Macro Flashcards
GDP: Components of Aggregate Demand
- consumption of consumer goods and services
- investment in capital goods and real estate
- government purchases of goods and services
- net exports (net demand of domestic goods by foreigners)
Labor Market: Unemployment, types
Jobless but looking for a job
- Frictional: result of free labor market and allocation of labor to jobs (“matching”) –> healthy
- Structural: result of a mismatch of skills in an economy (e.g. shift from manufacturing to service economy)
- Cyclical: loss of jobs in recession when firms cannot afford to hire enough employees
Labor Market: unemployment rate
# unemployed
Labor Force
Labor Market: Labor Force
Employed + # Unemployed
Labor Market: Participation Rate
Measure of the active portion of an economy’s labor force:
_ Labor Force _
Total Population over 16yTrend
Trend 1970 - 2010
- men: 80% –> 70% (result of aging population)
- women: 40% –> 60% –> 55% (recession)
Labor Market: Categories
- employed
- unemployed
- retired
- full-time student
- disabled
- other (detached from labor force)
Macro Data: GDP (Y) Definition
GDP is a measure of output, i.e. market production
- market value
- of all final goods and services newly produced
- on domestic soil
- during a period of time
Labor Market: Problems of Unemployment
1) Depreciation of human capital (lose skills)
2) Productive externalities: waste resources
3) Social externalities: increase in crime, divorce, etc.
4) Individual self-worth: lower marginal utility of leisure
GDP: Measuring GDP in Practice
1) P_roduction method_ (supply): sample firms and gather “value added” (sales - cost of raw material)
2) Expenditure method (demand): Y = C + I + G + NX
3) Income method: Labor income + capital income
GDP: Expenditure components
1) Consumption (C): sum of durables, non-durables and services purchased domestically by individual consumers (excluding new housing)
2) Investments (I): sum of durables, non-durables and services purchased domestically by businesses
Does NOT include real estate / stock transactions –> not produced!
GDP: Government spending
Spending on goods and services
(Does not include wealth transfers (welfare spending)
GDP: Supply Side components
Production = f(A, N, K, other inputs)
A: technology
N: labor input - demand/supply
K: capital input - past investments
Prices: Types of prices
P = price of output (cf. CPI)
W = realwage, price of labor
r = real interest rate, price of money
$, e = price of foreign currency, FX market
Markets that determine the level of GDP (Y) and all aspects of the macroeconomy
1) Labor market: demand / supply
2) IS-LM market: loan demand / supply
3) Aggregate Demand vs. Aggregate Supply
4) FX market
Markets: Labor Market (1/4)
Labor market:
- determined by demand / supply
- determines N, W
- determines production/supply side
Markets: IS-LM market (2/4)
IS-LM market:
- determined by loan demand / supply
- determines r, I
- key to central bank policy
Markets: Aggregate Demand vs Aggregate Supply(3/4)
Aggregate Demand vs. Aggregate Supply
- determines P, Y
- key to understand inflation
Markets: FX market (4/4)
FX market
- determines $, e (value of currency)
- key to linking international markets
GDP: Savings - Personal Savings Rate
Savings Rate =
<em>S(hh) </em>* / *<em>Y(d) </em>
- Household Savings S(hh) = Y - T + Tr - C
- Disposable Income Y(d) = Y - T + Tr
(T: Taxes, Tr: Welfare Transfers)
Trend: 1970 - 2010: 15% –> 2.5%
Savings: Government (Public) Savings, Deficit
Sgovt = T - (G + Tr)
Negative Sgovt = deficit
Savings: Total Savings
Total Savings in the Economy
S = Sgovt + SHH
S = Y - C - G
S = I + NX
Price and Inflation: Importance to measure prices
- price is a key metric to measure production (Y)
- Changes in price (inflation, deflation) are important to track real growth rates
Price and Inflation: Price Index, Technological Bias of CPI
Consumer Price Index
- representative basket of goods –> measure inflation
- technological bias: quality improvements, new product inventions distort the CPI –> 1% of inflation
Price and Inflation: Real and Nominal Values given CPI
Real Value of 1995 GDP in 1982 $
= Nominal 95$ * CPI (82$/95$)
Price and Inflation: Real Growth GDP I
1) Determine Real Y(t+1) and Real Y(t) in same year$
2) Calculate Growth Rate
= Real Y (t+1) - Real Y (t)
Real Y (t)
Price and Inflation: Real Growth GDP II
Price: Yield Curve
definition and insights
- Definition: relationship between interest rates (yields) on securities of differing maturities
- Insights: infer the market’s expectation of future economic conditions
- flat curve: low aggregate demand, recession
- upward sloping: boom, growth, high aggregate demand (accelerating π or r)
Nominal Yield / Interest Rate
i = r + πe + p
- i = nominal interest rate
- r = real interest rate on security
- πe = expected inflation
- p = risk premium (in macro = 0)
Yield Curve: causes for shift
Change (increase, decrease) in
- current and future r
- current and future πe
Yield Curve:
what causes the yield curve to slope upwards or downwards?
Change in
- future (not current) r –> expected future recession
- future (not current ) πe–> expected acceleration or falling inflation rates
Inflation
Why do we care about inflation?
Costs of Inflation
- Variability:
- higher inflation correlates with higher variability for both borrower and lender
- both require risk premium
- no contract possible, ineffective economy
- Indexing Costs:
- contracts are indexed
- cash flows less stable!
- Menu Costs:
- costs of re-pricing goods
- price loses signaling function
- Shoe-Leather Costs:
- unattractive to hold cash
- increased transaction costs of borrowing
