12.1 – measuring the nation’s output and income

  • Macroeconomics – part of economics that deals with the economy as a whole and uses aggregate measures of output, income, prices, and employment
  • Gross Domestic Product is one of the most important macro measures that keep track of nation’s production, consumption, saving, and investment.

GDP – The measure of national output

  • Gross domestic product (GDP) – the dollar value of all final goods, services, and structures produced within a country’s national borders during a one-year period, measure of final output
  • To calculate the GDP, you multiply the good/service produced in a year by their prices, then adds them up to get the total dollar value of production
  • Intermediate products – products that are components of other final products included in GDP
  • Secondhand sales – sales of used goods not included in GDP
  • Nonmarket transaction – economic activity not taking place in the market and, therefore, not included in GDP
  • Underground economy – unreported legal and illegal activities that do not show up in GDP statistics
  • GDP must be adjusted for inflation using base year
  • Base year – year serving as point of comparison for other years in a price index or other statistical measure
  • Real GDP – gross domestic product after adjustments for inflation
  • Current GDP – gross domestic product measured in current prices, unadjusted for inflation
  • Adjust GDP for population by GDP per capita
  • GDP per capita – gross domestic product on a per person basis; can be expressed in current or constant dollars
  • Limitation of GDP
    • GDP tells us nothing about the composition of output
    • GDP tells little about the impact of production on the quality of life
    • GDP is produced to control activities that give us little utility or satisfaction, thus making GDP even larger
  • GDP is our best measure of overall economic performance and well-being, because it is a measure of the voluntary transactions that take place in the market.

Economic sectors and circular flows

  • Largest sector in the economy is the household – basic unit of consumer sector consisting of all person who occupy a house, apartment, or separate living quarters
  • Unrelated individual – person living alone even though that person may have relatives living elsewhere
  • Family – two or more persons living together who are related by blood, marriage, or adoption
  • Second largest sector of macro economy is the business, or investment; consist of proprietorships, partnerships, and corporations that are responsible for producing the nation’s output
  • The third sector is public sector, which includes all local, state, and federal levels of government.
  • Forth sector is the foreign sector, which includes all consumers and producers outside of US.

The output expenditure model

  • Output expenditure model – macroeconomic model describing aggregate demand by the consumer, investment, government, and foreign sectors
  • GDP = consumer + investment + government + (X – M)
  • (X-M) or net exports of goods and services – net expenditures by the foreign sector; equal to total exports less total imports

Chapter 13 – Economic instability

7B – section 1 – business cycles and fluctuations

  • Business cycles – regular increases and decreases in real GDP
  • Business fluctuations – irregular increases and decreases in real GDP

Business cycles and characteristics and causes

  • The two phrases of business cycle are recession and expansion
  • Recession – decline in real GDP lasting at least two quarters
  • Peak – point in time when real GDP stops expanding and begins to decline
  • Trough – point in time when real GDP stops declining and begins to expand
  • Expansion – period of interrupted growth of real GDP
  • Trend line – growth path the economy would follow if it were not interrupted by alternating periods of recession and recovery
  • Depression – state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship
  • Changes in capital expenditures are thought to be one cause of business cycle
  • Innovation may be a cause also; competitions
  • Another possible cause is Federal Reserve system’s policy on interest rates; low interest increase demand for loans
  • External shocks such as oil prices, wars, and international conflicts

Forecasting business cycles

  • Change in single statistics often indicates a change in GDP
  • Leading economic indicator – statistical series that turns down before the economy turns down, or up before the economy turns up
  • Several individual series of indicators are more accurate, often combined into an overall index
  • Composite index of leading economic indicators (LEI) – composite index of 10 economic series that move up and down in advance of changes in the overall economy; statistical series used to predict turning points in the business cycle
  • Econometric model – mathematical expression used to describe how the economy is expected to perform in the future
  • GDP = C + I + G + (X – M)

13.2 – inflation

  • Inflation – increase in the general level of prices of goods and services
  • Deflation – decrease in the general level of prices for goods and services

Measuring prices and inflation

  • Price index – statistical series used to measure changes in the price level over time
  • Consumer price index (CPI) – series used to measure price changes for a representative sample of frequently used consumer items
  • Market basket – representative selections of goods and services used to compile a price index
  • Find the average price of each item in the market basket, then add up the prices to find the total cost of the market basket
  • Base year – year serving as point of comparison for other years in a price index or other statistical measure
  • Dividing the cost of every market basket by the base year market basket cost in order to convert it to index value
  • Percentage change is found by dividing the change in the CPI by the beginning value of the CPI.
  • Rate of inflation t4nds to change over long periods of time
  • Creeping inflation – relatively low rate of inflation, usually 1 to 3 percent annually
  • Hyperinflation – inflation in excess of 500 percent per year
  • Usually the last stage before a total monetary collapse
  • Stagflation – period of slow economic growth coupled with inflation
  • Producer price index (PPI) – index used to measure prices received by domestic producers
  • Implicit GDP price deflator – index used to measure price changes in GDP
  • But CPI remains to be the most popular

Causes of inflation

  • Demand pull inflation – explanation that prices rise because all sectors of the economy try to buy more goods and services than the economy can produce
  • Prices are pulled up by demand, and consumers continue to purchase these items, leaving them in debt
  • Cost push inflation – explanation that rising input costs, especially energy and organized labor, derive up the prices of products
  • It may occur when there is an increase in oil prices
  • Wage price spiral is the idea that workers ask for higher wages due to the high prices, producers try to recover these lost by raising their prices
  • Excessive monetary growth is another explanation. Occurs when money supply grows faster than real GDP

Consequences of inflation

  • The devalue of dollar and erode purchasing power
  • Change people’s spending habits
  • Tempts some people to speculate heavily in an attempt to take advantage of rising prices
  • Alter the distribution of income
  • Creditors – person or institution to whom money is owed
  • Debtors – person who borrows and therefore owes money

7C – 13.3 – unemployment

Measuring unemployment

  • Civilian labor force or labor force – non institutionalized part of the population aged 16 and over, either working or looking for a job
  • unemployed – working for less than one hour per week for pay or profit in a non family owned business, while being available and having made an effort to find a job during the past month
  • unemployment rate – percentage of people in the civilian labor force who are classified as unemployed
  • number of unemployed persons/ civilian labor force
  • unemployment rates are underestimated
    • does not count those too frustrated or discouraged
    • considered employed even when they only hold part time jobs

sources of unemployment

  • frictional unemployment – unemployment involving workers changing jobs or waiting to go to new ones
  • structural unemployment – unemployment caused by a fundamental change in the economy that reduces the demand for some workers
  • outsourcing – hiring outside firms to perform non-core operations to lower operating costs
  • technological unemployment – unemployment caused by technological developments or automation that makes some workers’ skills obsolete
  • cyclical unemployment – unemployment directly related to swings in the business cycle
  • seasonal unemployment – unemployment caused by annual changes in the weather or other conditions that reduce the demand for jobs

costs of instability

  • economic instability carries enormous costs and can be measured
  • GDP gap – difference between what the economy can and does produce
  • Misery index or discomfort index – unofficial statistic that is the sum of the monthly inflation and unemployment rates
  • When its unstable, there is a factor of uncertainty
  • Politicians are also affected
  • Higher crime rates

14.3 – conducting monetary policy

  • Monetary policy – actions by the federal reserve system to expand or contract the money supply in order to affect the cost and availability of credit
  • Interest rate – the price of credit to a borrower
  • Easy money policy – monetary policy that results in lower interest rates and greater access to credit
  • Tight money policy 0 monetary policy that results in higher interest rates and restricted access to credit
  • For reserve requirements that congress passed, the Fed can change it around within border
  • Total MBRs/reserve requirements
  • Open market operations – sales or purchases of US government securities by the Fed

15.1 – 7d – Macroeconomic equilibrium

  • Macroeconomics – part of economics that deals with the economy as a whole

Aggregate supply and demand

  • Equilibrium price – price where quantity supplied equals quantity demanded
  • Aggregated supply – the total value of all goods and services that all firms would produce in a specific period at various price levels
  • Aggregate supply curve – hypothetical curve showing different levels of real GDP that would be produced at various price levels
  • Price level includes price of everything produced
  • Increases in aggregate supply are tied to the cost of production for an individual firm
  • Factors such as higher oil prices, higher interest rates, and lower labor productivity contributes
  • Aggregate demand – the total value of goods and services demanded at all different price levels
  • Aggregate demand curve – hypothetical curve showing different levels of real GDP that would be purchased at various price levels
  • Aggregate demand is affected by how much people decides to save compare to spend

Macroeconomic equilibrium

  • Aggregate supply and demand provide a framework to help us analyze the impact of economic policy on economic growth and price stability
  • Macroeconomic equilibrium – level of real GDP consistent with a given price level and marked by the intersection of aggregate supply and aggregate demand

15.2 – stabilization policies

  • Medicare – federal health care program for senior citizens regardless of income

Demand side policies

  • Designed to increase or decrease total demand in the economy
  • Fiscal policy – use of government spending and revenue collection measures to influence the economy
  • Keynesian economics – government spending and taxation policies suggested by john Maynard Keynes to stimulate the economy
  • Consumer sector among the equation is the most stable, and investment spending would be the least stable
  • Multiplier – magnified change in overall spending caused by a change in investment spending
  • Accelerator – change in investment spending caused by a change in overall spending
  • Temporary federal deficits can recover economy to its stable state.
  • Automatic stabilizers – program that automatically provides benefits to offset a change in people’s incomes
  • Entitlements – broad social programs that uses established eligibility requirements to provide health, nutritional, or income supplements to individuals
  • Unemployment insurance – government program providing payments to unemployed workers
  • Stabilizers are more effective due to the speed they can be implemented

Supply side policies

  • Supply side policies – economic policies designed to stimulate the economy by increasing production
  • Supply siders is reducing government’s role in the economy by
    • Reducing government agencies
    • Sped less at federal level
  • Goal of supply side policies and demand side policies have the same goal: increasing production and decreasing unemployment without increasing inflation
  • Deregulation – relation or removal of government regulations on business activities
  • Lower tax rates allow individuals to keep more of the money they earn, which encourages them to work harder
  • Limitation of supply side policies is lack of experience

Monetary policies

  • Monetarism – school of thought stressing the importance of stable monetary growth to control inflation and stimulate long term economic growth
  • Fluctuations in the money supply can be destabilizing element that leads to unemployment and inflation
  • Monetary policy in which the money supply is tightened is called a contractionary monetary policy
  • It changes the interest rate, which changes the GDP
  • Expansionary monetary policy with larger money supply, over longer period of time, can lower interest rates
  • Can act as inflation control
  • Wage price controls – policies and regulations making it illegal for firms to give raises or raise prices without government permission

15.3 – economics and politics

Changing nature of economic policy

  • Discretionary fiscal policy is policy that someone must choose ito implement
  • Passive fiscal policies do not require new or special action to go into effect
  • Structural fiscal policies are policies designed to strengthen the economy over a longer period of time
  • Less used today because
    • Various lags that inevitably occur between recognizing that there is a problem and actually doing something about it
    • Decline of discretionary fiscal policy is the gridlock that can occur when the political parties in congress oppose each other’s views on the budget
    • Ideology
  • Monetary policy – actions by the federal reserve system to expand or contract the money supply in order to affect the cost and availability of credit
author avatar
William Anderson (Schoolworkhelper Editorial Team)
William completed his Bachelor of Science and Master of Arts in 2013. He current serves as a lecturer, tutor and freelance writer. In his spare time, he enjoys reading, walking his dog and parasailing. Article last reviewed: 2022 | St. Rosemary Institution © 2010-2024 | Creative Commons 4.0

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