AP Macro Unit 2 Summary 2
AP Macro Unit 2 Summary 2
ECONOMICS
1
What is Macroeconomics?
Macroeconomics is the study of the large economy
as a whole. It is the study of the big picture.
• Instead of analyzing one consumer, we analyze everyone.
• Instead of one business we study all businesses.
3
For all countries there are three major
economic goals:
1. Promote Economic Growth
2. Limit Unemployment
3. Keep Prices Stable (Limit Inflation)
4
Goal #1
Promote Economic Growth
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*CIA 2007 Estimate
How can you measure growth from year to
year?
GDP = C + I + G + Xn 11
Calculating GDP
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Included or not Included in GDP?
For each situation, identify if it is included in
GDP the identify the category C, I, G, or Xn
1. $10.00 for movie tickets
2. $5M Increase in defense expenditures
3. $45 for used economics textbook
4. Ford makes new $2M factory
5. $20K Toyota made in Mexico
6. $10K Profit from selling stocks
7. $15K car made in US, sold in Canada
8. $10K Tuition to attend college
9. $120 Social Security payment to Bob
10.Farmer purchases new $100K tractor 13
Included or not Included in GDP?
GDP=$7,125,010
1. $10.00 for movie tickets
2. $5M Increase in defense expenditures
X $45 for used economics textbook
4. Ford makes new $2M factory
X $20K Toyota made in Mexico
X $10K Profit from selling stocks
7. $15K car made in US, sold in Canada
8. $10K Tuition to attend college
X $120 Social Security payment to Bob
10.Farmer purchases new $100K tractor 14
Nominal GDP vs.
Real GDP
15
How can you figure out which is the most popular movie of all time?
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How can you figure out which is the most popular movie of all time?
19
Real vs. Nominal GDP Example
2008 The GDP in year 20048 shows
10 cars at $15,000 each = $150,000 the dollar value of all final
10 trucks at $20,000 each = $200,000 goods produced.
Nominal GDP = $350,000
The nominal GDP in year 2009
is higher which suggests that
2009 the economy is improving.
10 cars at $16,000 each = $160,000
10 trucks at $21,000 each= $210,000 But how much is the REAL
Nominal GDP = $370,000 GDP? How do you get it?
21
Does GDP accurately measure
standard of living?
Standard of living (or quality of life) can be measured, in
part, by how well the economy is doing…
But it needs to be adjusted to reflect the size of the nation’s
population.
Real GDP per capita (per person)
• Real GDP per capita is real GDP divided by the total
population. It identifies on average how many products each
person makes.
Real GDP per capita is the best measure of a nation’s standard
of living.
22
List the top 5 most populated countries
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GDP Per Capita
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Why do some countries have higher GDPs than others?
Productivity (TECHN)
1. Technology
2. Economic System
Example#1: Capitalist countries have historically had more economic growth.
– Capital (like robots) can produce more than people
– Countries with more capital, can produce more products than countries without a lot of capital.
3. Capital
Ex: Capital stock is machinery, tools, and man-made resources.
Example#1: India has over a billion people (human resources) but relatively few capital resources and therefore a lower GDP than the
U.S.
Example#2: Japan has few natural resources but a high GDP
4. Human Capital (Knowledge)
5. Natural Resources
Ex: Syria has a lower GDP because it is mostly desert.
THE BUSINESS
CYCLE
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THE BUSINESS CYCLE
The national economy fluctuates resulting in periods of
boom and bust.
Inflation Unemployment
Full
employment
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What is Unemployment?
The Unemployment rate
The percent of people in the labor force who want a job
but are not working.
Unemployment # unemployed
rate = # in labor force x 100
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3 Types of Unemployment
#1. Frictional Unemployment
•“Temporarily unemployed” or being between
jobs.
•Individuals are qualified workers with
transferable skills but they aren’t working.
Examples:
•High school or college graduates looking for
jobs.
•Individuals that were fired and are looking
for a better job. You’re
Fired!
35
3 Types of Unemployment
Seasonal Unemployment
•This is a specific type of frictional
unemployment which is due to time of year
and the nature of the job.
•These jobs will come back
Examples:
•Professional Santa Clause Impersonators
•Construction workers in Michigan
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3 Types of Unemployment
#2. Structural Unemployment
• Changes in the structure of the labor force
make some skills obsolete.
• Workers DO NOT have transferable skills and
these jobs will never come back.
• Workers must learn new skills to get a job.
• The permanent loss of these jobs is called
“creative destruction.” (Why?)
Examples:
• VCR repairmen
• Carriage makers
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3 Types of Unemployment
Technological Unemployment
•Type of structural unemployment where
automation and machinery replace
workers causing unemployment
Examples:
•Auto assemblers fired as robots take over
production
• Producers of Capital Goods (tractors)
fire assemblers
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3 Types of Unemployment
#3 Cyclical Unemployment
• Unemployment that results from economic
downturns (recessions).
• As demand for goods and services falls,
demand for labor falls and workers are fired.
Examples:
• Steel workers laid off during recessions.
• Restaurant owners fire waiters after months
of poor sales due to recession.
This
sucks!
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The Natural Rate an Full Employment
Two of the of the three types of unemployment
are unavoidable:
•Frictional unemployment
•Structural unemployment
•Together they make up the natural rate of
unemployment (NRU).
We are at full employment if we have only
the natural rate of unemployment.
•This is the normal amount of unemployment
that we SHOULD have.
•The number of jobs seekers equals the
number of jobs vacancies.
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The Natural Rate an Full Employment
In other words…
Full employment means NO Cyclical
unemployment!
Economists generally agree that an
unemployment rate of around 4 to 6
percent is normal.
4-6% Unemployment = Full Employment
Currently the U.S. is at _______%
California is at ______%
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Criticisms of the Unemployment Rate
What is wrong with the unemployment rate?
It can misdiagnose the actual unemployment rate
because of the following:
Disgruntled job seekers-
• Some people are no longer looking for a job
because they have given up.
Part-Time Workers-
• Someone who wants more shifts but can’t get
them is still considered employed.
Race/Age Inequalities-
• Hispanics – 5.8% for January
• African American- 8.9% for January
• Teenagers- 15.3% for January
Illegal Labor-
• Many people work under the table. 42
Goal #3
LIMIT INFLATION
Country and Time-
Zimbabwe, 2008
Annual Inflation Rate-
79,600,000,000%
Time for Prices to Double-
24.7 hours
What is Inflation?
Inflation is rising general level
of prices
Inflation reduces the
“purchasing power” of
money
Examples:
• It takes $2 to buy what $1
bought in 1982
• It takes $6 to buy what $1
bought in 1961
•When inflation occurs, each
dollar of income will buy
fewer goods than before.
How is Inflation measured?
The government tracks the prices of the same goods and
services each year.
• This “market basket” is made up of about 300
commonly purchased goods
• The Inflation Rate-% change in prices in 1 year
• They also compare changes in prices to a given base
year (usually 1982)
• Prices of subsequent years are then expressed as a
percentage of the base year
• Examples:
• 2005 inflation rate was 3.4%
• U.S. prices have increase 98.3% since 1982 (base year).
• The inflation rate in Bolivia in 1985 was 50,000%
•This is called Hyperinflation
•A $25 meal today would cost $12,525 a year later
World Inflation Rates
Is Inflation Good or Bad?
Identify which people are helped and
which are hurt by unanticipated
inflation?
1. A man who lent out $500 to his friend in 1960 and
is still waiting to be paid back.
2. A tenant who is charged $850 rent each year.
3. An elderly couple living off fixed retirement
payments of $2000 a month
4. A man that borrowed $1,000 in 1995 and paid it
back in 2006
5. A women who saved a paycheck from 1950 by
putting it under her mattress
Make a T-Chart
Hurt by Inflation Helped by Inflation
• Lenders-People who • Debtors-People who
lend money (at fixed borrow money
interest rates) • A business where the
• People with fixed price of the product
incomes increases faster than
• Savers the price of
resources
Cost-of-Living-Adjustment (COLA)
Some works have salaries that mirror inflation.
They negotiated wages that rise with inflation
Measuring Inflation
Consumer Price Index (CPI)
Consumer Price Index (CPI)
The most commonly used measurement inflation for
consumers is the Consumer Price Index
Here is how it works:
• The base year is given an index of 100
• To compare, each year is given an index # as well
Inflation Rate
% Change
in Prices = Year 2 - Year 1
Year 1
X 100
Calculating GDP Deflator
Nominal GDP
GDP
Deflator = Real GDP
x 100
Examples:
• Bolivia, Peru, Brazil
• Germany after WWI
What would happen if the government decided to
pay off the $13 Trillion national debt all at once?
3 Causes of Inflation
2. DEMAND-PULL INFLATION
“Too many dollars chasing too few goods”
DEMAND PULLS UP PRICES!!!
• Demand increases but supply stays the
same. What is the result?
• A Shortage driving prices up
• An overheated economy with excessive
spending but same amount of goods.
3 Causes of Inflation
3. COST-PUSH INFLATION
Higher production costs increase prices
A negative supply shock increases the costs of
production and forces producers to increase
prices.
Examples:
• Hurricane Katrina destroyed oil refineries and
causes gas prices to go up. Companies that use
gas increase their prices.
Cost-Push Inflation
The Wage-Price Spiral
A Perpetual Process:
1.Workers demand raises
2.Owners increase prices to
pay for raises
3. High prices cause workers
to demand higher raises
4. Owners increase prices to
pay for higher raises
5. High prices cause workers
to demand higher raises
6. Owners increase prices to
pay for higher raises