From Micro to Macro: Aggregate Economy Flashcards
unemployment
when a person willing and able to work is not employed
population of working age
usually 15-64 year olds
labor force
people in population of working age who are or wish to be employed
inactive population
people in population of working age who are neither employed nor looking for a job
participation rate
labor force / population of working age
unemployment rate
unemployed / labor force
employment rate
employed / population of working age
recession - NBER definition
output is declining, a recession is over once the economy begins to grow again
recession - alternative definition
level of output is below normal level, even if economy is growing; recession is not over until output has grown enough to be normal again
business cycle
alternating periods of faster and slower growth rates (BOOM-RECESSION)
Okun’s law
empirical negative relationship between growth of GDP and the unemployment rate (🔼🔽)
Okun’s coefficient
change in unemployment rate in percentage points associated with a 1% change in GDP
3 ways to estimate GDP
spending, production, income
value added
value of output - value of all inputs = profits before taxes + wages
(M)
imports - goods and services produces in other countries ad purchased by domestic households, firms, government
(X)
exports - goods and services produced in a particular country and sold to households, firms, governments in other countries
(C)
consumption - expenditure on consumer goods
(I)
investment - expenditure on newly produced capital goods and buildings
inventory
things produced but not sold, production but no income
(G)
government spending - expenditure by government to purchase goods and services (DOES NOT INCLUDE TRANSFERS)
government transfers
spending by government in form of payments to households or individuals, e.g. pensions (count as C)
trade balance
= net exports (X - M)
trade deficit
negative trade balance (imports more than exports)
trade surplus
positive trade balance (exports more than imports)
aggregate demand equation
Y = C + I + G + (X - M)
inflation
increase in general price level in an economy
deflation
decrease in general price level in an economy
consumer price index (CPI)
measure of general level of prices
GDP deflator
measure of the level of prices for domestically produced output (ratio - nominal GDP : real GDP)
multiplier effect
when direct and indirect effects of a change in autonomous spending affect aggregate output, e.g. building a new school leading to construction workers spending more money on everyday goods
disinflation
the inflation rate is falling
nominal interest rate
interest rate uncorrected for inflation
real interest rate
interest rate corrected for inflation (nominal - inflation rate)
relative price
price of one good or service compared to another (ratio)
Philips curve
inverse relationship between the rate of inflation and the rate of unemployment (high & low & vice versa)
Great Depression timeline
1929 onwards
Golden Age timeline
end of WWII till early 1970s
‘08 crisis timeline
2007 onwards
subprime borrower
individual with low credit rating and high default risk
positive feedback loop
process where some initial change sets in motion a process that magnifies that initial change
supply side
how labor and capital are used to produce goods and services
great moderation
low volatility in aggregate output between 1980s and ‘08
gold standard
system of fixed exchange rates, abandoned in Great Depression (value of currency defined in terms of gold)
zero lower bound
nominal interest rate cannot be negative (minimum 0)
New Deal
Roosevelt’s program of emergency public relief programs to employ millions of people
Bretton Woods system
international monetary system of fixed but adjustable exchange rates (established end of WWII, replaced gold standard)
catch-up growth
how many economies in the world close the gap between the world leader and their own economy
secret of golden age’s performance in productivity
- changes in policymaking
- new arrangements between employers and workers
virtuous cycle of the golden age
after-tax profits remained high → profits led to investment → high investment and technological progress created more jobs → the power of workers
postwar accord
informal agreement between employers, governments and trade unions that created conditions for rapid economic growth from late 40s to early 70s
stagflation
persistent high inflation + high unemployment
supply-side policies
designed to improve the economy by increasing productivity and international competitiveness (cutting taxes on profits, changing legislation, reform of competition policy)
