)

Helga (retiree)

Jerome (potential homeowner/borrower)

Lawrence (British business owner)

The Inflation Game – Examples of Unanticipated Inflation

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A. Includes people who are actively looking for work.

IV. Unemployment

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B. Issues

Discouraged workers – people who gave up looking for work because they couldn’t find a job. Leads to underestimation of the number of people who would like to work.

Underemployed – people who are working part time but want a full time job

Different groups experience different rates of unemployment

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C. Types Frictional unemployment – people who are

temporarily between jobs

Cyclical unemployment – people who are not working because firms do not need their labor due to a lack of demand or a downturn in the business cycle

Structural unemployment – involves mismatches between job seekers and job openings. Unemployed people who lack skills or do not have sufficient education

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For each of the following, label it Frictional, Cyclical, Structural

A computer programmer is laid off because of a recession.

A literary editor leaves her job in New York to look for a new job in San Francisco.

An unemployed college graduate is looking for his first job.

Advances in technology make the assembly-line workers job obsolete.

Slumping sales lead to the cashier being laid off An individual refuses to work for minimum wage. A high school graduate lacks the skills necessary

for a particular job

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V. Business Cycles

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A. Refers to alternating rises and declines in the level of economic activity

• A cycle is one “up” followed by one “down”

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B. There are 4 phases to the business cycle1) Expansionary/Recovery • Real output is increasing• Unemployment is declining• As expansion continues, inflation may begin to

accelerate

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2) Peak• Real output (GDP) is at its highest point of the

business cycle

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3) Contractionary/Recession• Real output in the economy is decreasing• Unemployment rate is rising• As contraction continues, inflationary

pressures subside• If the recession continues long enough,

deflation may occur (falling prices)

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4) Trough• Lowest point of Real GDP reached during the

business cycle• If very deep, it may be called a depression• Very low output• Very high levels of unemployment• There is no precise decline when a recession becomes

a depression