MACRO
ECONOMICS
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Sing Along!
The study of the…
whole economy…
Is...called..MA-CRO
MA–CRO
MACRO is the name-o!
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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.
Why study the whole economy?
• The field of macroeconomics was born during
the Great Depression.
• Government didn’t understand how to fix a
depressed economy with 25% unemployment.
• Macro was created to:
1. Measure the health of the whole economy.
2. Guide government policies to fix problems.
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Unit 2:
Macro Measures
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For all countries there are three major
economic goals:
1. Promote Economic Growth
2. Limit Unemployment
3. Keep Prices Stable (Limit Inflation)
In this unit we will analyze how each
of these are measured.
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Goal #1
Promote Economic Growth
How does a country measure
economic growth?
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How do we know how well the economy is doing?
• Economists collect statistics on production, income,
investment, and savings.
• This is called national income accounting.
The most important measure of growth is GDP.
Gross Domestic Product (GDP) is the dollar value of all
final goods and services produced within a country’s
borders in one year.
• Dollar value- GDP is measured in dollars.
• Final Goods-GDP does not include the value of
intermediate goods.
• One Year-GDP measures annual economic
performance.
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What does GDP tell us?
Just like calculating your own income, GDP measures
how well the U.S. is doing financially.
How do you use GDP?
1. Compare to previous years (Is there growth?)
2. Compare policy changes (Did a new policy work?)
3. Compare to other countries (Are we better off?)
Which 15 countries have
the highest GDP?
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GDP by Country
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*CIA Factbook 2013 Estimate
GDP by Country
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*CIA Factbook 2013 Estimate
World GDP Distribution
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How can you measure growth from
year to year?
% Change
in GDP
=
Year 2 - Year 1
Year 1
X 100
Mordor’s GDP in 2014 was $4000
Mordor’s GDP in 2015 was $5000
What is the % Change in GDP?
Transylvania’s GDP in 2014 was $2,000
Transylvania’s GDP in 2015 was $2,100
What is the % Change in GDP?
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GDP Growth by Country
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*CIA Factbook 2013 Estimate
Does GDP accurately measure
standard of living?
Standard of living 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.
GDP Per Capita (per person)
GDP divided by the population. It identifies on
average how many products each person makes.
GDP per capita is the best measure of
a nation’s standard of living.
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What are the top 10 most populated countries?
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GDP Per Capita
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Why do some countries have higher GDPs than others?
Productivity
1. Economic System
Example#1: Capitalist countries have historically had more
economic growth.
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Capital (like robots) can produce more than people
Countries with more capital, can produce more products than countries
without a lot of capital.
2. Property Rights
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.
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What is NOT included in GDP?
1. Intermediate Goods
• Goods inside the final goods don’t count.
• EX: Price of finished car, not the stock
radio or tires.
2. Nonproduction Transactions
•Financial Transactions (nothing produced)
•Ex: Stocks, bonds, Real estate
•Used Goods
•Ex: Old cars, used clothes
3. Non-Market and Illegal Activities
• Things made at home- household production
•Ex: Unpaid work, black markets, drugs
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Calculating GDP
Two Ways of calculating GDP:
1. Expenditures Approach -Add up all the
spending on final goods and services
produced in a given year.
2. Income Approach -Add up all the income
that resulted from selling all final goods and
services produced in a given year.
Adding up how much was spent on goods and
services and how much income was earned
should generate the same number
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Expenditures Approach
Four components of GDP:
1. Consumer Spending- 70% of U.S. GDP
Purchases of final goods by private individuals.
Ex: $5 Sandwich at Subway
2. Investment- 15% of U.S. GDP
Businesses spending tools and equipment.
Ex: Walmart buys self checkout machines
3. Government Spending- 20% of U.S. GDP
Ex: School, tanks, but NOT transfer payments
4. Net Exports- Exports (X) – Imports (M)
Ex: Value of 3 Ford Focuses minus 2 Hondas
GDP = C + I + G + Xn
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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 and sold 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
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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 and sold 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
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2008 Audit Exam
2008 Audit Exam
2007 FRQ
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2007 FRQ
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Income Approach
The income approach adds up all the income
earned from producing goods and services
1. Labor Income - Purchases of final goods by
private individuals. Ex: $5 Sandwich at Subway
2. Rental Income - Income earned from
property owned by individuals
3. Interest Income- Interest earned from
loaning money to businesses
4. Profit - Money businesses have after paying all
their costs
These are called FACTOR PAYMENTS. Labor
earns wages, land earns rent, capital earns
interest, and entrepreneurship earns profit.
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What are some problems with using GDP to
measure the nation’s standard of living?
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Video:
Robert Kennedy GDP Speech
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Nominal GDP vs.
Real GDP
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How can you figure out which is the most popular
movie of all time?
What is the problem with this method?
Nominal Box Office Receipts
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How can you figure out which is the most popular
movie of all time?
REAL Box Office Receipts (adjusted for inflation)
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The Problem with GDP
If a country’s GDP increased from $4 Billion to $5
Billion in one year, is the country experiencing
economic growth?
Did the country definitely produce 25% more
products?
What is Inflation?
• A rising general level of prices
EX: If apples are the only thing being produced
Year 1: 10 apples at $1 each; GDP = $10
Year 2: 10 apples x $1.25; GDP = $12.50
GDP is rising, but country is worse off!
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Real vs. Nominal GDP
Nominal GDP is GDP measured in current
prices. It does not account for inflation from
year to year.
Real GDP is GDP expressed in constant, or
unchanging, dollars. Real GDP adjusts for
inflation.
REAL GDP IS THE BEST MEASURE
OF ECONOMIC GROWTH!
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Real vs. Nominal GDP Example
2008
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each = $200,000
Nominal GDP = $350,000
2009
10 cars at $16,000 each = $160,000
10 trucks at $21,000 each= $210,000
Nominal GDP = $370,000
2009
10 cars at $15,000 each = $150,000
10 trucks at $20,000 each= $200,000
REAL GDP = $350,000
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The GDP in year 2008 shows
the dollar value of all final
goods produced.
The nominal GDP in year 2009
is higher which suggests that
the economy is improving.
But how much is the REAL
GDP? How do you get it?
Use 2008 Prices.
The Real GDP for 2009 is the
same as 2008 after we adjust
for inflation.
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Real GDP “deflates” nominal GDP by adjusting for
inflation in terms of a base year prices.
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20012 Exam
Econmovies
Episode 5: Cars
The Business
Cycle
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The Business Cycle
The national economy goes up and down like a roller
coaster over time
Real
GDP
Inflation
Unemployment
Peak
Real GDP
Trough
Full
Employment
Recession
(Contraction)
Recovery
(Expansion)
Time
A recession is 6 month period of decline in Real GDP.
(If really bad…then depression)
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THE BUSINESS CYCLE
Why does the economy fluctuate?
•Retailer and Producers send misleading
information about consumer demand
•Advances in tech, productivity, or resources
•Outside influences (wars, supply shocks, panic)
Who cares?
•Macroeconomics measures these fluctuations and
guides policies to keep the economy stable.
•The government has the responsibility to:
• Promote long-term growth
• Prevent unemployment (Resulting from a Bust)
• Prevent inflation (Resulting form a Boom)
Connection to PPC
The same information shown on the business
cycle can be shown on a production
possibilities curve.
1. Full employment
2. Unemployment
3. Inflation
The shifters of the PPC affect GDP
1. Change in quantity/quality of resources
2. Changes in technology
3. Changes in trade
What is Economic Growth?
1. An increase in real GDP over time
2. An increase in real GDP per capita over
time (usually used to determine standard of
living)
Why is economic growth the goal of every
society?
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Provides better goods and services
Increases wages and standard of living
Allows more leisure time
Economy can better meet wants
1. Define Macroeconomics
2. What are the 3 economic goals that all
countries have
3. Identify the 3 key parts of the definition of
GDP
4. How do we use GDP
5. Identify w hat is NOT included in GDP
6. List the 4 components of GDP
7. Define Inflation
8. Explain the difference between Nominal and
Real GDP
9. Explain Real GDP per Capita
10.Name 10 Disney Movies
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