Unit 2 Economic Performance (Macro)

Unit 2 Overview & Video Lesson: Top 10 things you must know for GDP, business cycles, unemployment, and inflation. This video lecture is geared toward college-level principles of macro courses and students enrolled in AP Economics and IB classes. Below the Top 10 video, you will find mini lessons, essential questions, graphs and models on specific concepts. Take notes and pause when necessary.

Top 10 concepts in this video: 

#1. Circular Flow Model

#2. Gross Domestic Product (GDP)

#3. Excluded from GDP

#4. Real vs. Nominal GDP

#5. Business Cycles

#6. Unemployment

#7. Demand-Pull vs. Cost-Push Inflation

#8. Inflation Rate

#9. Fisher Equation

#10. Winners and Losers of Unanticipated Inflation

NB2. Circular Flow Model (Macro)

What is the circular flow model?

The circular flow model is a system of incentives that shows how businesses and households interact through product markets and resource markets.

Learning objectives: 

1. Students will be able to explain how the factor market is different from the product market. 

2. Students will be able to identify the flows in product and factor markets. 

3. Students will be able to show what households provide businesses in the factor market. 

4. Students will be able to understand how businesses incur costs in the factor market. 

5. Students will be able to explain the role of the government in the expanded version of the circular flow model.

NB2. Gross Domestic Product (Macro)

What is included in the calculation of a nation's GDP?

The four components to a nation's gross domestic product are consumption, gross investment, government spending, and net exports. The GDP accounts for production within a country's borders in one year.

What are the components of gross investment? 

In economics courses, investment generally refers to business expenditures on capital goods. Here are some of the major components to gross investment when calculating the gross domestic product:

1. Fixed investment on capital goods (tools, machinery)

2. Residential and nonresidential investment (houses, apartments, stores, plant)

3. Adjustments to inventories (accounting for unsold goods produced in the current year)

4. Intellectual property, research and development

Net Investment = Gross Investment - Depreciation (AKA Consumption of Fixed Capital)

Learning objectives:

1. Students will be able to define GDP.

2. Students will be able to identify the four components to a nation's gross domestic product as consumption, gross investment, government spending, and net exports.

3. Students will be able to calculate nominal GDP using the expenditures approach.

NB2. Excluded from GDP (Macro)

What types of goods are excluded from the calculation of a nation's GDP?

A nation's gross domestic product reflects the production of goods and services produced legally within a country's borders in one year. The following items are NOT included in the calculation of a country's GDP:

1. Financial transactions (stocks,bonds)

2. Transfer payments

3. Used goods

4. Goods produced overseas

5. Non-market transactions

6. Illegal transactions

7. Unreported transactions

8. Intermediate goods

Learning objectives:

1. Students will be able to explain a nation's gross domestic product as the production of goods and services produced legally for pay within a country's borders in one year. 

2. Students will be able to explain why the following items are NOT included in the calculation of a country's GDP:

a. Financial transactions (stocks,bonds)

b. Transfer payments

c. Used goods

d. Goods produced overseas

e. Non-market transactions

f. Illegal transactions

g. Unreported transactions

h. Intermediate goods

NB2. Real GDP vs. Nominal GDP (Macro)

What is the difference between real GDP and nominal GDP?

Real GDP is output that has been adjusted to hold the price level constant. This way we can measure the level of goods and services that are produced over a period of time without worrying about changes in the price level.

Nominal GDP has not been adjusted for changes in the price level and reflects the market value of all goods and services in the year everything was produced.

Therefore, real GDP is more important than nominal GDP for measuring economic growth.

How to calculate the Real GDP:

Real GDP = Nominal GDP / GDP Price Index

What is real GDP per capita?

Real GDP per capita is one way to measure economic growth and a nation's general economic well-being. It represents the output per person within an economy.

Real GDP per capita = Real GDP / Population

What is the business cycle?

The business cycle shows the upturns and downturns of economic activity. It contains four parts:

1. Expansions (real GDP increases, unemployment falls, prices rise, interest rates rise)

2. Peaks (real GDP is at its max, resources are fully employed)

3. Contractions (real GDP declines, unemployment rises, prices fall, interest rates fall)

4. Troughs (real GDP is at its lowest point, unemployment is near its highest point)

Learning objectives:

1. Students will be able to define real GDP as output that has been adjusted to hold the price level constant. 

2. Students will be able to understand that real GDP is important because it allows us to measure the level of goods and services that are produced over a period of time without 3. worrying about changes in the price level.

3. Students will be able to distinguish between nominal GDP (GDP that has not been adjusted for changes in the price level and reflects the market value of all goods and services in the year everything was produced) and reall GDP.

4. Students will be able to calculate using a GDP deflator or price index (Real GDP = Nominal GDP / GDP Price Index).

NB2. Types of Unemployment (Macro)

What are the three types of unemployment?

There are three types of unemployment that make up the rate of unemployment in a given economy.

1. Frictional unemployment (temporary, seasonal): includes recent graduates and people who quit their job to find something better.

2. Structural unemployment (skills no longer needed): includes people who are replaced by technology or new industries (creative destruction). These people need to retrain or move to find work.

3. Cyclical unemployment (due to recession): includes people who are laid off because the economy is weak (downturn in the business cycle).

Learning objective:

1. Students will be able to list and explain the three types of unemployment that make up the rate of unemployment in a given economy as:

a. Frictional unemployment (temporary, search): includes recent graduates and people who quit their job to find something better.

b. Structural unemployment (skills no longer needed): includes people who are replaced by technology or new industries (creative destruction). These people need to retrain or move to find work.

c. Cyclical unemployment (due to recession): includes people who are laid off because the economy is weak (downturn in the business cycle).

NB2. Unemployment Rate (Macro)

How do you calculate the unemployment rate?

The unemployment rate measures the percentage of people in the labor force that are actively looking for employment. To calculate the rate of unemployment, take the number of people that are unemployed and looking for work and divide by the number of people that are working plus the number of people looking for work.

Unemployment Rate = Quantity of people unemployed / Quantity of people in the labor force

Learning objectives:

1. Students will be able to define unemployment rate as a measure of the percentage of people in the labor force that are actively looking for employment.

2. Students will be able to calculate the rate of unemployment by taking the number of people that are unemployed and looking for work and dividing by the number of people that are working plus the number of people looking for work (Unemployment Rate = Quantity of people unemployed / Quantity of people in the labor force).

NB2. Inflation Overview (Macro)

What is the difference between demand-pull inflation and cost-push inflation?

Demand-pull inflation is caused by an increase in aggregate demand. This means that buyers are pulling up the general price level of goods and services within an economy. Cost-push inflation is caused by a decrease in short-run aggregate supply. This means that an increase in production costs (resource prices) have caused an increase in the general price level.

How do you calculate the inflation rate?

The inflation rate measures the percentage increase in consumer prices over a period of time. To calculate the inflation rate, we can use a price index like the consumer price index (CPI). The consumer price index tracks the prices of goods and services that the typical household buys using a market basket sample (CPI = Market Basket of Specific Year / Market Basket of a Base Year).

How do you calculate the real interest rate?

To calculate the real interest rate, we can use the Fisher equation. The real interest rate accounts for changes in the price level and is very important for businesses interested in investment spending. When real interest rates are low, businesses will increase spending. When real interest rates are high, businesses are less likely to invest.

Real Interest Rate = Nominal Interest Rate - Inflation Rate

(or)

Nominal Interest Rate = Real Interest Rate + Inflation Rate

Learning objectives:

1. Students will be able to define inflation.

2. Students will be able to calculate the inflation rate

3. Students will be able to distinguish between deflation and disinflation.

4. Students will be able to explain the causes and effects of demand-pull inflation.

5. Students will be able to explain the causes and effects of cost-push inflation.

6. Students will be able identify the winners and losers of unanticipated inflation.

7. Students will be able to describe an appropriate fiscal policy and monetary policy that can reduce the rate of inflation in the short run.