Tuesday, October 27, 2009
Monday, September 7, 2009
Tuesday, May 26, 2009
Summer Assignment Discussion
Hey Guys,
Here is where you will post your summer assignment discussion responses. Occasionally I will post questions to get you thinking. Please reply to this post in the comments section.
-Halsey
P.S. Don't forget to leave your full name in your comment so I can give you credit!
Here is where you will post your summer assignment discussion responses. Occasionally I will post questions to get you thinking. Please reply to this post in the comments section.
-Halsey
P.S. Don't forget to leave your full name in your comment so I can give you credit!
Wednesday, May 6, 2009
Facebook Review
Visit these facebook groups for a great review featuring students and teachers across the country. One is for the macro test and one is for the micro test.
http://www.facebook.com/event.php?eid=90215276873
http://www.facebook.com/event.php?eid=74105360422
http://www.facebook.com/event.php?eid=90215276873
http://www.facebook.com/event.php?eid=74105360422
Tuesday, April 28, 2009
Monday, April 27, 2009
Tuesday, March 31, 2009
Unit 5 Key Ideas
Unit 5: Monetary and Fiscal Combinations: Economic Policy in the Real World
* Macroeconomic policy involved combinations of fiscal and monetary policies.
* The interactions between monetary and fiscal policies can affect overall aggregate demand. For example, a tight monetary policy combined with an expansionary fiscal policy can cause “crowding out.”
* “Crowding out” is the effect of a rise in interest rates caused by increased borrowing by the federal government. The higher interest rates “crowd out” business and consumer borrowing.
* A Phillips curve illustrates the inflation unemployment tradeoff and how this tradeoff may differ in the short and long run.
* Both monetary and fiscal policies are primarily aggregate demand policies, but not all of the macroeconomic problems in the economy are aggregate demand problems.
* If factors other than excess aggregate demand are contributing to inflation, it is difficult for monetary and fiscal policies to deal with them.
* Economic growth is concerned with increasing an economy’s total productive capacity at full employment or its natural rate of output. This output is represented by a vertical long-run aggregate supply curve.
* Economic growth is usually measured by changes in real GDP or by changes in real GDP per capita.
* Economic growth can be shown graphically as a rightward shift of a nation’s long-run aggregate supply curve or a rightward shift of its production possibilities curve.
* The Keynesian model is based on the belief that fiscal policy works through aggregate demand. Government fights unemployment by increasing aggregate demand and fights inflation by decreasing aggregate demand. Monetary policy works through interest rates and investment and also affects aggregate demand.
* The rate of economic growth is affected by a variety of aggregate supply and demand factors.
* The classical model represents an idealized version of a private-enterprise economy in the long run. In terms of aggregate demand and supply, the classical model is characterized by a vertical aggregate supply schedule, which is a function of tastes, technology, society’s resource base, and the distribution of economic resources, and an aggregate demand schedule that is a function of real money balances. Supply-side factors determine real output and employment. Aggregate demand and supply together determine the price level.
* The monetarist model, which is closely related to the classical model, focuses on the importance of changes in money supply on the economy. The monetarists’ basic analytical device is MV=PQ. Monetarists favor a monetary rule calling for a constant rate of change in the money supply that coincides with changes in real GDP.
* The rational expectations model, which is also closely related to the classical model, maintains that economic agents are intelligent decision makers and can be expected to take the effects of government policy changes into account in deciding their behavior. Because agents anticipate changes in policies, these policies will have no effect on read GDP.
* Supply-side economics emphasizes factors that cause the aggregate supply curve to shift. Supply-side economists argue that the inflation and stagflation are caused largely by decreases in aggregate supply-not by changes in aggregate demand. They recommend microeconomic solutions such as improved productivity and less government regulation.
* Different economic theories are only one reason why economists disagree; other reasons are disputes about time periods, different assumptions, and different values.
* Macroeconomic policy involved combinations of fiscal and monetary policies.
* The interactions between monetary and fiscal policies can affect overall aggregate demand. For example, a tight monetary policy combined with an expansionary fiscal policy can cause “crowding out.”
* “Crowding out” is the effect of a rise in interest rates caused by increased borrowing by the federal government. The higher interest rates “crowd out” business and consumer borrowing.
* A Phillips curve illustrates the inflation unemployment tradeoff and how this tradeoff may differ in the short and long run.
* Both monetary and fiscal policies are primarily aggregate demand policies, but not all of the macroeconomic problems in the economy are aggregate demand problems.
* If factors other than excess aggregate demand are contributing to inflation, it is difficult for monetary and fiscal policies to deal with them.
* Economic growth is concerned with increasing an economy’s total productive capacity at full employment or its natural rate of output. This output is represented by a vertical long-run aggregate supply curve.
* Economic growth is usually measured by changes in real GDP or by changes in real GDP per capita.
* Economic growth can be shown graphically as a rightward shift of a nation’s long-run aggregate supply curve or a rightward shift of its production possibilities curve.
* The Keynesian model is based on the belief that fiscal policy works through aggregate demand. Government fights unemployment by increasing aggregate demand and fights inflation by decreasing aggregate demand. Monetary policy works through interest rates and investment and also affects aggregate demand.
* The rate of economic growth is affected by a variety of aggregate supply and demand factors.
* The classical model represents an idealized version of a private-enterprise economy in the long run. In terms of aggregate demand and supply, the classical model is characterized by a vertical aggregate supply schedule, which is a function of tastes, technology, society’s resource base, and the distribution of economic resources, and an aggregate demand schedule that is a function of real money balances. Supply-side factors determine real output and employment. Aggregate demand and supply together determine the price level.
* The monetarist model, which is closely related to the classical model, focuses on the importance of changes in money supply on the economy. The monetarists’ basic analytical device is MV=PQ. Monetarists favor a monetary rule calling for a constant rate of change in the money supply that coincides with changes in real GDP.
* The rational expectations model, which is also closely related to the classical model, maintains that economic agents are intelligent decision makers and can be expected to take the effects of government policy changes into account in deciding their behavior. Because agents anticipate changes in policies, these policies will have no effect on read GDP.
* Supply-side economics emphasizes factors that cause the aggregate supply curve to shift. Supply-side economists argue that the inflation and stagflation are caused largely by decreases in aggregate supply-not by changes in aggregate demand. They recommend microeconomic solutions such as improved productivity and less government regulation.
* Different economic theories are only one reason why economists disagree; other reasons are disputes about time periods, different assumptions, and different values.
Friday, March 20, 2009
Unit 4 Key Ideas
To accomplish its functions, money should have certain characteristics which include portability, uniformity, acceptability, durability, divisibility, and stability in value.
Throughout history, there have been four basic types of money: commodity money, representative money, fiat money, and checkbook money.
Money has three main functions- as a medium of exchange, a standard of value, and a store of value.
Economists often disagree about what money is. M1 is the narrowest definition and consists of checkable deposits, traveler’s checks, and currency. Checkable deposits are called demand deposits and account for about 75% of M1.
M2 and M3 are broader definitions of money and include savings accounts and other time deposits.
MV=PQ is the equation of exchange; money times velocity equals price times quantity of goods. PQ is the nominal GDP.
Velocity is the number of times per year the money supply is used to make payments for final goods and services: V=GDP/M
Money is created when banks make loans. One bank’s loan becomes another bank’s demand deposit. Demand deposits are money. When a loan is repaid, money is destroyed.
Banks are required to keep a percentage of their deposits are reserves. Reserves can be currency in the bank vault or deposits at the Federal Reserve Banks. This reserve requirement limits the amount of money banks can create.
The money multiplier is equal to one divided by the reserve requirement. 1/rr
The higher the reserve requirement, the less money can be created; the lower the reserve requirement, the more money can be created.
The Federal Reserve, or “Fed,” regulates financial institutions and controls the nation’s money supply. The three main tools that it uses to control the money supply are: changing the discount create, changing the reserve requirement, and buying and selling government bonds on the open market (open market operations).
If the Fed wants to encourage bank lending and increase the money supply, it will decrease the discount rate, decrease the reserve requirement, and buy bonds on the open market. The Fed expands the money supply to fight unemployment. This is called an expansionary monetary policy or an “easy money” policy.
If the Fed wants to hold down or decrease the money supply, it will discourage bank lending by increasing the discount rate, increasing the reserve requirements, and selling bonds on the open market. The Fed discourages bank lending during inflation. This is called a contractionary monetary policy or a “tight money” policy.
The reserve requirement is the most powerful tool of monetary policy; it is rarely used because of its power. Open market operations are the most frequently used tool because they permit the Fed to make small changes in the money supply.
Monetarists believe that money directly affects the economy through the equation of exchange. Monetarists believe the money supply should be increases at the rate of three to five percent a year, exactly the same amount as the increases in real GDP.
Keynesians believe that money affects interest rates and that interest rates, in turn, affect investment and GDP. Tight money increases interest rates, which decrease aggregate demand, which helps fight inflation. Easy money decreases interest rates and increases GDP during recessions.
The Fed cannot target both the money supply and interest rates simultaneously so it must choose which goal to attempt to achieve.
Throughout history, there have been four basic types of money: commodity money, representative money, fiat money, and checkbook money.
Money has three main functions- as a medium of exchange, a standard of value, and a store of value.
Economists often disagree about what money is. M1 is the narrowest definition and consists of checkable deposits, traveler’s checks, and currency. Checkable deposits are called demand deposits and account for about 75% of M1.
M2 and M3 are broader definitions of money and include savings accounts and other time deposits.
MV=PQ is the equation of exchange; money times velocity equals price times quantity of goods. PQ is the nominal GDP.
Velocity is the number of times per year the money supply is used to make payments for final goods and services: V=GDP/M
Money is created when banks make loans. One bank’s loan becomes another bank’s demand deposit. Demand deposits are money. When a loan is repaid, money is destroyed.
Banks are required to keep a percentage of their deposits are reserves. Reserves can be currency in the bank vault or deposits at the Federal Reserve Banks. This reserve requirement limits the amount of money banks can create.
The money multiplier is equal to one divided by the reserve requirement. 1/rr
The higher the reserve requirement, the less money can be created; the lower the reserve requirement, the more money can be created.
The Federal Reserve, or “Fed,” regulates financial institutions and controls the nation’s money supply. The three main tools that it uses to control the money supply are: changing the discount create, changing the reserve requirement, and buying and selling government bonds on the open market (open market operations).
If the Fed wants to encourage bank lending and increase the money supply, it will decrease the discount rate, decrease the reserve requirement, and buy bonds on the open market. The Fed expands the money supply to fight unemployment. This is called an expansionary monetary policy or an “easy money” policy.
If the Fed wants to hold down or decrease the money supply, it will discourage bank lending by increasing the discount rate, increasing the reserve requirements, and selling bonds on the open market. The Fed discourages bank lending during inflation. This is called a contractionary monetary policy or a “tight money” policy.
The reserve requirement is the most powerful tool of monetary policy; it is rarely used because of its power. Open market operations are the most frequently used tool because they permit the Fed to make small changes in the money supply.
Monetarists believe that money directly affects the economy through the equation of exchange. Monetarists believe the money supply should be increases at the rate of three to five percent a year, exactly the same amount as the increases in real GDP.
Keynesians believe that money affects interest rates and that interest rates, in turn, affect investment and GDP. Tight money increases interest rates, which decrease aggregate demand, which helps fight inflation. Easy money decreases interest rates and increases GDP during recessions.
The Fed cannot target both the money supply and interest rates simultaneously so it must choose which goal to attempt to achieve.
Monday, March 16, 2009
Common Mistakes On The AP Macro Exam
Check out this SlideShare Presentation:
Common Mistakes On The AP Macro Exam
View more presentations from MrRed.
Wednesday, February 25, 2009
GDP Webquest
Name _________________________________________________ Per. ________
GDP Activist Webquest
Scenario: You are an activist who wants to save the world. You are interested in creating an organization to help empower the poor. You want to understand what their problems are and how you can help them exit poverty by giving them the tools they need to be self-sustainable or lifting the obstacles that block them.
The problem is you need to identify who are the people that need your help the most, in other words, who are the poorest of the poor? How can someone decide on how well-off people are and whether their standard of living (or level of well-being) is satisfactory? That's pretty hard...
You suddenly remember that in school you where taught about an index called GDP (Gross Domestic Product). It is supposed to be able to offer an idea about the healthy of an economy which is a reflection of people's level of well-being...Or that's what you've heard..Maybe that's it?! Maybe this index can help you decide on who really needs your help the most, so you can focus your efforts there and bring maximum value through the organization you are designing!
Task: You decide that you will find out more information on GDP and create a chart where you will compare The USA to two other countries of your choice as to their overall standard of living.
In that chart you can use the GDP but also any other index you may feel can supplement and improve your understanding. You will then conclude which of the three countries is the one in most need. You will need to explain the rational behind your choice of country in most need and back it up with data from your web search. Always keep this question in mind: is the GDP telling me all I need to know to identify the population in most need? How can I get an even more accurate picture?
At the end, each group will present their choice and the class will decide which of the presented countries will get to receive the activist's organization.
Process: First you will be assigned to a team of three students. Once in your group you will agree on the 2 countries you will pick to compare in addition to the US, which is mandatory (so the countries are 3 in total , USA+2 more). You will then create a chart where you will compare the countries and decide on the one with the lowest living standards.
You will proceed to present your work in class.
The class will vote for the country in most need (lowest living standards) based on the argumentation presented by each group.
The information required can be extracted from the following resources:
1.Human development reports:
http://hdrstats.undp.org/indicators/indicators_table.cfm
2.GDP comparisons
http://www.indexmundi.com/g/r.aspx?c=ca&v=65
3.World Bank
http://geo.worldbank.org/
4.CIA:the world FactBook
https://www.cia.gov/library/publications/the-world-factbook/
5.Greek Statisctic Beureau
http://www.statistics.gr/
You are free however, to search and find additional info. Please be sure that the sites you will be using as sources are credible (eg. belong to well known statistics providers, are state-owned, sponsored by the EU, or an international organization like the UN)
SAMPLE CHART
Country 1 Country 2 Country 3
Name
GDP 2008
GDP 2009
GDP Growth Rate
Unemployment Rate
Inflation Rate
Infant Mortality Rate
Summary of Economy
Exports
Imports
GDP Activist Webquest
Scenario: You are an activist who wants to save the world. You are interested in creating an organization to help empower the poor. You want to understand what their problems are and how you can help them exit poverty by giving them the tools they need to be self-sustainable or lifting the obstacles that block them.
The problem is you need to identify who are the people that need your help the most, in other words, who are the poorest of the poor? How can someone decide on how well-off people are and whether their standard of living (or level of well-being) is satisfactory? That's pretty hard...
You suddenly remember that in school you where taught about an index called GDP (Gross Domestic Product). It is supposed to be able to offer an idea about the healthy of an economy which is a reflection of people's level of well-being...Or that's what you've heard..Maybe that's it?! Maybe this index can help you decide on who really needs your help the most, so you can focus your efforts there and bring maximum value through the organization you are designing!
Task: You decide that you will find out more information on GDP and create a chart where you will compare The USA to two other countries of your choice as to their overall standard of living.
In that chart you can use the GDP but also any other index you may feel can supplement and improve your understanding. You will then conclude which of the three countries is the one in most need. You will need to explain the rational behind your choice of country in most need and back it up with data from your web search. Always keep this question in mind: is the GDP telling me all I need to know to identify the population in most need? How can I get an even more accurate picture?
At the end, each group will present their choice and the class will decide which of the presented countries will get to receive the activist's organization.
Process: First you will be assigned to a team of three students. Once in your group you will agree on the 2 countries you will pick to compare in addition to the US, which is mandatory (so the countries are 3 in total , USA+2 more). You will then create a chart where you will compare the countries and decide on the one with the lowest living standards.
You will proceed to present your work in class.
The class will vote for the country in most need (lowest living standards) based on the argumentation presented by each group.
The information required can be extracted from the following resources:
1.Human development reports:
http://hdrstats.undp.org/indicators/indicators_table.cfm
2.GDP comparisons
http://www.indexmundi.com/g/r.aspx?c=ca&v=65
3.World Bank
http://geo.worldbank.org/
4.CIA:the world FactBook
https://www.cia.gov/library/publications/the-world-factbook/
5.Greek Statisctic Beureau
http://www.statistics.gr/
You are free however, to search and find additional info. Please be sure that the sites you will be using as sources are credible (eg. belong to well known statistics providers, are state-owned, sponsored by the EU, or an international organization like the UN)
SAMPLE CHART
Country 1 Country 2 Country 3
Name
GDP 2008
GDP 2009
GDP Growth Rate
Unemployment Rate
Inflation Rate
Infant Mortality Rate
Summary of Economy
Exports
Imports
Sunday, February 22, 2009
Unit 3 Key Ideas
Unit 3: Aggregate Demand and Aggregate Supply: Fluctuations in Outputs and Prices
Aggregate demand (AD) and aggregate supply (AS) curves look and operate much like the supply and demand curves used in microeconomics. However, these macroeconomic AD and AS curves depict different things, and they change for different reasons than microeconomic demand and supply curves. AD and AS curves can be used to illustrate changes in real output and the price level of an economy.
The downward sloping aggregate demand curve is explained by the wealth effect, the income effect, and the foreign purchases effect.
The aggregate supply curve is divided into three ranges: the horizontal or Keynesian range, the upward sloping or intermediate range, and the vertical or classical range.
Changes in the price level and output are illustrated by shifts and movements along the aggregate demand and supply curves.
Shifts in the aggregate demand can change the level of output and the price level or both. The determinants of AD include changes in consumer spending, investment spending, government spending, and net export spending.
Shifts in aggregate supply can also change the level of output and the price level. Determinants of AS include changes in input prices, productivity, the legal institutional environment, and the quantity of available resources.
Changes in outputs can also be illustrated by the Keynesian expenditure-output mode. This model differs from the AD/AS model because in the Keynesian model the price level is assumed to be constant. The Keynesian model has fixed prices.
The AD/AS model can be reconciled with the Keynesian expenditure-output model. In the Keynesian (horizontal) range of the AS curve, both models are identical. The models differ in the intermediate and vertical range of the AS curve.
Autonomous spending is the part of AD that is independent of the current rate of economic activity.
Induced spending is that part of AD that depends upon the current rate of economic activity.
The multiplier is a number that influences the relationship of changes in autonomous spending to changes in real GDP.
The formula for calculating the multiplier is: M=1/MPS or M=1/1-MPC
The multiplier results from subsequent rounds of induced spending that occur when autonomous spending changes.
Keynesian economists believe the equilibrium levels of GDP can occur at less than or more than the full-employment level of GDP. Classical economists believe that long-run equilibrium can occur only at full employment.
Fiscal policy consists of government actions that may increase or decrease aggregate demand. These actions involve changes in government spending and taxing.
The government uses an expansionary fiscal policy to try to increase or decrease aggregate demand. These actions involve changes in government spending and taxing.
The government uses a contractionary fiscal policy to try to decrease aggregate demand during a period of inflation. The government may increase taxes, decrease spending, or do a combination of the two.
Discretionary fiscal policy means the federal government must take deliberate action or pass a new law changing taxes or spending. The automatic or built-in stabilizers change government spending or taxes without new laws being passed or deliberate action being taken.
The balanced budget multiplier indicates that equal increases or decreases in taxes and government spending increase or decrease equilibrium GDP by an amount equal to that increase or decrease.
Stagflation can be explained by a decrease in aggregate supply.
Aggregate demand (AD) and aggregate supply (AS) curves look and operate much like the supply and demand curves used in microeconomics. However, these macroeconomic AD and AS curves depict different things, and they change for different reasons than microeconomic demand and supply curves. AD and AS curves can be used to illustrate changes in real output and the price level of an economy.
The downward sloping aggregate demand curve is explained by the wealth effect, the income effect, and the foreign purchases effect.
The aggregate supply curve is divided into three ranges: the horizontal or Keynesian range, the upward sloping or intermediate range, and the vertical or classical range.
Changes in the price level and output are illustrated by shifts and movements along the aggregate demand and supply curves.
Shifts in the aggregate demand can change the level of output and the price level or both. The determinants of AD include changes in consumer spending, investment spending, government spending, and net export spending.
Shifts in aggregate supply can also change the level of output and the price level. Determinants of AS include changes in input prices, productivity, the legal institutional environment, and the quantity of available resources.
Changes in outputs can also be illustrated by the Keynesian expenditure-output mode. This model differs from the AD/AS model because in the Keynesian model the price level is assumed to be constant. The Keynesian model has fixed prices.
The AD/AS model can be reconciled with the Keynesian expenditure-output model. In the Keynesian (horizontal) range of the AS curve, both models are identical. The models differ in the intermediate and vertical range of the AS curve.
Autonomous spending is the part of AD that is independent of the current rate of economic activity.
Induced spending is that part of AD that depends upon the current rate of economic activity.
The multiplier is a number that influences the relationship of changes in autonomous spending to changes in real GDP.
The formula for calculating the multiplier is: M=1/MPS or M=1/1-MPC
The multiplier results from subsequent rounds of induced spending that occur when autonomous spending changes.
Keynesian economists believe the equilibrium levels of GDP can occur at less than or more than the full-employment level of GDP. Classical economists believe that long-run equilibrium can occur only at full employment.
Fiscal policy consists of government actions that may increase or decrease aggregate demand. These actions involve changes in government spending and taxing.
The government uses an expansionary fiscal policy to try to increase or decrease aggregate demand. These actions involve changes in government spending and taxing.
The government uses a contractionary fiscal policy to try to decrease aggregate demand during a period of inflation. The government may increase taxes, decrease spending, or do a combination of the two.
Discretionary fiscal policy means the federal government must take deliberate action or pass a new law changing taxes or spending. The automatic or built-in stabilizers change government spending or taxes without new laws being passed or deliberate action being taken.
The balanced budget multiplier indicates that equal increases or decreases in taxes and government spending increase or decrease equilibrium GDP by an amount equal to that increase or decrease.
Stagflation can be explained by a decrease in aggregate supply.
Thursday, February 19, 2009
Thursday, February 12, 2009
Wednesday, February 4, 2009
Unit II AP Test Review Concepts
Unit II Review
• Macroeconomics is the study of the economy as a whole; microeconomics is the study of individual parts of the economy such as businesses, households, and prices. Macroeconomics looks at the forest, microeconomics at the trees.
• A circular-flow diagram illustrates the major flows of goods and services, resources, and money in an economy. It shows how changes in those flows can alter the level of goods and services, employment, and income.
• Gross Domestic Product (GDP) is the market value of all final goods and services produced in a nation in one year; it is the most important measurement of production and output.
• GDP counts only final goods and services; it does not count intermediate goods and services.
• GDP also does not count second hand goods; the buying and selling of stocks and bonds; and transfer payments such as social security benefits, unemployment compensation, and certain interest payments.
• GDP includes profits earned by foreign-owned businesses and income earned by foreigners in the United States, but it excluded profits earned by U.S.-owned companies overseas and income earned by U.S. citizens working abroad.
• GDP is most easily calculated in two ways; (1) add all the consumption, investment, and government expenditures plus net exports; and (2) add all the incomes received by owners of productive resources in the economy.
• Gross National Product (GNP) includes profits earned by U.S.-owned companies overseas and income earned y U.S. citizens working abroad, but it does not include profits earned by foreign-owned companies in the United States or income earned by foreigners working in this country.
• Other measures derived from national income accounting measures include Net National Product (NNP), National Income (NI), Personal Income (PI), and Disposable Personal Income (DPI).
• In 1991, the basic measurement of output and production in the United States was changed from GNP to GDP. Most other nations already used GDP, and this change reflected the increasing interdependence of the world’s economies.
• Price indexes are used to measure price changes in the economy; they are used to compare the prices of a given “bundle” or “market basket” of goods and services in one year with the prices of the same “bundle” or “market basket” in another year.
• A price index has a base year, and the price level in that year is given an index number of 100; the price level in all other years is expressed as a percentage of the price level in the base year.
• Price index number = Current year prices/Base year prices x 100.
• The most frequently used price indexes are the GDP Price Deflator, the Consumer Price Index (CPI), and the Producer Price Index (PPI).
• Real GDP is adjusted for price changes; nominal GDP is not adjusted for price changes.
• Inflation is a general increase in the overall price level.
• Savers, lenders, and people on fixed incomes generally are hurt by unanticipated inflation; borrowers gain from unanticipated inflation.
• Unemployment occurs when people who are willing and able to work cannot find jobs at satisfactory wage rates.
• Unemployment is classified into four categories: frictional, cyclical, structural, and seasonal.
• The unemployment rate represents the percentage of the labor force that cannot find work on acceptable terms.
• Full employment is not defined to mean zero unemployment. Frictional and structural unemployment exist even with zero cyclical unemployment.
• A business cycle measures the ups and downs of economic activity over a period of years.
• The phases of the business cycle are expansion, the peak, contraction, and trough
• Macroeconomics is the study of the economy as a whole; microeconomics is the study of individual parts of the economy such as businesses, households, and prices. Macroeconomics looks at the forest, microeconomics at the trees.
• A circular-flow diagram illustrates the major flows of goods and services, resources, and money in an economy. It shows how changes in those flows can alter the level of goods and services, employment, and income.
• Gross Domestic Product (GDP) is the market value of all final goods and services produced in a nation in one year; it is the most important measurement of production and output.
• GDP counts only final goods and services; it does not count intermediate goods and services.
• GDP also does not count second hand goods; the buying and selling of stocks and bonds; and transfer payments such as social security benefits, unemployment compensation, and certain interest payments.
• GDP includes profits earned by foreign-owned businesses and income earned by foreigners in the United States, but it excluded profits earned by U.S.-owned companies overseas and income earned by U.S. citizens working abroad.
• GDP is most easily calculated in two ways; (1) add all the consumption, investment, and government expenditures plus net exports; and (2) add all the incomes received by owners of productive resources in the economy.
• Gross National Product (GNP) includes profits earned by U.S.-owned companies overseas and income earned y U.S. citizens working abroad, but it does not include profits earned by foreign-owned companies in the United States or income earned by foreigners working in this country.
• Other measures derived from national income accounting measures include Net National Product (NNP), National Income (NI), Personal Income (PI), and Disposable Personal Income (DPI).
• In 1991, the basic measurement of output and production in the United States was changed from GNP to GDP. Most other nations already used GDP, and this change reflected the increasing interdependence of the world’s economies.
• Price indexes are used to measure price changes in the economy; they are used to compare the prices of a given “bundle” or “market basket” of goods and services in one year with the prices of the same “bundle” or “market basket” in another year.
• A price index has a base year, and the price level in that year is given an index number of 100; the price level in all other years is expressed as a percentage of the price level in the base year.
• Price index number = Current year prices/Base year prices x 100.
• The most frequently used price indexes are the GDP Price Deflator, the Consumer Price Index (CPI), and the Producer Price Index (PPI).
• Real GDP is adjusted for price changes; nominal GDP is not adjusted for price changes.
• Inflation is a general increase in the overall price level.
• Savers, lenders, and people on fixed incomes generally are hurt by unanticipated inflation; borrowers gain from unanticipated inflation.
• Unemployment occurs when people who are willing and able to work cannot find jobs at satisfactory wage rates.
• Unemployment is classified into four categories: frictional, cyclical, structural, and seasonal.
• The unemployment rate represents the percentage of the labor force that cannot find work on acceptable terms.
• Full employment is not defined to mean zero unemployment. Frictional and structural unemployment exist even with zero cyclical unemployment.
• A business cycle measures the ups and downs of economic activity over a period of years.
• The phases of the business cycle are expansion, the peak, contraction, and trough
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