Macro Unit One Flashcards
Three key macroeconomics indicators of “doing well”
Economic growth -measured in GDP Level of employment -measured by the unemployment rate Price stability -measured by inflation
Households
Individuals who live together and make collective economic decisions
Historically consume around 67-70% of the goods and services produced
Business
Private producers of goods and services
Organize factors of production to produce goods
aka Private Sector
Government
Political units of a country
Consumes some output/organizes some factors of production to produce some goods
aka Public Sector
Foreign
All economies outside the economy being studied
Consumes/produces some output
aka International Sector
Financial Market
Securities and commodities are bought and sold
Formulas
Y = GDP Y = C + I + G + X (consumption + investment +government spending + net exports)
C
Consumption
Household spending on new goods and services
Durable AND non-durable goods are included
“Used housing” is accounted for by adding in “monthly rental value”
I
Investment Business spending on: -capital goods (capital stock) (ex. equipment/machines, buildings, etc.) Household spending on: -new housing
G
Government Purchases
Government spending on goods and services
Does not include transfer payments, such as Social Security
X
Net Exports
Exports (goods leave the country; payments come in)
MINUS
Imports (goods come into the country; payments leave)
Exports - imports
Inventories
Goods are added to GDP when they enter inventories
-they count as produced and are added to inventories
-when the goods are sold:
~value is subtracted from inventory
~added to “sales”
Real
Measured at constant prices
Adjusted for inflation
Nominal
Measured at current prices
Not adjusted for inflation
Gross National Product
The total income earned by a nation’s permanent residents
-includes income US citizens earn abroad
-excludes income foreigners earn in the US
GDP ≈ GNP
Conclusions: Y = output and Y = income
Inflation
A general increase in prices throughout and economy
Deflation
A general decrease in prices
Inflation Rate
Percent change from one year to the next
“Demand-Pull” Inflation
Caused by consumer demand for goods increasing faster than the economy can produce the goods
“Cost-Push” Inflation
Caused by businesses reducing the amount supplied due to increasing costs
-due to an increase in the price of an input (oil, wages, etc.)
IMPORTANT EQUATION
Real = Nominal - Inflation Applications: -GDP -wages -interest rates
GDP deflator
Used to calculate rate of inflation
(Nominal GDP/Real GDP) x 100
GDP deflator is 100 in the base year
Calculate the percent change in the deflator to find the inflation rate
Consumer Price Index (CPI)
Shows the costs of goods and services bought by a typical consumer (basket of goods)
Used to calculate the inflation rate
(Price of a basket of goods and services/Price of basket in base year) x 100
Calculating inflation with CPI
The following equation can be used to find percentage changes:
Inflation in year X = ((CPI in year X - CPI in year Y)/(CPI in year Y)0 x 100
Producer Price Index
Measuring the inflation using a basket of goods and services bought by firms
Unemployment rate
Percentage of labor force that is unemployed
Unemployment rate = unemployed workers/labor force
Labor force
People who are employed + people who are actively looking for jobs
Discouraged workers
Individuals who have given up looking for work
-they are NOT counted in the labor force
Natural Rate of Unemployment
Around 5% of workers are expected to be unemployed at any given time
This is considered an equilibrium and includes frictional and structural unemployment
Full employment level of output
5% unemployment
Cyclical Unemployment
Deviations from the natural rate of unemployment
-caused by changes in the business cycle
Frictional unemployment
Unemployment that results from a worker’s search for the right job
Structural unemployment
Results when the quantity supplied of job seekers exceeds the quantity demanded
Usually occurs because of structural problems in the US economy
-can be caused by above average wages, changes in technology, diseconomies of scale, etc.
Doesn’t go away on its own
-might require massive “structural changes” to the economy
