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Unit 3 Macroeconomics
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Page 1: Macroeconomics

Unit 3

Macroeconomics

Page 2: Macroeconomics

I. Measuring the Economy

Page 3: Macroeconomics

A. GDP

1. Defined – $ value of products made within a country’s borders.

2. Used by economists & leaders to analyze domestic and foreign economic policy.

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B. Ways of Calculating GDP

1. Expenditure Approach - Add together

a. Add together all goods and services.

b. Net exports or imports of goods and services.

2. Income Approach… Add together all incomes in the economy.

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C. Downsides of using GDP

It does not take into account..

1. Types of items produced

2. Health

3. Black Market

4. Households

5. Amount produced per person

6. How goods are distributed

7. Over adjustment for inflation.

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D. A Wealthy Nation has the following…

1. Amounts of natural resources (including productive labor) within a nation.

2. Technology and equipment available to a nation.3. Skill and educational level of workforce.4. Price levels.5. Capital deepening – more spent on capital with each

worker.6. Savings invested in the economy help spur growth.7. Population increase means more workers for more

production.8. Government investing in public goods (roads, school)9. Foreign trade increases growth if we export goods or

import investments.

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E. Ups & Downs

1. Phases – Business cycle

a. Expansion – Period of economic growth

b. Peak – height of economic expansion.

c. Contraction – period of economic decline

d. Trough – Lowest point in an economic contraction.

Page 8: Macroeconomics

2. Negative Parts of the Cycle

a. Recession – ½ year of declining GDP.

b. Depression – Recession that is especially long and severe.

c. Stagflation – Decline in real GDP combined with a rise in the price level.

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F. What can dramatically change GDP?

1. Investment.

2. Interest rates, credit.

3. Consumer expectations.

4. External shocks (bad weather & war).

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G. Historical Examples

1. Great depression –a. GDP falls over 10%

b. unemployment rate - over 20%.

2. 1970’sa. Greatest example of stagflation.

b. OPEC reduces supply, prices rise

c. Production slows due to end of Vietnam

Page 11: Macroeconomics

II. Unemployment

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A. Types

1. Frictional – When people take time off to find a job.

2. Seasonal – Industries slow

3. Structural – Workers’ skills do not match.

4. Cyclical –economic hard times

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B. Measuring

1. Unemployment rate = number of people unemployed divided by the labor force

2. National unemployment is for USA as a whole. Different from state to state.

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C. Full Employment

1. No cyclical unemployment.

2. Few people left for employers to hire.

3. Companies raise pay, pass on costs to customers = inflation.

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III. Inflation

A. Defined

1. General increase in prices. 2. Creeping – Slow inflation rate between

1 -3% annually.3. Chronic – Accelerated and hard on the

economy. Hard to predict.4. Hyperinflation – Inflation that rises

rapidly as high as 100-500% per month. Hyperinflation is equivalent with total economic collapse.

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B. Measuring

1. Price index – measured amount of price increases for a standard group of goods over a period of time.

2. Consumer price index is computed by the Bureau of Labor Statistics.

3. CPI = updated costs x 100

Base period cost

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C. Causes

1. Quantity – too much money in the economy causes prices to rise.

2. Demand-pull – When demands for goods and services exceeds supplies.

3. Cost-push – producers raise prices in order to pay increased costs.

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D. Effects

1. Purchasing power – as prices increase, your purchasing power decreases.

2. Fixed income recipients like those on social security, have less purchasing power when prices rise.

3. The amount of interest you receive from investments will be of less value.

Page 19: Macroeconomics

IV. Poverty

A. Measured1. Poverty Threshold – income below which is sufficient to

support a family or household.

2. varies among size of the household.

3. Poverty is higher for

a. African-Americans

b. Hispanics

c. Single mothers

d. Children

e. Inner cities

f. Isolated rural regions

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B. Causes1. Lack of Education – as you increase education, the

average income also increases.

2. Location – Inner city residents –less likely to own autos. Rural residents distant from everything.

3. Discrimination –

a. Europeans earn more than racial minority groups

b. Men earn more than women.

c. Discrimination is diminishing.

d. Programs like affirmative-action don’t close gap.

4. Economic Shifts –bad times hurt poor worse.

5. Family Structure - Two incomes are better than one..

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C. Income

1. Average income in the USA $37,000.

2. Income inequality is decided by…

a. Ranking the nation’s household incomes

b. Dividing them into quintiles

c. Average each quintile’s income

d. Then calculate their share of total income.

3. Uneven distribution is caused by lack of skills, education, and inheritances.

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D. Antipoverty

1. Enterprise zones – area of underdevelopment that businesses are lured to by tax breaks.

2. Government employment assistance: training, unemployment, and minimum wage.

3. Welfare: Begun by President Johnson, reformed by President Clinton.

a. Food Stamps

b. WIC

c. Cash assistance’

d. Heating.

e. Housing.

f. Welfare to work.