Exam 1 Flashcards
macroeconomics
the study of the economy as a whole (in the aggregate)
Most basic measure of the economy
Gross Domestic Product (GDP)
Higher GDP is..
Good
Lower GDP is…
Bad
GDP
the market value of all final goods and services produced within a country in a year. anything you pay for is included.
flow
amount per unit of time (as opposed to stock: an accumulation of flows from various years)
double counting
GDP counts only final goods to avoid double counting values
Final good
one sold in a form in which it will be used for consumption or in production without being transformed. buy it for itself.
Intermediate good
one used in production and transformed into another good.
stages of production: cup of coffee
- farmer grows beans and sells them to a roaster for $10 (value added: $10)
- Roaster roasts the beans and sells them to coffee shop for $15 (value added $5)
- Coffee shop brews coffee and sells in to consumers for $20 (value added $5)
Total value added: $20
best measure of economic performance
GDP. (it is the best but it is not a perfect measure)
GDP imperfections
- does not count household production (“nonpriced production”)
- does not count leisure value
- does not count production from the underground (shadow economy)
% of women in labor force
1950:
Now:
1950: 34%
Now: 60%
Average US work week
1965:
Now:
1965: 38 hours
Now: 34.5 hours
US citizen in different country
Not included in US GDP
Underground economy
the buying and selling of legal goods and services that is concealed from the government to avoid taxes and/or regulations
black market
explicitly illegal goods and services
GDP (vs. NGDP)
- Market value of all goods and services
- a measure of market value
- Nominal measure (counted in dollars)
- not adjusted for changes in prices
Nominal GDP (vs. GDP)
Will change over time whenever:
- the production of real goods/services changes
- when nominal prices change
- is not adjusted for inflation
inflation definition
the growth rate (% change) of the price level
Price level
a measure of the average nominal prices of goods
Bureau of Economic Analysis (BEA) counts GDP in terms of:
- expenditures (any money spent on a final good)
- incomes (everyone’s net income at each stage of production)
both approaches will result in the same number in accordance with Say’s Law
Say’s Law
“Inherent in supply is the where-with-all for its own consumption” -Jean Baptisle Say
Supply creates its own demand
People produce goods to sell so that they can earn income so they can spend it on other goods.
for the whole economy..
market value of expenditures = market value of production = market value of income
Expenditures approach
GDP = C + I + G + NX
C
consumption expenditures (use it for yourself)
% of GDP: 69%
I
Investment expenditures (earn income with it)
% of GDP: 16%
G
Government Purchases
% of GDP: 17%
Net Exports
Exports - imports
adds goods produced in US but sold elsewhere and subtracts goods purchased in US but produced elsewhere
% of GDP: -3%
Income Approach
- compensation to employees (salaries, benefits, wages)
- proprietors income (money business owners take home after they pay employees)
- Corporate profits
- Rental Income
- Net Interest
Second important measure of economic performance
Unemployment rate
Business cycles
short run ups and downs of the economy
Great Recession
- the last recession
- began December 2007
- started to grow June 2009
- GDP fell by 4%
- unemployment rate high of 10% (started at 5%)
Unemployment Rate
percent of the labor force without jobs
Labor Force
the sum of people who are employed or are actively looking for work
Labor Force Excludes
- minors
- stay at home moms (house partners)
- full time students
- military
- discouraged workers
- anyone in prison
discouraged workers
people who have given up looking for a job because they believe there are no jobs available for them
Labor force and unemployment rate calculated by
US Bureau of Labor Statistics (BLS) calculate unemployment rate and Labor Force.
Last taken July 2015
July 2015 Statistics
Civilian Noninstitutional Population, Labor Force, Unemployed, Discouraged Workers, Part Time For Economic Reasons
Civilian Noninstitutional Population = 250 million people
Labor Force = 157 million people
Unemployed = 8.3 million people
discouraged workers = .67 million people
Part time for economic reasons = 6.5 million people
Labor force participation rate
Labor Force / Population
157 / 250 = 62.5%
Unemployment rate
Unemployment / Labor Force
8.3 / 157 = 5.3%
Types of unemployment
- Structural
- Cyclical
- Frictional
Structural unemployment
persistent mismatch between the skills and atributes of workers and the skills and atributes sought after by employers.
ex. boybands, print based journalists
Cyclical Unemployment
Caused by business cycle fluctuations.
ex. 2009 ford motor co. credit subsidiary cut 1200 jobs. (laid off)
* fear that what begins as cyclical will become structural
Frictional Unemployment
short term. arises from the process of matching workers with available jobs. the workers choice. not a bad thing.
ex. you don’t agree with the requirements of your job so you quit to look for another job.
Inflation fun facts
- policy makers worry about it constantly
- almost constantly positive rates of inflation since WW2
- negative rate of inflation = rate of deflation
- inflation rate was low and stable since the early 1980s
Why do we care about inflation?
- high and/or unstable rates of inflation can harm the economy
- we want to know how much of nominal GDP growth is due to real growth and production verses nominal price growth
Quantity theory of money.
Equation of Exchange
MV=PY
M
Supply of money
P
price level (average level of dollar prices)
Y
real output of goods (real GDP)
V
velocity (the number of times the typical dollar changes hands during a year)
Growth rate is denoted by
%Δ
ex. %Δ M = growth rate of M
MV = PY
is the same as
%Δ M + %Δ V = %Δ P + %Δ Y
In General for any two variables X and Z
%Δ (XZ)
is the same as
%Δ X + %Δ Z
%Δ (X/Z)
%Δ X - %Δ Z
EXAMPLE
Per capita GDP = GDP / Population
Assume GDP grows 5% annually
Assume population grows 2% annually
how much does GDP per capita change?
GDP per capita grows at 3% annually
5% - 2%
%Δ V
approximately 0
purchasing power of money
if nominal prices increase, then the given dollar can purchase fewer goods.
when the price level goes up, inflation rate > 0, purchasing power of money goes down
how does the bureau of labor statistics (BLS) measure the US price level
Price index = (Nominal cost of a “market basket” in a given year) / (nominal cost of that “market basket” in some base year) * 100
In general, having low and stable rates of inflation is preferable to high and unstable rates of inflation because…
- Inflation can distort financial markets by transferring wealth from creditors to debtors (i.e., lenders to borrowers)
- if prices are “sticky” inflation can disrupt the efficiency of the price system
- Inflation can impose “shoe-leather” costs
- Hyperinflation can cause people to abandon use of their nation’s currency
