Section 1 Learning Goals In this section we re studying how economists measure two things the size of an economy with GDP and average prices in an economy with the GDP deflator and the Consumer Price Index We want to understand these so that we can measure how economies grow like the U S Australia or Botswana or don t like Haiti or the Democratic Republic of the Congo after you adjust for the effects of rising prices i e inflation The chapter numbers below are from the 4th and 5th editions so be careful if you have the the 3rd Ch 8 deals with GDP and Ch 9 with unemployment and the CPI 1 Be able to calculate real and nominal GDP and explain what they measure Ch 8 1 8 3 and notes Ways to calculate Real GDP 1 2 nominal GDP Real GDP X 100 Price of the base year X Quantity of the current year Price of the base year X Quantity of the current year Nominal GDP Prices of the current year Quantity of the current year 2 Be able to explain i what fiscal and monetary policy are ii how they influence the economy and iii how they are currently being used in the U S notes Fiscal Policy Changes in federal expenditures and taxes are changed independently controlled by the president and congress Monetary policy Conducted by the US federal reserve chartered by congress key positions appointed by the President and confirmed by the senate Fed influences the economy by influencing interest rates or changing the money supply M1 or M2 3 Be able to calculate the GDP deflator and CPI and explain what they measure Ch 8 3 9 4 and notes Both are measures of inflation GDP Deflator Nominal GDP Real GDP X 100 Measures the prices for all goods in the economy CPI Expenditures in the current year Expenditures of the base year X 100 Expenditures of current year Quantity of base year X Price of current year Average price of the consumer 4 Be able to explain the limitations of GDP and the CPI Ch 8 2 9 4 4 Limitations that cause change in CPI 1 Substitution Bias one product price increases results in the increase purchase of a similar good Increase in Quality Bias Improvement of products 2 3 New Product Bias New products are not included in 10 year update of market basket goods 4 Outlet Bias Records purchases from full retail priced stores such as Costco 5 Be able to calculate the inflation rate core and headline real wages and real prices and to be able to explain what they measure Ch 9 4 9 5 and notes The core inflation rate is the percent change in CPI without accounting for the prices of food and energy Headline inflation rate includes the prices for food and energy 6 Be able to calculate real interest rates and explain their importance Ch 9 6 and The real interest rate corrects the nominal interest rate for the effect of inflation on purchasing power Real Interest Rate Nominal Interest Rate Inflation Rate The real interest rate provides a better measure of the cost of borrowing and the true return from lending then does the nominal interest rate Used by firms when deciding whether to borrow the funds to buy and investment notes good 7 Be able to explain what economists mean by money both the definition and how money is measured in the U S Ch 14 1 14 2 and notes Money Assets that people are generally willing to accept in exchange for goods and services or for payment The Federal Reserve determines how money is measured Two measures known as monetary aggregates o M1 M2 M1 Corresponds with a medium of exchange Narrower Definition o The sum of currency o The value of all checking account deposits in banks o The value of traveler s checks typically ignored since it is a small value M2 Includes M1 plus the savings account deposits small denomination time deposits balances in money market deposit accounts in banks and non institutional money market fund shares 8 Know the current values for real GDP nominal GDP the CPI the GDP deflator and the CPI and inflation deflation and disinflation as measured by the last two Also be able to describe their behavior since 1970 from our charts This means knowing their trends as well as behavior over expansions and recessions notes Section 1 handout and material below Nominal GDP 17 6 trillion 2014 III Real GDP 16 2 trillion 2014 III Economic Growth over the last year by the change in real GDP from 2013 III to 2014 III 2 5 over the most recent quarter from 2014 II to 2014 III 5 0 at an annual rate CPI 236 1 12 2014 Inflation by the change in the CPI over the last year 0 8 and the core rate of inflation change in the CPI without food and energy prices 1 6 9 Be able to describe the harm from inflation Ch 9 7 and notes unfair Can change distribution of income in a manner that strikes many people as being The cost of firms changing prices are called Menu Costs Anticipated inflation acts to raise the taxes paid by investors and raises the cost of capital for business investment 10 Be able to use the key terms in these chapters see the end of the chapter for the list and definitions used in class Ch 8 9 4 to 9 7 11 Be able to explain material from the Macroeconomics Supplement and articles placed in this folder There is a particular emphasis placed on how this material connects with the above learning goals Section 2 Learning Goals In this section we re studying how economists explain growth over decades and centuries We build upon what we did in the first section in that we often use real GDP to measure production a well as income The chapter numbers below are from the 4th and 5th editions so be careful if you have an earlier one as you d expect both deal with long run growth After you read the text study this material and we cover it is class you should 1 Be able to explain why economic growth isn t zero sum notes Zero sum is considered one person s or group s gains from the loss of another 2 Be able to explain the relationship between human health and economic growth Ch 10 1 Real GDP per capita is the best measure of the standard of living As innovation increases discretionary hours for the individual increase as well 3 Be able to explain how long run economic growth has dramatically changed life and how novel the last two centuries have been Ch 10 1 and notes Real GDP per capita increases over the long run but fluctuates due to the business cycle in the short run Grew from about 6 000 in 1900 to about 49 200 in 2012 4 Be able to calculate growth rates and doubling times with the Rule of 70 Ch 10 1 and …