AP Macroeconomics Intro

Economics = The Social Science that studies how people and countries allocate and utilize scarce resources to achievemaximum satisfaction of human wants

Microeconomics = The study of economics that analyzes veryspecific components of an economy such as an individual firmor industry through supply and demand graphs.

Macroeconomics = The study of economics that analyzes the aggregates of an economy such as: the government, households, and the business sectors. This study analyzes total outputs(GDP), total level of employment, general level of prices(inflation), etc.

Scarcity = The fundamental problem of economics. Unlimitedwants and needs, but limited resources.”There is no such thing as a free lunch…”

-

Macroeconomic Goals of Government

1. Economic Growth– measured by GDP; hopefully 3-4%increase per year

2. Price Level Stability – keep the price level consistent by controlling inflation and deflation – “The Fed”

3. Full Employment – 95% of the civilian labor force employedequals the “full employment rate”

4. Economic Efficiency – maximize benefits at the least cost fromour available resources

5. Economic Security-- maintain “safety net” components of government to ensure the less fortunate, elderly, physically challenged, etc. receive sufficient levels of income

6. Equitable Distribution of Income– Try to maintain the belief that the USA is a country of the “middle class”; graduated tax structure by the federal government

8. Favorable Balance of Trade? Should we always have a trade surplus (exports are greater than imports)?

2007 trade deficit = $ 731 billion2008 trade deficit = $ 673 billion2009 trade deficit = $ 400 billion (projected)

9. Balanced Budget? – Should the federal government have a balance budget every fiscal year.

Fiscal 2008 = $ 455 billion budget deficit 2009 = $1.42 trillion ( $800 B stimulus package)2010 = $1.17 trillion (projected)

** National Debt = $12.3 trillionFederal government’s debt limit = $ 13.6 trillion

Marginal Analysis = Rational decisions that compare marginal Benefits and marginal costs.

Marginal = “additional”, “extra”, or “change in”

Marginal benefit = the extra benefit or utility to an individual or society obtained by the consumption or use of additionalunit of production

Marginal Cost = the extra cost to an individual or society ofproducing an additional unit of output for consumption

4 Factors of Production

• Land = property; natural resources used for production

• Labor = the physical and intellectual skills and efforts of workers

• Capital = equipment, buildings, transportation

• Entrepreneurship = innovative and creative skills

3 Major Economic Resources

• Human = knowledge, skills, abilities, labor

• Natural = resources produced by the earth such as: oil, natural gas, coal, timber, water, gold, etc.

• Capital = anything that is used to produce goods and services, ie. tools, machines, robots, buildings, computer, technology

Production Possibilities Model

• Illustrates opportunity costs or trade-off costs

• military goods (guns) vs. consumer goods (butter)

• Shows the full employment and full production capabilities of an economy

• Supply of resources and technology are fixed

Opportunity Costs

• The value of time, goods or services, or the best alternative forgone or sacrificed when one makes an economic choice

• Illustrate scarcity and choices

• Economics is about choices people and countries decide upon

Economic Growth• How does an economy of a country expand or

grow?1. Investment in capital goods and resources2. Investment in technology3. Trade with other countries by using the trade

principle of comparative advantage4. Increase productivity = using resources more

efficiently to produce more products with the same amount of inputs

5. PPC Curve shifts outward to the frontier

Economic Systems

• 1. Traditional = based on the habits and customs of the people relying on simple technologies ie. “3rd World” Countries

• 2. Command/Planned = the government makes most, and in some cases, all of the economic decisions through centralized planning

a) Evolutionary/democratic Socialism

• Countries that have voted for socialism through the democratic process

• The central government “nationalizes” major industries such as transportation, healthcare, utilities, mining, etc.

• People still retain full economic, religious, and political rights

a) continued

• Examples: Norway, Sweden, Denmark, and to a lesser degree France, Germany, UK

• Personal income taxes = 50% in Scandinavian countries

• Government provides for: universal healthcare, education, pension plans, housing if needed, etc

B) Centralized Socialism

• Also known as communism or Marxism• The central government controls and makes

most if not all economic decisions“centralized planning”

• Inefficient, static, lack of innovations, lack of personal motivation plague this system

• Individuals lack economic, political, and religious rights

b) continued

• Totalitarian governments control the political and economic interests of the nation

• Examples: North Korea, Cuba, former USSR, China? (incorporating more market economy principles)

Market/ Free-enterprise and Capitalism

• Most dynamic of all economic systems• Most countries in the world have this

system• Free-enterprise, competition, private

property, laissez-faire, profit motive, supply and demand

• Private ownership and individual market freedom

Capitalism (continued)

• Philosopher = Adam Smith (1776)1. Individuals should pursue their self-interests; let the “invisible hand” to guide you!

• Most modern economies of the world have this system: USA, Germany, France, Canada, Mexico, UK, Italy, Australia, South Korea, China?

Mixed Systems• Countries that have elements of both a free market

system and a centralized system• The USA is a mixed economy. How?

1. Social Security

2. Unemployment insurance

3. Medicare

4. Federal Reserve Regulations

5. Federal and state regulations on businesses

Circular Flow Model

• Product Markets = consumers buy and compete for finished goods and services from businesses

• Resource or “Factor” Market = suppliers or firms compete with one another for the factors of production (L,L,C,& E)

Sole-Proprietorships

• Business owned by one person or family

• Most common form (74%); revenue = 6%

Ads. = 1. Easy to organize

2. Individual control

3. Tax breaks

Disads.= 1. Unlimited liability

2. Hard to raise capital

Partnerships

• Represent 8% of business organizations• Generate only 4% of business revenue• Formed by two or more people who want to pool

resources• Ads: 1. Easy to form; lower overhead

2. Raise more capital• Disads. 1. Unlimited liability

2. Less autonomy3. Unscrupulous partners

Corporations

• Business organization created by a business going “public” through the sale of stock shares. (18% of business organizations, but90% of all business revenue!

Ads. 1. Limited liability2. Unlimited life3. Easy to raise capital (stocks)4. Legal entity = 14th Amendment5. Most dynamic

Corporations(cont.)

Disads.1. Investors have little control over daily operations and decisions

2. Double taxation of profits* the federal government taxes corporate income/ profits, then taxes* dividend payments to stockholders be- cause these payments are considered income

Corporations(cont.)

• CEO = Chief Executive Officer

• I.P.O. Initial Public Offering

• Common stock = voting shares of stock

• Preferred stock = nonvoting shares but receive dividend payments first

• Stock split = 2 to 1 or 3 to , etc. creates more stock shares for corporations

Corporations(cont.)

• Dividend = a share of a corporation’s profits paid to stockholders

• Wall Street = NY City; financial capital of the world NYSE and NASDAQ/AMEX

• Bear Market = overall value of stocks are decreasing

• Bull Market = overall value of stocks are increasing

Corporations(cont.)

• NYSE = the “Big Board”; the largest stock exchange in the world based on market value of its corporations

• NASDAQ/AMEX = Stock exchange comprised of newer corporations with technological emphasis

Corporations(cont.)

• Dow Jones 30 = composite index of 30 stocks from both the NYSE and the NASDAQ; used as a barometer of the stock markets

• S & P 500 = composite index of 500 stocks from the NYSE and the NASDAQ; many investment funds track this index

Corporations(cont.)

• Blue-Chip” corporations = corporations that pay dividend payments in both bull and bear markets; most prestigious stocks

Perfect Competition

• Theoretical situation used by economists to compare different types of markets

• These markets have:

1. No barriers to entry

2. Standard products w/ many producers

3. Nonprice competition = none

4. Price takers = no control over market

price

Imperfect Competition

• Monopoly = market with only one producer

1. Anti-trust laws in USA prevent these

2. Technological = patents and copyrights

3. Geographical = remote location

4. Natural/ public utilities = regulated by local, state, or federal laws; efficiency

Oligopoly

• A market controlled by a few producers

(2-9)

* Automobiles, pharmaceuticals, steel, oil companies, grocery store chains

Monopolistic competition

• Market consisting of 10-20 producers who supply a similar product such as fast food, clothing, shoe apparel, retail goods and services

• Considerable emphasis on advertising, brand names, trademarks,etc

Monopsony

• A market consisting of only one buyer

• ie. US government buying defense/military goods, professional sports leagues “buying” a particular type of labor

Taxation

• Regressive Taxes = a tax system that places the burden on lower income earners by taking a larger percentage of lower incomes than higher incomes, ie. sales taxes, F.I.C.A

• Proportional Taxes = a system that places the same tax rate on all incomes ie. 10%

1. Also known as a “flat” tax

Taxation (cont.)

• Progressive Taxes = a tax system in which tax rates increase as a person’s income increases, and vice-versa; “Graduated income taxes”

• Capital Gains Tax = a tax on all the profits from the sale of stocks, bonds, and real estate

Fiscal Year

• The business year for the federal government = Oct 1 thru September 30 of the next year. We are currently in Fiscal year 2010.

• The President and Congress will be negotiating Fiscal Budget 2011 very soon.

Budget Deficit

• Anytime the government spends (expenditures) more money than it receives in taxation (revenue) this occurs. Since 1969 we have had budget deficits each year except for four years.

Budget Surplus

• Anytime the federal government’s revenues are greater than its expenditures this occurs.

• Clinton was the last president to have budget surpluses!

National Debt

• The total amount of all budget deficits and outstanding debt that the federal government has accrued over its history

• 2010 = $12.3 trillion• Treasury Securities = T-bills, T-notes, and

T-bonds are sold by the Fed to allow for deficit spending and maintaining the interest on the national debt

The Federal Reserve System

• The “Fed” = a system of banker’s banks that functions as the monetary agent of the federal government and whose purpose is to develop the monetary policy of the USA

• Federal Reserve Notes = legal tender, fiat money– Fiat money = anything that a government

decrees to be money

Easy Money

• Fed’s monetary policy to stimulate the economy by lowering interest rates

1. Used during sluggish growth periods or recessionary periods in the economy

2. Decrease discount rate, required reserve ratio, and buy government securities

Tight Money

• Fed’s monetary policy to fight inflation and to slow down the economic growth of the economy by raising interest rates

1. Fed is very concerned about inflationary pressures

2. Increase discount rate, required reserve ratio, and sell government securities

Federal Funds Rate

• Interest rate that the Fed sets for banks when they make overnight loans to each other out of their excess reserves

• “Benchmark rate” = influences other interest rates in the economy such as:

1. Prime rate

2. Mortgage rates

Adam Smith

• The first modern economist

• Invisible hand theory• We should pursue our

self-interests in the economy

• Philosopher of capitalism

John Maynard Keynes

• Demand-side economics

• Deficit spending OK• C + Ig + G + Xn = AD• Liberal economic

theory• “Keynesian”

economics

Milton Friedman

• Monetarist• Chicago School of

Economics• The Fed should ensure

that the economy has a stable money supply

• Laissez-faire

Alan Greenspan

• Former Chairman of the Fed from 1987-2006

Ben Bernanke

• The Chairman of the Fed

• Time’s Man of the Year 2009

• Expert on the Great Depression

• Please read the article!