AP Macro 2-6 Unit Summary.pdf, Lecture notes of Macroeconomics

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MACRO

ECONOMICS

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.

What is Macroeconomics?

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.

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. For all countries there are three major economic goals:

Goal # Promote Economic Growth

How does a country measure

economic growth?

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?)

What does GDP tell us?

*CIA 2007 Estimate 7

How can you measure growth from year to year? % Change in GDP = Year 2 - Year 1 Year 1

X 100

Mordor’s GDP in 2007 was $

Mordor’s GDP in 2008 was $

What is the % Change in GDP?

Transylvania’s GDP in 2007 was $2,

Transylvania’s GDP in 2008 was $2,

What is the % Change in GDP? 8

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. Both ways generate the same amount since every dollar spent is a dollar of income.

Four components of GDP:

1. Consumer Spending

Ex: $5 Little Caesar's Pizza

2. Investments - When businesses put money

back into their own business. Ex: Machinery or tools

3. Government Spending

Ex: Bombs or tanks, NOT social security

4. Net Exports - Exports ( X ) – Imports ( M )

Ex: Value of 3 Ford Focuses minus 2 Hondas GDP = C + I + G + X

n

Expenditures Approach 11

Included or not Included in GDP?

For each situation, identify if it is included in

GDP the identify the category C, I, G, or X

n

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 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

1. $10.00 for movie tickets
2. $5M Increase in defense expenditures X $45 for used economics textbook
3. Ford makes new $2M factory X $20K Toyota made in Mexico X $10K Profit from selling stocks
4. $15K car made in US, sold in Canada
5. $10K Tuition to attend college X $120 Social Security payment to Bob 10.Farmer purchases new $100K tractor GDP=$7,125, Included or not Included in GDP?

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

How can you figure out which is the most popular

movie of all time?

Real Box Office Receipts (adjusted for inflation)

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!

Real vs. Nominal GDP Example 2008 10 cars at $15,000 each = $150, 10 trucks at $20,000 each = $200, Nominal GDP = $350, 2009 10 cars at $16,000 each = $160, 10 trucks at $21,000 each= $210, Nominal GDP = $370, The GDP in year 20048 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. 2009 10 cars at $15,000 each = $150, 10 trucks at $20,000 each= $200, REAL GDP = $350,