1.2 Measuring the Macroeconomy Flashcards
Macroeconomics
study of how aggregate economy behaves within a social world that is inherently unstable
makes sure that the economic system works properly
exogenous variables
pre-determined variables outside of the model
e.g. consumer optimism or gov spending
endogenous variables
determined within the model e.g. unemployment rate
comparatives statics
shows effect of an exogenous shock
Macro indicators
GDP Level vs Growth rate
Inflation rate vs price level
unemployment rate vs level
nominal gdp
sum of quantities Q at time t in every sector i multiplied by their current price
can increase over time because of either
i. quantities increase (real growth)
ii. prices increase (nominal)
real GDP
at time t is constructed as the sum of all quantities Q multiplied by constant prices P (fixed at a certain “base year”)
how to measure aggregate output in economy
National Income Accounting: measures economic activity and its component in a given country
total production = total expenditure = total income
any output is purchased by someone and results in income to someone
How can GDP be calculated
i. by income (wages, rent, interest, and profits earned by agents in the domestic economy)
ii. by output (totalling value of all final goods and services produced)
iii. by added value (sum of value added from all goods and services produced) = total sales - intermediates
iv. by expenditure (C+I+G+X-M)
problems relating to GDP measure
GDP counts “bads” as “goods” - money spent to destroy building or fund wars
omits underground economic activity - only measures formal markets
ignores distributional issues and inequality and environmental spillovers
overlooks full impact of commons (free use of tech or cultural events)
happiness versus living standards (does not account for living time: Easterlin Paradox)
Consumer Price Index
average cost of living, as represented by typical basket of goods and services purchased by consumers in a country
GDP deflator
average price of output at every t
Nominal GDP/Real GDP
unemployment
number of people who have no job but are looking for one
employment
number of people who have a job
labour force
sum of employment and unemployment
unemployment rate
unemployed / labour force
proportion of unemployed people with respect to the Labour Force
link between unemployment rate and participation rate
when unemployment rate is too high, some of the unemployed give up looking for a job and exit the labour force, so the participation rate is lower
is it possible for nominal gdp in a year to be less than real gdp in the same year?
if the prices in that year are less than prices in the base year
explain whether it is possible for nominal GDP to increase and real GDP to decrease in the same period
nominal gdp can rise because either the price level is rising or quantity has increased. nominal gdp can increase while real gdp falls if the increase in price level is proportionately larger than the drop in real economic activity
when is gdp deflator a better measure than inflation rate
if one wants to know how the price level of goods produced in said country is changing
when is inflation rate a better measure than gdp deflator
when one wants to know how the price level of consumer goods was changing over time
consumers care about the cost of living (goods they actually consume)
some goods are sold not to consumers but to firms (tools), gov and foreigners
some goods bought by consumers are not produced domestically but are imported from abroad
labour rate
number of labour force / number of adult population
participation rate
ratio of labour force to total population of working age
discouraged worker
people who are unemployed but give up looking for a job (not incl. in labour force)
labour force
unemployed + employed
labour force survey
used to compute unemployment rate and is based on interviews with a representative sample of individuals
why care about unemployment?
still associated with financial and psychological suffering
extent of suffering depends on nature of unemployment
unemployment rate provides a signal that the economy is not using some of its resources
low unemployment rate can show that economy is overusing its resources and there may be labour shortages
inflation
sustained rise in general level of prices
pure inflation
where inflation would only be a minor inconvenience because relative prices would be unaffected
why care about inflation?
inflation affects income distribution
leads to uncertainty, making it harder for firms to make decisions about the future, such as investment decisions.
deflation leads to high uncertainty.
okun’s law
output growth is high = unemployment decreases
phillips curve
higher unemployment is associated with lower inflation (on average)
short run
few years. movements in output are primarily driven by movements in demand. changes in demand, perhaps as a result of changes in consumer confidence or other factors
medium run
a decade. economy tends to return to level of output determined by supply factors: capital stock, level of tech and size of labour force. factors move sufficiently slowly that we can take them as given.
long run
few decades or more. capital stock and level of tech e.g. education system, saving rate, role of gov.
