Econ 2133 1st Edition Exam 1 Study Guide Lectures 1 5 US trend growth since WW2 2 5 3 2014 we got 2 6 now 9 years in a row of below 3 On average it grows 2 5 percent and that s REAL GDP 17 5 trillion dollars is nominal current GDP Cyclical turning points of the US business cycle since 1960 A Periods of Economic Expansion 1 Longest Period of Economic Expansion March 1991 to March of 2001 121 months 2 Second Longest Period of Economic Expansion Feb 1961 to December 1969 106 months 3 Third Longest Period of Economic Expansion November 1982 to July of 1990 92 months B Periods of Economic Contraction Recession 1 The Great Recession December 2007 to July 2009 2 Second worst recession July 1981 to 1982 3 OPEC Recession November 1973 to March 1975 Real GDP vs Nominal GDP what is the difference Inflation makes this comparing apples to oranges P1971 x Q1971 vs P2015 x Q2015 NEED INFLATION FREE PPC need to measure level of output in terms of prices back in 1971 Nominal GDP GDP measured in current prices which contains inflation Real GDP GDP measured in constant prices which does not contain inflation What is counted in GDP and what are the equivalent measures C I G National Income Aggregate Demand PxQ Current value What s not counted Gross Domestic Product GDP measure of overall economic activity Nominal GDP Aggregate Market Demand Total Spending Sum of all Good Spending National Income Aggregate Market Demand total sum of demand for goods and services spending payments of factors of production Ex Wages are a cost to a producer but an income for their workers All the same and mean the same depending from you viewpoint if you are an individual consumer or government GDP C I G C consumption consumers I investment capitol held by businesses G government federal money GDP P x Q P Overall price level Q Output of goods and services produced and consumed Therefore C I G P x Q Examples of GDP Spending and what it can tell us WWII 52 of US GDP spent on war by government 2014 48 of US GDP spent by government but on what Social programs entitlements Pro cyclical counter cyclical a cyclical and examples of each A Pro cyclical varies with the business cycle and goes up together then down together EX tax revenues employment rate B Counter cyclical varies with the business cycle and goes opposite EX unemployment federal deficit budget C A cyclical has no relation with Business Cycle EX Spending habits on citrus fruit The Business Cycle The Business Cycle periods of economic growth above trend followed by fits and spasms if economic contraction below trend that repeat at an irregular interval Exponential or Linear Trend of economy Rule Number 3 Greed kills Have Linear to have macroeconomic stability a secular trend 1945 2010 2 5 to 3 year 2014 finally peaked above 3 level which is historical average We get above and below trend that repeats itself over and over again as an economy but irregularly Secular cycle has 4 phases 1 Expansion upward positive economic growth last for an average of 59 months so roughly 5 years 2 Peak highest level of growth then begins to fall 3 Recession Contractions economic activity is falling and economy is retracting last for an average of 11 months 4 Trough lowest point of economic growth and starts looking up to expansion Amplitude and Periodicity in Business Cycle 1 Amplitude killer of dreams bigger the amplitude the less economic stability highs and lows of cycle swings Goal is to minimize amplitude and it creates economic instability 2 Persistence periodicity length of time for the cycle to return to trend after a disturbance Minimize inevitable recessions take a blow and get right back up there Longer it takes the greater the forgone cost of economic production the longer it will take 3 questions every society needs to answer what to produce how to produce it and for whom Fundamental questions 3 for every society abundance or deprivation 1 What to produce Inputs land labor capitol entrepreneurship to production process to outputs goods services that increase peoples welfare and make them happier 2 How to produce To most efficiently produce goods and services with scarce resources Why perfect competition called so because it allocates resources to make best most goods 3 For whom to produce One way or the other we have to figure out who gets what and how much they get How to allocate economic output In US we use mixed economy mixture of markets and government intervention 3 Questions in the US are answered by a mixture of Economic Activity 17 5 mil yr markets and govt intervention Laws of Supply Demand with individuals choices But wait need government to help make it fair for others and help with fair allocation of scarce resources So we have income redistribution programs Class A Class B Class C Class D Govt decides who they are taking money away from to give to who is determined to need it Egalitarianism being your neighbors fellow citizens keeper share your wealth because you have a duty to do so aka social safety net 5 macroeconomic goals full employment price stability economic growth are trinity other 2 still important 1 Full Employment on the production possibilities curve PPC Without full employment it s not using resources in best way or maximum way so being fully employed is doing so 5 6 national unemployment 5 6 because big change to employment population ratio percentage of people working and has been falling over last 8 years 2007 63 of working age who are working or seeking work 2015 58 Because 5 of adults retired huge opportunity cost Demographically disaggregate Ex male college graduates have lower unemployment rate b c college education and matrimony makes for a good worker Ex high school dropout have higher unemployment rate Geographically disaggregate Ex Raleigh has smaller unemployment than Greenville 2 Price Stability low and stable inflation Inflation percent goes up on the overall generation of level of prices Ever 1 dollar decrease per gallon of gas puts 276 billion dollars back into American pockets that used to go to oil producers percentage growth rate Pt Pt 1 Pt 1 x 100 Inflation alters the purchasing power of income and moves down ladder of success because you can t purchase the same amount you could have standard of living Temerity unwanted boldness you have got a lot of nerve Uncertainty clouds the future and reduces economic risk taking and economic growth Inflation increase interest rates 3 Economic growth 17 5 million dollars Without