Quiz #1 Flashcards
Four Macroeconomic Variables
- Output/Income
- Inflation
- Unemployment
- Interest Rates
Nominal GDP is…
the current value of newly produced final goods + services
GDP does not include ____.
the sale or resale of previously produced good
Nominal GDP equation
Nominal GDP = (p) * (x)
p: the average price of all goods
x: the number of goods produced
GDP Implicit Price Deflator
(Deflator - 100) tells us….
the percent change in prices from the base year through a given year
Example: Deflator in 2018= 120
The average price of all newly produced final goods + services increased 20% from base year through 2018
Equation of Real GDP
Real GDP = (Nominal GDP / Deflator) * 100
value of output produced in any year measured with base year prices
GDP is not a perfect measure of a nation’s output:
- does not include the work we do ourselves
- does not include volunteer work
- does not include illegal work
GDP is not a perfect measure of nation’s well-being:
- leisure
- economic bads
- negative externalities
- distribution of wealth
Inflation
Symbol: p̂
defined as the rate of growth of prices in a given time period (1 year)
DOES NOT compare prices to a base year!!!!
Price Indexes
- GDP Implicit Price Deflator
- Consumer Price Index
- Producer Price Index
Consumer Price Index (CPI)
average price of a “basket” of consumer goods (what we can buy)
CPI in 2019 = 111
The average price of a basket of consumer goods rose 11% from base year through 2019.
Producer Price Index (PPI)
average price of a basket of producer goods
PPI in 2021 = 114
the average price of a basket of producer goods rose 14% from base year through 2021
Example:
CPI in 2018 = 112
CPI in 2019 = 125
What was inflation in 2019?
(CPI in 2019 - CPI in 2018) / CPI in 2018 * 100
(125-112)/112 * 100 = 11.6%
Consumer prices rose 11.6% during 2019
Inflation rate overstate the “true” problem of rising prices
- Substitution Effect
- Increases in Quality Effect
- New Product Effect
- Outlet Effect
Labor Force =
= Employed + Unemployed
Employed
- work within the past week
-those who did not work due to sickness or vacation
Unemployed
- those who did’t work in the past week but who would look for work in the past four weeks
Not included in the labor force
- full-time college students
- retired people
- institutionalized
- active military
Calculating unemployment rate
U.E=
= unemployed/labor force * 100
labor force participation rate =
=labor force/working age population * 100
percent of working age people who are either working or looking for work
Example:
Employed = 70
Unemployed = 10
Working Age population = 120
Calculate unemployment rate and labor force participation rate
UE rate = 10/(10+70) * 100 = 10/80 * 100 = 12.5%
LFP rate = 80/120 * 100 = 66%
Three Different Types of unemployment
- Frictional
- Structural
- Cyclical
Frictional Unemployment (UE)
jobs available in industry “a” and at the same time there are unemployed people with “a” skills
not a major threat to the economy
Structural UE
jobs available in industry “a” and there are unemployed people with “b” skills
more severe threat to economy requires more time, money, and other resources
Cyclical UE
an economic downturn creates unemployment throughout the economy
during periods of recession that we experience cyclical UE
Presents GREATEST threat to economy’s health
The UE rate understates the “true” problem of unemployment:
- not working at the education level received
- part-time workers waiting for full-time counted as employed
- discouraged workers counted as unemployed
“i” can be viewed as
the cost of borrowing
Example: borrow $100 for 1 year at an interest rate of 4% per year
After 1 year we must payback
100+(.04*100) = $104
Real interest rates (r)
Formula is…
real interest rate = nominal interest rate - inflation rate
r = i - ṗ
Example:
i = 12%
ṗ = 9%
What does the number mean?
r = 12 - 9
r = 3
Price of goods rose 9% while our money grew by 12% with 12% more money we can buy 3% more goods
“purchasing power” has increased by 3%
The economy works into the following sectors:
- Household sector
- business sector
- government sector
- monetary sector
- foreign sector
Household sector involves two factors:
- household consumption spending
- household savings
household consumption spending function:
C = a + b * Yd
C = a + b * Yd
Define each symbol
C: total dollar amount of household consumption spending
a: autonomous consumption spending
- gifts, borrowed, savings NOT FROM current earned income
b * Yd: consumption spending derived from current earned income
Yd: Disposable income –> gross income - taxes (Yd = Y - T)
Consumption function meaning:
the dollar amount of consumption spending ay any level of at disposable income
Value of “b”
b is slope of the consumption function
b is also the Marginal Propensity to consume (MPC)
b or MPC identifies….
the change in consumption spending given a one dollar change in disposable income
example: b = MPC = .74
we spend 74 cents of each additional dollar of disposable income
an increase in the value of b or MPC..
- consumption function rotates up (more steep)
- spend more of each additional dollar of disposable income
a decrease in the value of b or MPC…
- consumption function rotates down (less steep)
- spend less of each additional dollar of disposable income
Changes in the value of “a”
in other words what are three causes autonomous consumption spending to change
- household wealth
- income expenditures
- ease and cheapness of borrowing
household wealth
- wealth is NOT current earned income
- wealth: net accumulation of household assets
If household wealth increases the value of “a”
will increase from a0 to a1 causing the consumption function to shift up
income expenditures
expect income to increase in a future date we will spend more today
if income expenditures is expected to increase the value of “a”
a0 increases to a1 causing the consumption function to shift up
ease and cheapness of borrowing
becomes costly to borrow money, than consumption spending will decrease
if borrowing money costs more then the value of “a”
a0 decreases to a1 causing consumption function to shift down
