GDP

•THE MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED

WITHIN A NATION IN A GIVEN TIME

NOMINAL GDP

• THE PRICE LEVELS FOR THE YEAR IN WHICH GDP WAS

MEASURED • (IF PRICES NEVER CHANGED,

NOMINAL GDP WOULD BE SUFFICIENT)

REAL GDP

•NOMINAL GDP ADJUSTED FOR

CHANGES IN PRICES (TAKES INTO ACCOUNT

INFLATION)

PER CAPITA GDP

•REAL GDP DIVIDED BY POPULATION

What is a business cycle?A SERIES OF PERIODS OF EXPANDING AND CONTRACTING ECONOMIC ACTIVITY

How is the business cycle measured?AN INCREASE OR DECREASE IN REAL GDP

The expansion stage of the business cycle is a period of

ECONOMIC GROWTH, or an increase in the GDP. JOBS are usually easy to find so UNEMPLOYMENT goes down.

More RESOURCES are needed to keep up with spending DEMAND. The PEAK is the point at which GDP is the highest. As prices RISE and RESOURCES tighten, businesses become less PRODUCTIVE.

After the peak begins the CONTRACTIONphase. What happens during this phase?

THIS IS THE POINT OF THE BUSINESS CYCLE WHERE REAL GDP FALLS AND PRODUCERS CUT BACK

BUSINESS CYCLES (Know the actual cycle)

• SERIES OF GROWING AND SHRINKING PERIODS OF

ECONOMIC ACTIVITY MEASURED BY INCREASES OR

DECREASES IN REAL GDP

A. EXPANSION PHASE-REAL GDP GROWS

RAPIDLYB. THE PEAK-GDP

REACHES HIGHEST POINT

C. CONTRACTION PHASE-REAL GDP

DECLINESD. THE TROUGH-

MARKS THE END OF CONTRACTION

A

B C

D

RECESSION-CONTRACTION LASTING

TWO OR MORE QUARTERS

DEPRESSION-EXTENDED PERIOD OF HIGH UNEMPLOYMENT AND LIMITED BUSINESS

ACTIVITY

STAGFLATION-PERIOD OF INFLATION

AND STAGNANT BUSINESS

The final phase is TROUGH. This is the point where both REAL GDP and EMPLOYMENT stop declining. The cycle is done when:IT HAS GONE THROUGH ALL FOUR PHASES

GREAT DEPRESSION

•WORST CONTRACTION ©-RECESSION) EVER IN

AMERICAN HISTORY

Fiscal Policy

*The government has three roles in the economy:

TAXATION,SPENDING,

& REGULATION

Historically…Initially, the US government started with a _________________________

approach to business. However, after the

______________________________________, it was clear that the economy

needed some guidance.

LAISSEZ FAIRE

GREAT DEPRESSION

http://cache.gawkerassets.com/assets/images/8/2011/11/add1ce9116d1320399c40975b92de5c3.jpg ; 11/22/2011.

So..After _______________, the government decided they needed to take a

_________________________ in the economy to regulate:

• UNEMPLOYMENT•BUSINESS CYCLES•INFLATION•COST OF MONEY

WWII

PROACTIVE ROLE

www.members.fortunecity.com ; 11/22/2011.

DISCRETIONARY FISCAL POLICY:Actions taken by the government by choice to correct economic instability; Congress must enact legislation in order for these policies to be implemented. (Similar to discretionary spending)

EXPANSIONARY FISCAL POLICY:Plan to increase aggregate demand and stimulate a weak economy

CONTRACTIONARY FISCAL POLICY:

Plan to reduce aggregate demand and slow down an inflationary (too-rapidly expanding) economy

AUTOMATIC STABILIZERS:Features of fiscal policy that work automatically to stabilize the economy

PUBLIC TRANSFER PAYMENTS

PROGRESSIVE INCOME TAXES

As income increases, so do taxes allowing it to be an automatic stabilizer

Unemployment compensation, food stamps, welfare, etc.; when people receive these benefits, they gain income to spend so that recession is less severe on the individual/family. In a weak economy, more people qualify for these benefits; in a strong economy, less qualify

Federal Budget

Automatic Stabi-lizersDiscretionary Spending

Discretionary spending is what the President and Congress have choice in how

to spend.

LIMITATIONS OF FISCAL POLICY:1. It follows economic conditions and passing legislation takes

time.2. It should follow the business cycle to balance out peaks and

troughs, but it is tough to predict.3. Rational Expectation Theory-people and businesses expect

fiscal policy to have certain outcomes. When they react to protect their interests, they may limit the effectiveness of the policy.

4. Political issues. (Council of Economic Advisers-advises president on fiscal policy, but they do not always follow because of political pressure.)

5. Regional issues.

DEMAND-SIDE ECONOMICS:FISCAL POLICY TO STIMULATE AGGREGATE

DEMAND– KEYNESIAN ECONOMICS

What was Keynes first

revolutionary idea?

He defined AGGREGATE DEMAND as the sum of investment,

consumer spending, government spending, and net exports.

Keynes advocated increased government spending and

decreased taxation to end recessions.

INCREASED GOVERNMENT

SPENDING

CREATES JOBS

INCREASES INCOME

Keynes advocated increased government spending and

decreased taxation to end recessions.

DECREASED TAXATION

CONSUMERS SPEND MORE

BUSINESSES INVEST MORE

During periods of STAGFLATION

(slow economic growth with high unemployment and inflation)

demand-side policies seem to be INEFFECTIVE

SUPPLY-SIDE FISCAL POLICY:Focuses on LOWERING TAXES ON PRODUCERS

cutting the cost of production to encourage producers to supply more.

SUPPLY-SIDE ECONOMISTS FAVOR:•CUTTING TAXES ON INDIVIDUAL AND CORPORATE INCOME

•CUTTING IN THE HIGHER TAX BRACKETS GIVES MORE MONEY TO THOSE MOST LIKELY TO INVEST IN BUSINESS

•SPENDING CUTS-THE LESS THE GOVERNMENT SPENDSTHE LESS TAXES NEED TO BE COLLECTED

•DECREASE GOVERNMENT REGULATION BECAUSE THESE ADDTO THE COSTS OF PRODUCTION

SUPPLY-SIDE

Cut corporate taxes

Lower production costs

More $ for hiring workers

More supply is made

But, more people have $ to spend

and demand goes up

Businesses make $ due to increased

demand

Laffer Curve

Illustrates how tax cuts affect tax revenues and economic growth.Tax revenues increase as tax rates increase to a certain point.

After that point, higher taxes actually lead to decrease tax revenue.WHY?

Too high of taxes could actually discourage people from working, investing, and spending.

PROVING LAFFER’S THEORY:Legislation passed in the 1980’s

CUT federal income tax rates substantially (top tax bracket from 70% to around

30%), however revenue collected from income tax

INCREASEDabout 13%.

DISPROVING LAFFER’S THEORY:1. With lower taxes people should work

more as some did. However, some found they brought home the same

amount of income from before the tax cuts by working less.

2. Lower tax rates should increase savings and investments, but savings declined

during the 1980’s.

What is a budget deficit?WHEN A GOVERNMENT SPENDS MORE THAN IT TAKES IN

What is deficit spending?WHEN A GOVERNMENT SPENDS MORE THAN IT COLLECTS IN A SPECIFIC BUDGET YEAR

What is a budget surplus?WHEN A GOVERNMENT TAKES IN MORE THAN THEY SPEND

Why does a government issue bonds?

BECAUSE THEY ARE BORROWING MONEY TO FILL A BUDGET GAP; THEY NEED TO PAY THIS MONEY BACK AT A FUTURE DATE