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                    Domain Focus


The student will illustrate the means by
  which economic activity is measured.
                    Domain Focus


The student will explain the role and
  functions of the Federal Reserve
                  Domain Focus


The student will explain how the
  government uses fiscal policy to
  promote price stability, full
  employment, and economic growth.
          Where to Begin?

Liberal    Moderate                    Conservative

               Georgia Council on Economic Education
       Where to Begin?

Unemployment          The Federal Reserve
GDP                   Government Spending
Inflation             Taxation
Recession             Federal Debt
Depression            Federal Deficit

               Georgia Council on Economic Education
SSEMA1 The student will illustrate the means by which economic
     activity is measured.

       a. Explain that overall levels of income, employment, and prices are determined by
       the spending and production decisions of households, businesses, government, and
       net exports.
       b. Define Gross Domestic Product (GDP), economic growth, unemployment,
       Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and
       aggregate demand.
       c. Explain how economic growth, inflation, and unemployment are calculated.
       d. Identify structural, cyclical, and frictional unemployment.
       e. Define the stages of the business cycle, as well as recession and depression.
       f. Describe the difference between the national debt and government deficits.
       How is economic activity
• Gross Domestic Product (the main measure)
    – Sometimes other measures are useful
    – GDP is used to derive many of them.
•   Gross National Product
•   Net National Product
•   National Income
•   Personal Income
•   Disposable Personal Income
    Gross Domestic Product

• Gross= total

• Domestic= produced anywhere in the 50
  states, by anyone

• Product= final goods and services
 What does GDP measure?

Total amount of final goods and
 services produced in a country
           in one year.

    (Measure of Output)
               What is counted in GDP?
• FINAL goods
   and services

• Goods/Services produced
  here, even if by a foreign co.
        What is NOT counted?

• Things produced outside the

• Illegal stuff

• Purely financial transactions
   – Pay a broker – broker part counts
   – Stock itself doesn’t count
      Gross Domestic Product
• Dollar value of all final goods and services
  produced within a country’s borders in a year.
  – Dollar value = the total of the selling prices
  – Final goods and services = products in the form sold
    to consumers, not in any intermediate form
  – Within the country’s borders = made in the USA even
    if made by a foreign-owned company
  – In a year = in one calendar year
     • Does not include things made by American companies
       outside our borders.
Are there any cool formulas you
   can give us relating to this
      interesting concept?

• C= consumption spending
    (think consumers)
• I= investment spending
    (think businesses investing in themselves)
• G= government spending
• (X-M)= difference between exports and
   Expenditure Approach

     How is GDP calculated?
• 1) Expenditure approach
  – Estimate what is spent in a year on 4
    categories of final goods and services
    (consumer, business, government and net
    imports or exports) then add all 4 together to
    get total expenditures for one year.
  – Total is GDP
  – Practical, but not as accurate as the income
      How is GDP measured?
• 2) Income approach
  – Add up all the incomes in the economy.
     • Ex: a firm sells a product, the selling price in income
       for the firm, the owners, the employees…

Problems associated with GDP

• Slow to calculate

• Does not count everything
  (it’s an estimate)

• Inflation can distort the figure
     Real vs. Nominal
      Real and Nominal GDP
• Nominal GDP is measured in current
  year’s prices.
• Real GDP is measured in constant or
  unchanging prices (more accurate).
  – Inflation distorts
     • 10 oranges @ $1 = $10
     • 10 oranges @ 3 = $30
     • Is our economy better?
        – NO – inflated!!
          Per Capita GDP
• GDP divided by country’s population
• How much is being produced per person
• Quality of life?
  – How many doctors in Yemen? Afghanistan?
  – More in Bibb County than some countries.
  – What does that mean?
               Per Capita GDP

GDP divided by a country’s population
Circular Flow Model
     Factors Influencing GDP
• Supply and demand affect GDP
  – Economists calculate price levels , the average of all
    prices, to determine aggregate supply (the total
    amount of goods and services in the economy
    available at all possible price levels).
  – Aggregate demand (the amount of goods and
    services in the economy that will be purchased at all
    possible price levels)
  – Intersection of aggregate supply and demand indicate
    equilibrium price level of the economy.
 GDP practice
(all about GDP)
Aggregate Demand and Aggregate
• What is different about these graphs?
• What do they look like?
• What causes them to shift?
Aggregate Demand
Aggregate Supply
     Demonstration Lesson
Aggregate Demand and Aggregate
          Supply Lesson
      Business Cycle

      What is a business cycle?
• A period of economic expansion followed by a
  period of contraction.
• Major changes in GDP above or below normal
• Four phases:
  –   Expansion
  –   Peak
  –   Contraction
  –   trough
  Phases of the Business Cycle
• Peak = height of expansion, GDP stops rising.
• Contraction = economic decline, falling real GDP, unemployment,
  fall in business activity.
• Trough – lowest point in contraction, real GDP stops falling.
• Expansion – growth, rise in real GDP, increased employment and
 Leading Economic Indicators (point to
   what will happen in the economy)
• Help economists predict new phase.
  – Stock market – downward slope before
  – Interest rates – low rates signal investment
    and expansion. High rates signal a slow
    down in buying, contraction.
  – Manufacturers’ new orders of capital goods –
    show expansion or contraction.
  – New home sales
        Other Leading Indicators
•   Average weekly hours for workers in manufacturing jobs
•   Weekly claims for unemployment insurance
•   New orders for consumer goods
•   Speed with which companies make deliveries (the busier
    the company, the longer it takes to fill orders)
•   Number of contracts and orders for plants and
•   Number of building permits
•   Changes in money supply in circulation
•   Changes in consumer expectations
• Coincident indicators – change at same time as
  business cycle (rate of production, sales,
  number of nonagricultural workers employed,
• Lagging indicators – lag behind changes – give
  clues as to what the cycle is doing (avg. length
  of unemployment, size of inventories, labor
  cost/unit, changes in price index, etc.)
• US DEPT. OF COMMERCE compiles statistics
  for 78 economic indicators covering all aspects
  of the economy.
   Other terms associated with
         business cycles
• Economic growth – period of steady, long term
  increase in real GDP.
• Recession – prolonged economic contraction.
  Real GDP falls for two consecutive quarters (6
• Depression – recession that is especially long
  and severe.
• Stagflation – decline in GDP combined with a
  rise in price level.
Business Cycles are affected by
       four main factors
• Business investment – when the economy is expanding, firms are
  investing in new plants and equipment, or in old ones to improve
  production. GDP is increasing.
• Interest rates – when they are low, businesses expand and invest –
  GDP increases. When they are high, businesses slow down and
  GDP falls.
• Consumer expectations – when the economy looks good, we spend
  more. When it looks bad, we spend less.
• External shocks that are unexpected – disruption in oil supply, wars,
  natural disasters, etc. These things influence our output. Can be a
  good shock like a new discovery of oil – boost the economy.
• Students should draw the business cycle
  and label each part, including a brief
  description of each phase in own words.
  Types of Unemployment

1. Structural
2. Cyclical
3. Frictional
• Types of unemployment
  – Frictional – when people change jobs or get laid off (between
    jobs, left one to take another)
  – Structural – when the skills of workers do not match the jobs that
    are available (big change in economy, change in the business,
    like a merger, or a closure.)
  – Seasonal – when a period of steady work is followed by a period
    of unemployment each year. Takes place every year,
    regardless of the economy.
  – Cyclical – when unemployment rises during economic
    downturns and falls when the economy improves (recession –
    people put off buying cars, etc. so people lose jobs). Can last 3-5
Structural Unemployment
Cyclical Unemployment
Frictional Unemployment
      What is “unemployed”?
• People available for work who made a
  specific effort to find work in the past
  month and who during the most recent
  survey week, worked less than one hour
  for pay or profit.
• Also people who worked in a family
  business without pay for less than 15
  hours a week.
        How is unemployment
• It’s an important indicator of the health of the
• Bureau of Labor statistics polls sample of
  population to determine how many are
  employed and unemployed.
• Unemployment rate is the percentage of nation’s
  labor force that is unemployed.
• It is only a national average – it’s doesn’t reflect
  regional trends.
          Full Employment
• The level of employment reached when
  there is no cyclical unemployment (no one
  out of work because of downturn in the
  economy – everyone who wants a job has
• 4-6% unemployment is “normal”.
• Figures don’t count those who have
  become frustrated and stopped looking for
  work (have to have looked for work in the
  past 4 weeks)
• If you have a part time job you are
  considered employed even if you would
  rather have a full time job – took this one
  because it’s all you could find.
 Which type of unemployment?
• You just graduated from college and are
  taking some time looking for work after
  finishing school.
• Which type of unemployment?
  – Change jobs or get laid off (not because of
    the economy)
 Which type of unemployment?
• You work for a landscaping company and
  get laid off during the winter.
• What type of unemployment?
  – Steady work followed by period of
    unemployment each year
  What type of unemployment?
• My aunt left her job to care for her sick
  mother and is now looking for work.
• What type of unemployment?
  – Change jobs or get laid off (not because of
    the economy)
  What type of unemployment?
• A new, robotic teacher is developed and
  humans are no longer needed to teach
  classes. I lose my job.
• What type of unemployment?
  – New technology developed that makes me
    obsolete. My skills don’t match the job that is
    now available.
  What type of unemployment?
• I am a ski instructor. The spring thaw
  comes, the snow melts, the ski lifts shut
  down. I am out of work until the next
  winter snows fall.
• What type of unemployment?
  – Steady work followed by period of
                Activity – choose one.
•   Draw a picture to represent each type of unemployment.

•   OR

•   Write two journal entries or letters to the editor describing two imaginary experiences as an
    unemployed person. Describe the reasons for your unemployment (using details of one of the
    types of unemployment. You should use two types of unemployment.)

•   OR

•   Skit acting out two of the types of unemployment.

•   OR

•   Conduct an imaginary interview with people who have lost their jobs – each should be
    unemployed for one of the four different reasons. Use two reasons in your interviews. Write out
    questions and answers. You could also choose to act this out.
Am I Unemployed?

1. Structural
2. Cyclical
3. Frictional
• What is inflation?
  – Rise in general price level – generally reported in
    terms of annual rate of change.
• How is it measured?
  – Look at price levels (relative magnitude of prices at
    one point in time, usually used for comparison)
  – To measure price level, a price index is constructed
    (such as Consumer Price Index, Producer Price
    Index, or implicit GDP price deflator).
       What is a price index ?
• Price index is a measurement that shows how
  the average price of a standard group of goods
  changes over time.
• Consumer Price Index – price index determined
  by measuring the price of a standard group of
  goods meant to represent the “market basket” of
  a typical consumer.
  – Computed each month by the Bureau of Labor
• Consumer Price Index – price index determined by
  measuring the price of a standard group of goods meant
  to represent the “market basket” of a typical consumer.
   – Computed each month by the Bureau of Labor Statistics.
• Reports changes for about 90,000 items in 364
• Sampled from 85 geographically distributed areas
  around the country.
• Some items sampled in all areas, some in only a few.
• There are separate indices for 28 selected areas around
  the country.
• Price index =     cost today         X 100
                  cost in base year
Price index is current value of a “basket” of goods and service divided
   by cost of same basket in base year and then multiplied by 100.
- Mixed basket of goods used because prices can go up or down for
   reasons that have nothing to do with inflation.
- Having a large group of representative items helps eliminate the
   effect of some product’s price dropping while others tend to be on
   the rise.
- Base year can be any year.
- Price index for the base year will always be 100.
- Index values over 100 indicate inflation.
- Index values under 100 indicate deflation.
      How is the inflation rate
• Take the CPI for Year A
• Subtract the CPI for Year B
• Multiply by 100
• Measures price changes received by domestic
  producers for output.
• Uses sample of about 3,000 commodities.
• Base year of 1982.
• Compiled for all commodities – but also broken
  down into subcategories – farm products, fuels,
  chemicals, rubber, pulp and paper, processed
• Measures price change in GDP.
• Has a base year of 1987 and can be used
  to remove the effects of inflation from
• Compiled quarterly, so not as useful for
  measuring month to month changes in
   Why is a price index used?
• Some measure change in price of a single
• Some measure price changes of imported
• Others measure price changes for
  agricultural goods.
           Degrees of Inflation
• Creeping inflation
   – Range of 1-3%
• Galloping inflation
   – Can go as high as 100-300%
• Hyperinflation
   – Out of control
   – In range of 500%
   – Doesn’t happen often – last stage before monetary
     collapse. (WW II – Hungary and Germany)
         Causes of Inflation
• Quantity theory – too much money in the
  economy causes inflation.
• Demand-pull theory – demand for goods
  and services exceeds supply – scarcity
  drives up prices.
• Cost-push theory – producers raise prices
  to meet increased costs.
               Other causes:
• Government deficit – inflation blamed on deficit –
  destabilizes output and employment more than
  price levels, especially true if interest rates rise
  and borrowers are crowded out.
• Wage-price spiral – self-perpetuating spiral –
  higher prices force workers to ask for higher
  wages. Producers try to recover this by raising
  prices, which forces workers to ask for higher
     Consequences of inflation
• Dollar buys less – purchasing power falls as prices rise.
• Spending habits change – disrupts the economy.
• Speculation increases – some people try to take
  advantage of higher price levels – people who usually
  play it safe start buying things that usually increase in
  price (condos, diamonds, art). Diverts spending from
  other channels and may cause structural unemployment.
• Distribution of income is altered. Lenders are usually
  hurt more than borrowers as loans mad earlier are
  repaid with dollars that have less purchasing power.
  Lenders can’t do as much with the repaid money.
  Inflation, in the long run, favors debtors more than
Teaching Tools for MACROECONOMICS
           from John Stossel
Clip 2- Nominal Values vs.
        Real Values

Commanding Heights

Georgia Council on Economic Education
       Commanding Heights
• On-line video
• Bolivia at the Brink
  – Watch for inflation statistics
  – What did you hear that surprised you?
• Imagine that the price of lunch increased
  1% every 10 minutes.
• By 4th lunch you don’t have enough money
  to buy a lunch! (maybe sooner!!!)
              Questions for You

• What is the national debt?
• What caused the national debt?
• Where does the government get the
  money when it wants to spend more
  than it takes in?
• What is a budget deficit?
• What is a budget surplus?
Debt v. Deficit
 Demonstration Lesson

Should we worry about the
      national debt?
1.   Will the national debt cause the US to go bankrupt?
2.   Are the interest payments on the debt important?
3.   What about paying off the debt by increasing taxes?
4.   Does running deficits today, and adding to the national
     debt, put a burden on future generations?

                 Georgia Council on Economic Education
Clip 12- Is Govt. Too Big?

Fiscal Policy
Actions taken by the Federal
Government to influence the
 economy (business cycles).
      How do they do it?

Taxation (revenue)

Spending (expenditures)

  -transfer payments-
If the economy needs a “boost” the Federal
   Government might:

_______________ taxes.

_______________ spending.

If the economy needs to be “cooled
   off” the Federal Government might:

_______________ taxes.

_______________ spending.
  Demonstration Lesson

How Can Changes in the Federal
Government’s Budget Stabilize the
Monetary Policy
The actions the Federal Reserve
     (Central Bank) takes to
 influence the level of GDP and
   the rate of inflation in the
Monetary Policy DVD
            How Do They Do It?

Tools of the Fed:
    1. Open Market Operations
    2. Discount Rate (Fed to banks)
    3. Federal Funds Rate (bank to bank)
    4. Reserve Requirements

If the economy needs a “boost” the
   Federal Reserve might:

_______________ bonds.
_______________ interest rates.
_______________ reserve requirements.

If the economy needs to be “cooled off”
   the Federal Reserve might:

_______________ bonds.
_______________ interest rates.
_______________ reserve requirements.

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