Domain Focus SSEMA1 The student will illustrate the means by which economic activity is measured.
Domain Focus SSEMA2 The student will explain the role and functions of the Federal Reserve System.
Domain Focus SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth.
Where to Begin? Unemployment The Federal Reserve GDP Government Spending Inflation Taxation Recession Federal Debt Depression Federal Deficit Georgia Council on Economic Education w w w . g c e e . o r g
SSEMA1 The student will illustrate the means by which economic activity is measured. a. Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports. b. Define Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand. c. Explain how economic growth, inflation, and unemployment are calculated. d. Identify structural, cyclical, and frictional unemployment. e. Define the stages of the business cycle, as well as recession and depression. f. Describe the difference between the national debt and government deficits.
How is economic activity measured? • Gross Domestic Product (the main measure) • Sometimes other measures are useful • GDP is used to derive many of them. • Gross National Product • Net National Product • National Income • Personal Income • Disposable Personal Income
Gross Domestic Product Gross= total Domestic= produced anywhere in the 50 states, by anyone Product= final goods and services
What does GDP measure? Total amount of final goods and services produced in a country in one year. (Measure of Output)
What is counted in GDP? FINAL goods and services Goods/Services produced here, even if by a foreign co.
What is NOT counted? Things produced outside the country. Illegal stuff Purely financial transactions Pay a broker – broker part counts Stock itself doesn’t count
Gross Domestic Product • Dollar value of all final goods and services produced within a country’s borders in a year. • Dollar value = the total of the selling prices • Final goods and services = products in the form sold to consumers, not in any intermediate form • Within the country’s borders = made in the USA even if made by a foreign-owned company • In a year = in one calendar year • Does not include things made by American companies outside our borders.
Are there any cool formulas you can give us relating to this interesting concept? GDP=C+I+G+(X-M)
C= consumption spending (think consumers) 72% I= investment spending (think businesses investing in themselves) 15% G= government spending 17% (X-M)= difference between exports and imports -4%
Expenditure Approach GDP=C+I+G+(X-M)
How is GDP calculated? • 1) Expenditure approach • Estimate what is spent in a year on 4 categories of final goods and services (consumer, business, government and net imports or exports) then add all 4 together to get total expenditures for one year. • Total is GDP • Practical, but not as accurate as the income approach.
How is GDP measured? • 2) Income approach • Add up all the incomes in the economy. • Ex: a firm sells a product, the selling price is income for the firm, the owners, the employees… • ECONOMISTS USE BOTH APPROACHES AND COMPARE THEM. • THEY ADJUST FOR MISTAKES. • COMPARISON GIVES BETTER RESULTS.
Problems associated with GDP Slow to calculate Does not count everything (it’s an estimate) Inflation can distort the figure Real vs. Nominal
Real and Nominal GDP • Nominal GDP is measured in current year’s prices. • Real GDP is measured in constant or unchanging prices (more accurate). • Inflation distorts • 10 oranges @ $1 = $10 • 10 oranges @ 3 = $30 • Is our economy better? • NO – inflated!!
Per Capita GDP • GDP divided by country’s population • How much is being produced per person (potentially)? • Quality of life? • How many doctors in Yemen? Afghanistan? • More in Bibb County than some countries. • What does that mean?
Per Capita GDP GDP divided by a country’s population
Factors Influencing GDP • Supply and demand affect GDP • Economists calculate price levels , the average of all prices, to determine aggregate supply (the total amount of goods and services in the economy available at all possible price levels). • Aggregate demand (the amount of goods and services in the economy that will be purchased at all possible price levels) • Intersection of aggregate supply and demand indicate equilibrium price level of the economy.
Aggregate Demand and Aggregate Supply • What is different about these graphs? • What do they look like? • What causes them to shift?
Aggregate Demand • AD = total amount of goods and services that all of the people in the economy are wiling to buy. • Slopes downward • When prices are low, people will buy more, increasing the nation’s real GDP. • When prices are high, people will buy less, decreasing the nation’s real GDP.
Aggregate Supply • AS = total amount of goods and services that all producers in an economy are willing and able to make. • Curves are more complicated than those for individual markets. • Individual markets can adjust quickly to changes in demand by lowering prices. • Takes longer for the average price of ALL goods and services produced in an economy to change. • ECONOMISTS USE TWO CURVES TO SHOW AS CHANGES: short-run and long-run.
SHORT-RUN AGGREGATE SUPPLY CURVE • Slopes upward (like the supply curves we did in micro) • Producers make slightly more goods as prices increase and slightly less as prices decrease. (slopes gently upward)
LONG-RUN AGGREGATE SUPPLY CURVE • Supply is pretty constant because in the long-run, the total amount that any economy can produce (the real GDP) remains fairly constant, because real GDP is limited by its resources. • Line is a straight vertical line.
Demonstration Lesson Aggregate Demand and Aggregate Supply Lesson
Business Cycle GDP
What is a business cycle? • A period of economic expansion followed by a period of contraction. • Major changes in GDP above or below normal levels. • Four phases: • Expansion • Peak • Contraction • trough
Phases of the Business Cycle • Peak = height of expansion, GDP stops rising. • Contraction = economic decline, falling real GDP, unemployment, fall in business activity. • Trough – lowest point in contraction, real GDP stops falling. • Expansion – growth, rise in real GDP, increased employment and income.
Leading Economic Indicators (point to what will happen in the economy) • Help economists predict new phase. • Stock market – downward slope before recession. • Interest rates – low rates signal investment and expansion. High rates signal a slow down in buying, contraction. • Manufacturers’ new orders of capital goods – show expansion or contraction. • New home sales
Other Leading Indicators • Average weekly hours for workers in manufacturing jobs • Weekly claims for unemployment insurance • New orders for consumer goods • Speed with which companies make deliveries (the busier the company, the longer it takes to fill orders) • Number of contracts and orders for plants and equipment. • Number of building permits • Changes in money supply in circulation • Changes in consumer expectations
Indicators • Coincident indicators – change at same time as business cycle (rate of production, sales, number of nonagricultural workers employed, etc.) • Lagging indicators – lag behind changes – give clues as to what the cycle is doing (avg. length of unemployment, size of inventories, labor cost/unit, changes in price index, etc.) • US DEPT. OF COMMERCE compiles statistics for 78 economic indicators covering all aspects of the economy.
Other terms associated with business cycles • Economic growth – period of steady, long term increase in real GDP. • Recession – prolonged economic contraction. Real GDP falls for two consecutive quarters (6 months) • Depression – recession that is especially long and severe. • Stagflation – decline in GDP combined with a rise in price level.
Business Cycles are affected by four main factors • Business investment – when the economy is expanding, firms are investing in new plants and equipment, or in old ones to improve production. GDP is increasing. • Interest rates – when they are low, businesses expand and invest – GDP increases. When they are high, businesses slow down and GDP falls. • Consumer expectations – when the economy looks good, we spend more. When it looks bad, we spend less. • External shocks that are unexpected – disruption in oil supply, wars, natural disasters, etc. These things influence our output. Can be a good shock like a new discovery of oil – boost the economy.
Activity • Students should draw the business cycle and label each part, including a brief description of each phase in own words.
Types of Unemployment Structural Cyclical Frictional
UNEMPLOYMENT • Types of unemployment • Frictional – when people change jobs or get laid off (between jobs, left one to take another) • Structural – when the skills of workers do not match the jobs that are available (big change in economy, change in the business, like a merger, or a closure.) • Seasonal – when a period of steady work is followed by a period of unemployment each year. Takes place every year, regardless of the economy. • Cyclical – when unemployment rises during economic downturns and falls when the economy improves (recession – people put off buying cars, etc. so people lose jobs). Can last 3-5 years.
What is “unemployed”? • People available for work who made a specific effort to find work in the past month and who during the most recent survey week, worked less than one hour for pay or profit. • Also people who worked in a family business without pay for less than 15 hours a week.
How is unemployment measured? • It’s an important indicator of the health of the economy. • Bureau of Labor statistics polls sample of population to determine how many are employed and unemployed. • Unemployment rate is the percentage of nation’s labor force that is unemployed. • It is only a national average – it’s doesn’t reflect regional trends.