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Topics and percentages 8-12% Basic Economic Concepts 12-16% Measurement of Economic Performance...

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Slide 2 Slide 3 Topics and percentages 8-12% Basic Economic Concepts 12-16% Measurement of Economic Performance 10-15% National Income and Price Determination 15-20% Financial Sector 20-30% Inflation, Unemployment, and Stabilization Policies 5-10% Economic Growth and Productivity 10-15% Open Economy: International Trade and Finance Slide 4 8-12% Basic Economic Concepts A. Scarcity, choice, and opportunity costs B. Production possibilities curve C. Comparative advantage, absolute advantage, specialization, and exchange D. Demand, supply, and market equilibrium E. Macroeconomic issues: business cycle, unemployment, inflation, growth Slide 5 Production Possibilities Assumptions: Full Employment Fixed Resources and Technology Movements Along curve shows opportunity cost Outward shift illustrates economic growth Inward shift indicates destruction of resources Producing Capital Goods will lead to greater economic growth than producing consumer goods. (Butter will lead to more growth than guns) Slide 6 Production Possibilities Graph Capital Goods Consumer Goods A B C D E Points A,B,C, are efficient pts. Point D is underutilization Point E is economic growth May Lead to most Future growth May Lead to most Future economic growth F.E.F.E.1 Slide 7 Supply and Demand Factors Demand Changes when: Income changes Related Products, complements and substitutes, (price or quality change) Expectations (future price change) Consumers (more or less added) Tastes, Fads, Preferences change Slide 8 Demand Increase: As Demand Increases, Price and Quantity Increase as well. P1 P2 Q1Q2 S1 D1 D2 Price Quantity Slide 9 Demand Decrease: As Demand Decreases, Price and Quantity decrease as well D1 D2 S1 P1 P2 Q1Q2 Price Quantity Slide 10 Supply Factors Supply Changes When: Input prices change (resources and wages) Government (tariffs, quotas, and subsidies) Number of sellers change Expectations (about price and product profitability change) Disasters (weather, strikes, etc..) Slide 11 Supply Increase: As Supply Increases, Quantity Increases, but Price Falls. Price Quantity Q1 Q2 P1 P2 S1 S2 D1 Slide 12 Supply Decrease: As Supply Decreases, Quantity Decreases, but Price Increases. Price Quantity S1 S2 D1 P1 P2 Q1Q2 Slide 13 Comparative Advantage A nation should specialize in producing goods in which it has a comparative advantage: ability to produce the good at a lower opportunity cost. Example: CheeseWine Spain:2 pounds2 Cases France2 pounds6 Cases Spain should produce cheese (1C = 1W) France should produce wine (1W = 1/3C) : Slide 14 Currency Terms AppreciationAppreciation: Currency is increasing in demand (stronger dollar) U.S. Currency will appreciate when more foreigners: travel to the U.S., buy more U.S. goods or services, or buy the U.S. dollar to invest in bonds Slide 15 Currency Terms DepreciationDepreciation: Currency is decreasing in demand (weaker dollar) Being SUPPLIED in exchange for other currency. U.S. Currency will depreciate when fewer foreigners: travel to the U.S., buy fewer U.S. goods or services, or sell the U.S. dollar to invest in their own bonds Slide 16 15 Business Cycles The increases and decreases in Real GDP consisting of four phases: Peak: highest point of Real GDP Recession: Real GDP declining for 6 months Trough: lowest point of Real GDP Recovery: Real GDP increasing (trough to peak) Slide 17 16 Business Cycle Peak -- Greatest spending and lowest unemployment. Inflation becomes a problem. Contraction/Recession -- Reduction of spending levels and increasing unemployment. Some cyclical unemployment begins. Trough -- Least spending and highest unemployment Expansion -- Spending increases and unemployment decreases We want to avoid extreme inflation and extreme unemployment. We want stability! Full Employment Slide 18 17 The two big problems The two big problems that plague the economy are:INFLATIONUNEMPLOYMENT People generally prefer steady, stable growth to large ups and downs. Therefore, government policies, both fiscal and monetary (see later sections), are aimed at flattening the business cycle. The government wants not only to stimulate the economy when its slow, but also to slow it down when its growing too quickly. Slide 19 18 12-16% Measurement of Economic Performance A. National income accounts 1. Circular flow 2. Gross domestic product 3. Components of gross domestic product 4. Real versus nominal gross domestic product B. Inflation measurement and adjustment 1. Price indices 2. Nominal and real values 3. Costs of inflation C. Unemployment 1. Definition and measurement 2. Types of unemployment 3. Natural rate of unemployment Slide 20 Circular Flow of Economic Activity Households supply resources (land, labor, capital, entrepreneurial ability) to the resource market. Households demand goods and services from businesses. Businesses demand household resources and supply goods and services to the product (factor) market. Slide 21 20 Slide 22 GDP (Gross Domestic Product): The total dollar (market) value of all final goods and services produced in a given year. Expenditure Formula: Consumption (C) + Business Investment (I) + Government Spending (G) + Net Exports (Xn) Gross Domestic Product Slide 23 GDP: What Counts: Goods Produced but not Sold (I) Goods produced by a foreign country (Japan) in the U.S. (Honda, Toyota) Government spending on the military Increase in business inventories Slide 24 GDP: What DOES NOT count: Intermediate Goods (Tires sold by Firestone to Ford) Used Goods Non-Market Activities (Illegal, Underground) Transfer Payments (Social Security) Stock Transactions Slide 25 Shortcomings of GDP: Leading to GDP being understated. Nonmarket activities: (services of homemakers) does not count. Leisure: Does not include the value of leisure. Does not include improvements in product quality. Underground economy Slide 26 GDP: Overstated Includes damage to the environment Includes more spending on healthcare- Americans being unhealthy. Includes money spent to fight crime-more police officers, more jails, etc Slide 27 Real GDP Real GDP= Nominal GDP adjusted for inflation. Calculation: Real GDP = Nominal GDP Price Index in Hundredths( deflator) Example: U.S. 2005 Real GDP= $12,4558 (billions) 1.1274 (based on 2000) $11.048 Trillion Slide 28 Real GDP Per Capita Most commonly used to compare and measure each countrys standard of living and overall economic growth. Real GDP/Nations Population Slide 29 28 Inflation Rise in the general level of prices Reduces the purchasing power of money Measured with the Consumer Price Index (CPI) Reports the price of a market basket, more than 300 goods that are typically purchased by an urban household Slide 30 Calculating Inflation CPI in Recent Year CPI in Past Year Divided by CPI in Past Year (Number then Multiplied by 100) Example: 2002 CPI = 179.9 2001 CPI = 177.1 Rate of Inflation: 179.9-177.1 = 1.58% 177.1 Slide 31 Types of Inflation Demand Pull InflationDemand Pull Inflation: too much money chasing too few goods. AD Curve will shift to the right, resulting in a higher Price Level and greater Output (until reaching Y* Cost-Push InflationCost-Push Inflation: Major cause is a supply shock- OPEC cutting back on oil production AS Curve will shift to the left resulting in a higher Price Level and a decrease in Real GDP. Slide 32 Nominal Real and Nominal Terms Real Income = Nominal Income Price Index (Hundredths) Real Interest Rate = Nominal Interest Rate Inflation Rate Nominal Interest Rate = Real Interest Rate + Inflation Premium (anticipated inflation) Slide 33 Inflation Winners Losers Inflation: Winners & Losers WinnersWinners: Debtors who borrow money that will be repaid with cheap dollars. Those who have anticipated inflation LosersLosers: Savers (especially savings accounts) Creditors (Banks will be repaid with those cheap dollars Fixed-Income Recipients (retirees receiving the same monthly pension) Slide 34 33 Unemployment Calculation: Number of Unemployed Labor Force (Multiplied by 100 to put as a %) The Labor Force is the total of employed and unemployed workers. U.S. unemployment should be about 5% Slide 35 Employed You are considered to be employed if: You work for 1 hour as a paid employee (so part- time workers count) You are temporarily absent from work (illness, strike, vacation) You work 15 hours or more as an unpaid worker (family farms are common) Slide 36 Unemployed Must be looking for work (at least 1 attempt in the past 4 weeks) Are reporting to a job within 30 days Are temporarily laid off from their job Slide 37 Not In Labor Force A person who is not looking for work: Full-time students Stay at home parents Discouraged workersDiscouraged workers: those who have given up hope of finding a job. Retirees Slide 38 37 Unemployment 100% of the people will never be employed, so the government considers 4-6% unemployment to be full employment. Types of Unemployment Frictional - temporary and unavoidable Structural - results from changes in technology or a business restructure (ex. Merger) Seasonal- occurs when industries slow or shut down for a season Cyclical - results from a decline in the business cycle. We can never be at Full Employment if there is any percentage cyclically unemployed. Slide 39 38 10-15% National Income and Price Determination A. Aggregate demand 1. Determinants of aggregate demand 2. Multiplier and crowding-out effects B. Aggregate supply 1. Short-run and long-run analyses 2. Sticky versus flexible wages and prices 3. Determinants of aggregate supply C. Macroeconomic equilibrium 1. Real output and price level 2. Short and long run 3. Actual versus full-employment output 4. Economic fluctuations Slide 40 Consumption and Saving As income increases, both consumption and savings will increase. The determinants of overall consumption and savings are: (More money or a positive outlook will increase consumption and reduce savings. Less money or a negative outlook

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