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Economics Dr.

Katie Sauer

Chapter 9 Reading Guide: Keeping Score I. GDP Gross Domestic Product is:

Technical Definition: Gross Domestic Product is the market value of all final goods and services produced within a nations borders in a given time period. Economic growth = growth in GDP A. GDP is a decent measure of economic well-being. Explain:

Real GDP means the number has been ________________________________________. Nominal GDP means the number has not. Which number is more meaningful? Why?

GDP per capita is:

GDP per capita tells us more about economic well-being than GDP does. GDP GDP per capita India Israel Explain how population growth affects GDP per capita.

The US economy is about $_______ trillion. It is the largest economy in the world. The second largest economy is ____________ and its GDP is the equivalent of $_______ trillion. US real GDP per capita is about $_______________. How does this compare with other nations? The average American is ____ times as rich as in 1970 and _____ times as rich as in 1940. (and these numbers have been adjusted for inflation) How is it possible we are so much richer than 60 years ago?

Time spent working to afford basic items:

Item stockings chicken cell phone

Year

Price

Time Spent Working to Afford

Year 2000 2009 today

Price $4 $3.86 .

Time Spent Working to Afford

1900 $0.25 1919 $1.23 Mid1980s .

A rapidly rising standard of living has not been the norm throughout history. Over the period between 500AD and 1500AD the GDP per capita in Europe grew by about _______%.

What it means to for a country to be poor by global standards: India example:

Using GDP as a measure of social progress has its problems. B. Drawbacks to using GDP as the measure of social progress: 1. It does not count economic activity that is not paid for.

2. It does not account for environmental degradation

Green GDP is:

3. There are no value judgments attached to GDP calculations.

4. Leisure is not counted.

5. GDP does not take into account the distribution of income.

An alternative to using GDP to measure social progress is the UNs Human Development Index. This index includes:

Explain how richness may not be correlated with happiness:

C. Other measures of economic progress ? List some factors that have been suggested.

II. Recessions In general, recessions stem from some shock to the economy. The USs 1929 and 2007 recession were caused by ________________________________. The USs 1973 recession was caused by _________________________________________. The USs 2001 slowdown was caused by _______________________________________. In developing nations, economic shocks often take the form of _________________________.

In our global economy, recessions spread from nation to nation. 2001 sudden coffee bean low price:

When consumers sustain a shock to income, they spend less. This has the effect of _____________ ________________________________________. The Paradox of Thrift - In troubling economic times, our natural reaction is to _____________________________. However, this makes our collective situation worse. Explain.

Did you or anyone you know adjust their spending in the recent recession? Explain.

The Great Recession of 2007 Part 1: Housing Bubble Burst During the housing boom, houses were getting bigger and mortgages were getting _______________. Down payments were getting __________________. Also, many households were excessively leveraged which means ______________________________________________________________. Additionally, subprime mortgages made it easier for people who werent otherwise creditworthy to get mortgages. When housing prices are rising and someone finds they cant afford their mortgage, they can ______________________________ to repay the loan. When housing prices are falling and someone finds they cant afford their mortgage, they cannot sell their home to repay the loan. As people defaulted on mortgages and banks foreclosed the properties and put them up for sale, the price of houses _____________________________. Part 2: Financial Sector The mortgage problem spread to the financial sector through 2 channels. 1. Banks who had made loans that went bad:

2. Wall Street investment banks and hedge funds: 4

Part 3: Financial System Seizes Up The Lehman Brothers investment bank realized ________________________________________. This meant it would have to declare bankruptcy. This caused panic in global financial markets. What happens when the financial system seizes up?

Girl Scout Example:

Adult Film Industry Example:

Part 4: Recession Spreads Internationally Whenever any large economy falls into recession, it hurts the US economy and vice versa. Explain.

Recovering from Recessions There are often underlying issues that need to work themselves out before an economy can recover. Examples Tech Wreck recession:

recessions from high oil prices:

financial crisis:

In terms of long-run economic growth, recessions might be a positive thing. Explain.

In the short run, however, recessions have real costs. 5

III. Government Economic Policy In a recession the objective of both fiscal policy and monetary policy is to encourage consumers and firms to begin spending and investing again. A. Fiscal Policy Fiscal Policy is when the government: Explain the recent stimulus bill. Spending:

Taxes:

The insight from economist John Maynard Keynes was that the government could use spending and taxing to fine tune the economy. Many economists agree with this in theory. In reality, fiscal policy might not be a good answer to a recession. Three requirements for successful fiscal policy: 1. 2. 3. In many cases, Congress was unable to pass stimulus legislation until after the recessions had ended. May 1977 legislation was for a recession that ended in __________. How did the recent stimulus legislation fare? Explain some of the support and opposition.

B. Monetary Policy Monetary policy refers to the actions undertaken by the Federal Reserve, specifically the raising and lowering of interest rates. In terms of speed, monetary policy works ____________________. In order to stimulate the economy during the Great Recession of 2007, the Fed ________ interest rates. The intended effect of this was: 6

IV. Other Key Economic Indicators A. Unemployment The unemployment rate is calculated as:

A discouraged worker is:

Okuns Law says that an economic growth rate of 3% will _________________________ the unemployment rate. If the economy grows at 4%, unemployment will fall by ________________________. If the economy grows at 2%, unemployment will rise by ________________________.

B. Poverty In the 1960s, the US government created the poverty line. It is defined to be:

Poverty Line for single adult = Poverty Line for family of 4 = The poverty rate is defined to be:

The current US poverty rate is ______%. C. Income Inequality The Gini Index measures income inequality. A score of 0 means A score of 100 means How does the US compare to other nations?

How does the US compare to itself over time?

D. Size of Government How do we measure the size of a government?

Historically, for the US this number has been about _______% of GDP. How does this compare to other nations? 7

E. Budget deficit / surplus Explain why economists dont mind if there is a short run deficit but in the long run the budget should balance.

F. Current Account deficit / surplus The Current Account reflects: The biggest component of the Current Account is the _____________________________. Sometimes it is good to have a Current Account deficit, sometimes not. Explain.

G. National Savings Savings are necessary to finance investment. If collectively Americans do not save, then:

In the 1960s, the personal savings rate was ______%. In the 1980s, the personal savings rate was ______%. In the mid 1990s, the personal savings rate was ______%. By the end of the 1990s, the personal savings rate was ______%. When the recession of 2007 hit, the personal savings rate: H. Demographics Explain how demographics factor in to the sustainability of Social Security.

___________________________________________________________________________________ In your own words, summarize the main points of this chapter.