Economics: Macroeconomic Analysis Flashcards
Aggregate Output: GDP
Market value of all final goods and services produced in a country/economy.
- Produced during the period
- Only goods that are valued in the market
- Final goods and services only (not intermediate)
- Rental value for owner occupied housing (estimated)
- Government services (at cost)-not transfers
Aggregate Output: Calculating GDP - Income Approach
Earnings of all households + businesses + government
Expenditures Approach
Sum the market values of all final goods and services produced in the economy
OR
Sum all the increases in value at each stage of the production process.
Aggregate Output: GDP - Expenditures Approach
GDP = C + I + G + (X - M)
C = consuption spending
I = business investment )capital equipment + change in inventories_
G= goverment purchases
X = exports
M = imports
Aggregate Output: Final Values and Value Added
Aggregate Output: Nominal vs. Real GDP
Aggregate Output: GDP Deflator
Aggregate Output: National Income
GDP = national income
- +capital consumption allowance
- +statistical discrepancy
Capital consumption allowance is the output that goes to replace capital stock wearing out, depreciation
National income =
- employees’ wages and benefits
- +corporate and governmen tprofits pre-tax
- +interest income
- +unincorporated business owners’ income
- +rent
- +indirect business taxes - subsidies
(taxes and subsidies included in final prices)
Aggregate Output: Personal Income
Personal income=
national income
+ transfer of payments to households
- indirect business taxes
- corporate income taxes
- undistributed corporate profits
Aggregate Output: Personal Disposable Income
Personal disposable income
= personal income - personal taxes
= after-tax income
Each period, individuals decide whethr to consume or save disposable income
Aggregate Output: Deriving the Fundamental Relationship
GDP = C + 1 +G + (X - M) Total Expenditures
GDP = C + S +T Total Income
¢ + S + T = ¢ + I + G + (X - M)
S + T = I + G + (X - M)
S = I + (G - T) + (X - M)
Aggregate Output: Fundamental Relationship
S = I + (G - T) + (X - M)
Savings = Investment + Fiscal Balance + Trade Balance
Saving are either invested, used to finance government deficit, or used to fund a trade surplus, when both exist.
Aggregate Output: Income = Savings (IS) Curve
**When income = planned expenditure: **
(S - I) = (G - T) + (X - M)
Increase in income increases savings more than investment → (S - I) is an increasing function of income
Increase in income decreases fiscal deficit, increases imports → (G - T) + (X - M) is a decreasing function of income.
Aggregate Output: Deriving the IS Curve
Aggregate Output: IS Curve: Increase in real interest rate
When income = planned expenditure
(S- I) = (G - T) + (X - M)
Increase in real interest rate, holding (G - T) + (X - M) and (S - I) constant:
- Investment decreases
- Savings must also decrease
- Decrease in savings must result from decrease in income
Aggregate Output: The IS Curve
Aggregate Output: Equilibrium in the Money Market
Real money supply (M/P)
Money demand = f (real rates, income)
M/P = MD (r,Y)
Real rates up → quantity demanded down
Income up → quantity demanded up
Higher real interest rates → higher income
Aggregate Output: The LM Curve
Aggregate Output: The Aggregate Demand Curve
Aggregate Output: Aggregate Supply
In the very short run: Aggregate supply does not change (input quantities are fixed)
In the short run: input prices are fixed so businesses expand real output when (output) price increase
In the long run: Aggregate supply is fixed at full-employment or potential real GDP
Aggregate Output: Aggregate Supply Chart
Aggregate Output: Aggregate Demand
- The aggregate demand curve (AD) shows the relation between price level and real quantity of final goods and servies (real GDP) demanded
- Components of aggregate demand
- Consumption (C)
- Investment (I)
- Government spending (G)
- Net exports (X), exports minus imports
Aggregate demand = C + I + G + netX
Aggregate Output: Shifts in Aggregate Demand
C + I + G + netX
- Increase in wealth increase C
- Increase in expectations for economic growth increase C, I
- Capacity utilization > - 85% increase I
- Increase in tax rates decrease disposable income and C
- I_ncreases in government spending_, G
- Increases in money supply reduce real rates and increase I, C
- Depreciation of currency increases netX - imports prices up, export prices down
- Growth of foreign GDP increases netX
Aggregate Output: Shifts in SR Aggregate Supply
Factors that Increase SRAS
- Descrease in input prices
- Improved expectation about future
- Decreases in business taxes
- Increases in business subsidies
- Currency appreciation that reduces the cost of imported inputs
Aggregate Output: Shifts in LR Aggregate Supply
Factors the Increase LRAS
- Increase in labor supply
- Increased availability of natural resources
- Increase stock of physical capital
- Increased human capital (labor quality)
- Advances in technology/labor productivity
Aggregate Output: Short-Run Disequilibrium
Aggregate Output: Increase in Aggregate Demand
Aggregate Output: Decrease in Aggregate Demand
Aggregate Output: Stagflation
- A supply shock decreases SRAS
- Prices rise to P1 and output declines to GDP1
- Government can address inflation or recession, not both
- It can take a long, difficult time for wages and input prices to fall
Aggregate Output: Sources of Economic Growth
Same as factors that increase LRAS
- Increase in labor supply
- Increased availabilit of natural resources
- Increased stock of physical capital
- Increased human capital (labor quality)
- Advances in technology/labor productivity
Aggregate Output: Sustainable Growth
**Potential GDP = **
Aggregate hours worked x labor productivity
Growth **in Potential GDP = **
growth in labor force +
growth in labor productivity
Long-term equity returns are dependent on sustainable growth
Aggregate Output: Production Function Approach
Y = A x f(L, K)
where:
Y = aggregate economic output
L = size of labor force
K = amount of capital available
A = total factor productivity, the increase in output not from increases in labor and capital, closely related to advances in technology
Aggregate Output: Output per worker
One measure of eocnomic progress is output per worker
Because of the diminishing marginal productivity of capital, progress in developed countries relies on technology.
Aggregate Output: Components of Economic Growth
Growth in potential GDP =
growth in total factor productivity +
WC (growth in capital) +
WL (growth in labor)
Where the weights are each factor’s share of national income
Aggregate Output: Per Capita Growth
**Growth in per-capital potential GDP = **
growth in technology +
WC(growth in capital-to-labor ratio)
In developed countries, K/L is high and growth in per capital GDP must come from technolical advancement
Aggregate Output: Example: Total Productivity
Aggregate Output: Problem
Business Cycles: Chart
Business Cycles: Inventory/Sales Ratios
- Eariy in a contraction, sales slow unexpectedly, casusing unplanned increase in inventories to above-normal levels
- Early in an expansion, sales increase unexpectedly, causing unplanned decrease in inventories; inventory/sales ratios decrease to below-normal levels