Macroeconomics Flashcards
Definition Macroeconomics
Deals with economy as a whole. Examines the behaviour of economic aggregates such as aggregate income, consumption, investment and the overall level of prices. Prices are sticky so markets are uncapable o of self-correcting (need for intervention)
Definition Sticky Prices
Prices don’t adjust to maintain equilibrium between quantity supplied and quantity demanded
Macroeconomic concerns (3)
1) Inflation
2) Unemployment
3) Output (Growth)
Definition Inflation
Sustained increase in the general level of prices for goods and services (annual percentual increase)
Increasing inflation –> decreasing purchasing power
Definition Deflation
General level of prices is falling (opposite of inflation)
Definition Disinflation
Inflation is decreasing (prices are still increasing, but rate of increase in prices has decreased)
Definition Hyperinflation
Unusually rapid inflation (Germany 1923)
Definition Stagflation
Combination of high unemployment and economic stagnation with inflation
Definition Core Inflation
- Indicator of underlying long-term inflation
- Consumer Price Index (CPI) and excluding items like food or energy or products with high price changes
Definition Open Inflation
- Government doesn’t try to prevent a rise in prices
- prices grow unlimitedly
- rationing of goods and distribution based on ability to pay
Definition Suppressed Inflation
- Government stops a rise in prices
- control introduction (measures of settlement and rationing)
Causes of Inflation
1) Demand-Pull Inflation (demand grows faster than supply –> prices increase)
2) Cost-Push Inflation (Companies’ costs go up –> increased prices to maintain margins)
Costs of Inflation
- anticipated inflation can be ‘controlled’
- unanticipated inflation: lower costs of loans, consumers spend less, declining purchasing power and standard of living
- re-pricing costs
- domestic products become less competitive
How do we measure inflation?
1) market basket with representative products
2) Consumer Price Index: Measure of price change (purchaser perspective) in consumer goods and services
3) Producer Price Index: Family of indexes measuring the average change over time in selling prices by domestic producers of goods and services (seller’s perspective)
Definition Output Growth
- Increase in production capacity of goods and services of an economy compared from one time period to another
- measured in nominal terms: include inflation
- measured in real terms: adjusted to inflation
Definition Business Cycle
- Cycle of short-term ups and downs in an economy
Definition aggregate output
- Total quantity of goods and services produced in an economy in a given period of time (measured by GDP)
- main measure of an economy’s performance
Definition Recession
- Period during which aggregate output declines
- signaled by two consecutive quarters of decrease in aggregate output
- prolonged and deep recession = depression
- aim: smoothen fluctuation in output during business cycle and increase growth rate of output in the long run
Definition Unemployment
- Percentage of labor force (not population) that is unemployed
- employed = working min. 1h paid or 15h no pay
- unemployed = person between 16 and 65 actively seeking for a job, but can’t find one
Implications of Unemployment
- key indicator for economic health
- existence of unemployment implies that the aggregate labor market is not in equilibrium
Definition Under-employment
Worker is employed, but not in desired capacity (hours, skills, wage), e.g. part-time workers, high-skilled workers in low quality jobs
Definition discouraged-worker effects
- unemployed workers want to find a job, but can’t find one –> get discouraged and stop looking for work
Definition Natural Rate of Employment
- natural job seekers and job openings (will be matched)
- job seekers gather information about job type and wage rate
Definition Frictional Unemployment
Normal worker movement from one job to another (good for economy, since they maybe find a better job)
Definition Structural Unemployment
Unemployment due to structural changes in economy causes loss of jobs in certain industries
Definition Cyclical Unemployment
Increases during recession and decreases during expansion
Definition Labor force participitation rate
- rate of working-age persons in an economy, who are employed, unemployed, but looking for a job
- labor force / population
Definition labor force
labor force = employed + unemployed
Definition population
labor force + not in labor force
Definition unemployment rate
unemployed / labor force
Definition Fiscal Policy
Government influences the economy by spending and taxation to promote strong and sustainable growth and reduce poverty
Definition Monetary policy
- Money supply and interest rates by central bank
- achieve unemployment, inflation, growth
- decrease inflation and recover from recession
Definition Supply side policy
- stimulate aggregate supply instead of aggregate demand
- economic growth by lower tax rates and less regulation –> facilitate production of goods and invest in capital
Circular Flow Diagram
- Shows income received and payments made by each sector of economy
- private sector: households and firms
- public sector: government
- Rest of the world: international sector
- -> every transaction has two sides
Definition Transfer payments
Payments from government to people who do not supply goods, services or labor in exchange for these payments
Goods & Services market (G&S)
- households and governments demand goods and services
- firms supply goods and services
- international trade (import and export)
- price of G&S is determined
Labor market
- firms and government demand labor from households (supply)
- total supply of labor depends on decisions made by households
- price of labor (wage) is determined
Money market
- households buy stocks and bonds from firms
- firms and government also engage in borrowing and lending
- interest rates are determined
National income and product accounts
Key components of national income and output in economy –> how they are connected and how economy performs
Gross Domestic Product (GDP) (basic measure of how economy performs)
An estimated value of the total worth of a country’s production and services, within its boundary, by its nationals and foreigners, calculated over the course on one year (total production value)
How is market value determined?
Value of a good is measured by its price, which is determined in the market
Definition Final Goods & Services (G&S)
- all goods for final use excluding resale and intermediate goods to avoid double accounting
- any good used longer than a year
Definition intermediate goods
- Goods produced by one firm for use in further processing by another firm
- any good that is used within a year
Meaning ‘within a country’
Good is included into border of economy in which it is produced without considering the ownership of production
Definition value added
Difference between a firm’s total revenue and what it pays other firms for intermediate goods (wages, rent, salaries, interest, profit)
Calculating GDP
1) summing up value added at each production stage
2) taking value of final sales
consumption + investment + (government spending) + (exports - imports)
Exclusions from GDP
1) Raw materials and intermediate goods
2) Non-Market production (for own consumption)
3) paper transactions (bonds dividends)
4) second hand sales (money or goods are exchanged, but no new goods are produced)
5) Illegal production
6) transaction from import goods (only domestic production or output)
Domestic production (GDP)
- good or service produced in this economy
- good produced elsewhere and sold here doesn’t count
- output from German people elsewhere is not included in German GDP (output not produced in Germany)
- output from foreigners in Germany counts in German GDP (production is here)
Gross National Product (GNP) (how nationals of a country perform economically)
- An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land, calculated over the course of one year
- Total output produced by domestically owned FOP regardless of where in the world they are physically located
Calculation GNP
GDP + NR (net income inflow from assets abroad) - NP (net payment outflow to foreign assets)
Calculating GDP: expenditure approach
- total amount spent on all final goods during a given period
GDP = C + I + G + (EX - IM)
Personal Consumption Expenditures (C)
- Expenditures by consumers on final Goods & Services
- durable goods, nondurable goods and services
Definition Durable Goods
Goods, that last quiet a long time (e.g. cars)
Definition Nondurable Goods
Goods, that are used quickly (e.g. food or clothing)
Definition Services
Not involving physical things (e.g. legal, medical services, eating away)
Investment (I)
- Purchase of new capital goods
Definition Gross private domestic investment
Total investment by private sector (housing, equipment)
Definition Nonresidential Investment
Expenditures by firms for machines, tools, plants
Definition Residential Investment
Expenditures by households and firms on new houses and apartment buildings
Definition Inventories
- Goods that firms produce now but intend to sell later
- change in given period
Relationship total production (GDP) and total sales
GDP = final sales + change in business inventories
Definition Depreciation
Difference between gross investment and net investment (asset’s value falls in given period)
Definition Net investment
Equal to gross investment less depreciation
Definition Gross investment
Total value of all newly produced capital goods (plant, equipment, housing and inventory) in a given period
Capital (end of period) = Capital (start of period) + net investment
Government consumption and gross investment (G)
- Expenditures by all levels of government (federal, state and local)
- Not including government transfer pays or interest payments on national debt (neither is payment for final Goods & Services)
- Domestic spending includes purchases of imports (included in C and subtracted from Imports)
Exports (EX)
Sales to foreigners of a nation’s-produced Goods and Services
Imports (IM)
A nation’s purchases of Goods & Services from abroad
The income approach
Computing GDP by measuring income (wages, rents, interests and profits) - received by all FOP in producing final goods
Four Components of Income Approach
1) National income
2) Depreciation
3) Indirect Taxes Minus Subsidies
4) Net factor payments to rest of the world
Income Approach: National Income
- total income earned by the FOP owned by a country’s citiziens
- NI = employee compensation + proprietor’s income + corporate profits + net interests + rental income
Income Approach: Depreciation
- Decrease in value of capital assets
- Income paid to a FOP (e.g. robot wears out)
Income Approach: Indirect Taxes Minus Subsidies
- indirect taxes are included in final sales
- subsidies = negative indirect taxes
Definition subsidies
Government payments for which it receives no goods or services for (subtracted from national income to get GDP)
Income Approach: Net factor payments to rest of the world
Interests and dividends citizens receive on investments abroad minus receipts of spendings abroad
Net national product (NNP)
GNP minus depreciation (nation’s total product minus what is required to maintain the value of its capital stock)
National Income (NI)
NNP minus indirect business taxes plus subsidies
Personal Income (PI)
Total income of households
NI - (profits - dividends) - social insurance payments + personal interest income form government and consumers + transfer payments made to persons
Disposable Personal Income (DPI)
PI minus personal income taxes
Personal saving
Any disposable personal income not spent
Nominal GDP
GDP with current prices for goods and services
Definition Inflation
Increase in average price level
Calculating Real GDP
fixed-weight procedure: choose base year and prices in that year (sensitive to growth rates)
Calculation GDF deflator
- way to measure overall price level
- (Nominal GDP / Real GDP) x 100
Problem of Fixed Weights
ignores:
- structural changes in economy
- supply shifts
- substitution effects of price increases
Limitations of GDP
- social welfare (some factors not measures, e.g. crime)
- underground economy not included
Gross National Income per Capita
- GNI / population
- measure for well-being
Gross National Income
- for international comparisons of output
- GNP converted into dollars
