Economics Case

PERFORMANCE AND POLICY

- Economists collect and analyze economic data

-macroeconomists tend to focus on just a few statistics when trying to assess the health and development of an economy

1. REAL GDP( REAL GROSS DOMESTIC PRODUCT)

: measures the value of final goods and services produced WITHIN the borders of a given country during a given period of time, typically a year

: it can tell whether an economy's output is growing

: to get the real GDP- 1st calculate NOMINAL GDP( totals the dollar value of all goods and services produced within the borders of a given country using THEIR CURRENT PRICES DURING THE YEAR THAT THEY WERE PRODUCED)

: it suffers from a major prob: can increase from 1 yr to the next even if there is no increase in output

: corrects for price changes

- we can compare real GDP #s from 1 yr to the next and really know if there is a change in output(rather prices)

- more output=greater consumption possibilities

- economists and policymakers are deeply committed to encouraging a large and growing real GDP

2. UNEMPLOYMENT

: state a person is in if he or she cannot get a job despite being willing to work and actively seeking work

: high rates of unemployment are undesirable bcuz they indicate a nation is not using a large fraction of its most impt resource--talents and skills of its people

: a waste; must count as a loss all goods/services unemployed workers could have produced

: drawn links between higher rates of unemployment and major social problem (higher crime rate, political unrest, depression, heart disease, illness)

3. INFLATION

: increase in the overall level of prices

: it will cost family more money to buy those goods and services

Can be problematic for several reasons:

1. If family's income does not rise as fast as prices of the goods and services that it consumes, it won't be able to purchase as much as it used to and its standard of living will fall.

*Inflation reduces the purchasing power of people's savings; they will buy less than they expected due to higher-than-expected prices

- these statistics are standards by which economists keep track of long-run growth and short-run fluctuations

Macroeconomic models clarify many important questions about the powers and limits of govt economic policy:

1. Can govt promote long-run economic growth?

2. Can they reduce severity of recessions by smoothing out short-run fluctuations?

3. Are certain govt policy tools more effective....(p.467)?

4. Is there trade-off between lower rates of unemployment and higher rates of inflation?

5. Does govt policy work best when it is announced in advance or when it is surprise?

--ans. Is crucial cuz of vast differences in economic performance seen across various economies at diff. times

THE MIRACLE OF MODERN ECONOMIC GROWTH

-Before Industrial Revolution began, in the late 1700s in England, standards of living showed virtually no growth over hundreds or thousands of yrs

(page 468)

- their total outputs of goods and services increased many times over

- problem: as they did, their populations went up by similar proportions so that the amt of output per person remained virtually unchanged

- Industrial revolution: ushered factory production and automation, massive increases in research and development so that new and better technologies were constantly being invented

- result: output grow faster than population

- living standards began to rise as the amt of output/person increased

- MODERN ECONOMIC GROWTH: output/person rises compared with earlier times in which output increased

: annual increase in output/person is not large, 2%; implies that standard of living will double every 35yrs

- vast differences in living standards seen today between rich and poor countries are almost entirely the result cuz some countries have experienced modern economic growth

1. It converts each country's GDP from its own currency into US dollars so that there is no confusion about the values of different currencies

2. It divides each country's GDP measured in dollars by the size of the population

GDP/person=average amt of output each person in each country could have if each country's total output were divided equally among its citizens

It is a measure of each country's average standard of living

3. PURCHASING POWER PARITY: adjust for the fact that prices are much lower in some countries than others

SAVINGS, INVESTMENT, AND CHOOSING BETWEEN PRESENT AND FUTURE CONSUMPTION

- heart of economic growth: principle that in order to raise living standards over time, an economy must devote at least some fraction of its current output to increasing future output

1. SAVINGS: generated when current consumption is less than current output (current spending<current income)

2. INVESTMENT: resources are devoted to increasing future output

FINANCIAL INVESTMENT

: captures what ordinary people mean

: the purchase of assets (stocks, bonds, real estate) in hope of financial gain ECONOMIC INVESTMENT

: has to do with the creation and expansion of business enterprises

: only