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Macroeconomics
| Term | Definition |
|---|---|
| What is economics? | Economics is the study of choice under scarcity. Or the study of how we use make our choices when we are faced with constraints. |
| scarcity | limited in supply. Economists agree that all resources (i.e. land, labor, capital) are scarce. |
| Organizations faced with scarcity | Individuals Business outfits or firms Government |
| Opportunity Cost | The opportunity cost of any choice is what we forgo when we make that choice. / the name given to those things we chose not to do |
| Example of Opportunity Cost | The cost of attending this class is the time you can spend elsewhere either working or sleeping |
| Resources in Economics | Land, Labor, Capital and entrepreneurship |
| Land | physical space on which production of goods and services takes place. Land is a free gift of nature. Natural resources can be categorized as land |
| Example of Land | forest, the moon, the sea, the physical earth surface etc. |
| Labor | Human effort, physical or mental, used in the production process |
| Capital | any last longing tool that is used for further production of goods and services |
| Example of Capital | tractor, ATM machine |
| Entrepreneurship | is the ability to combine land, labor and capital into a productive enterprise |
| Rewards for resources: Land | Rent |
| Reward for Labor | Wages and Salaries |
| Reward for Capital | Interest |
| Reward for Entrepreneurship | Profit |
| Micro vs. Macroeconomics | title |
| Microeconomics | the study of individual household, firms and government. The choice they make and their interactions in the specific terms. |
| Microeconomics topics | include demand and supply in specific markets, market structures (perfect market, monopoly, etc.) |
| Macroeconomics | the study of aggregates example: total output (GDP), inflation etc. |
| Inflation | Macro topic based on all markets |
| The Method of Economics | Economics rely on models |
| Models | are abstractions from reality. A model simplifies and reduces our complex world to graphical and mathematical representations. |
| Example of models | the map of Ole Miss Campus, the circular flow of Income |
| The Circular Flow of Income (pg. 54) See notes | a simple model that shows how goods, resources and dollar payment flow between households, firms and governments |
| Product Market | where we buy and sell goods and services |
| Resources/Factor Market | Where we buy and sell labor services |
| Economic Agents | 1)Households 2)Firms 3)Government |
| Positive Economics | employs scientific methodology to economic outcomes / deals with what was or what will be "Inflation reduces our purchasing power" is a positive economic statement |
| Normative Economics | "deals with what should be" Example : "The gov't should give more financial assistance" should = normative |
| What Macroeconomics tries to explain, meaning, the goals of Macroeconomics | Most economists agree that there are 3 important goals that Macroeconomics tries to accomplish |
| Macroeconomic Goals | (1) Economic Growth, (2) High employment or Low Unemployment, (3) Stable Prices |
| Economic Growth | sustainable growth in the production of goods and services |
| Why do we care about sustainable increase in goods and services? | We care about increase in goods and services because our standard of living depends on the total amount of goods and services we produce. |
| Economist monitor economic growth by keeping track of______________? | gross domestic product |
| GDP | the total amount of goods and services produced for the market place in a country in a given period of time, usually a year |
| The US government publishes GDP data every quarter | every 3 months |
| The government agency that keeps track of GDP data is? | The Bureau of Economic Analysis or BEA |
| In terms of economic growth, GDP must be growing faster than the _________? | population |
| GDP per capita | Real GDP divided by population |
| Goal 2 | Low Unemployment or High Employment |
| Unemployment Rate | the percentage of the labor force that cannot find work |
| Labor Force | the sum of the employed and the unemployed workers in the economy |
| A High Unemployment rate means that the economy is not _______________________? | Living up to its potential. |
| The Current Unemployment Rate | April 2013 is 7.5% |
| The Government agency that keeps track of unemployment rate is called _______________? | Bureau of Labor Statistics of the BLS |
| The BLS publishes unemployment rate data ____________? | the first Friday of every month for the previous month |
| Goal 3 | Stable Price Level |
| Price Level | the average of the prices of various goods and services in the economy. |
| Inflation rate | is a persistent increase in price level |
| The objective of stable prices | means that prices are not rising to fast, which is low inflation. High inflation rate erodes consumers purchasing power and also causes uncertainty in the economy. |
| The Business Cycle | The business Cycle is the fluctuation in real GDP around its long term trend. The business cycle is simply a plot of real GDP, economic growth, against time (see notes) |
| A nation's GDP | is the total monetary value of all final goods and services produced for the market place during a given period within the nation's border Important points about GDP |
| Example of GDP | books: 40 books x $2 = $80.00 shirts: 100 shirts x $5 = $500.00 GDP = $580 |
| Nominal vs. Real GDP | current year prices vs. base year prices |
| Expenditure method | GDP = C + I + G + Nx; Nx = X |
| Government purchases (spending) (G) | Government Spending is the spending by states, local and federal government on goods and services. Government spending includes spending on drones, fighter jets, police cars, school buildings, new roads, spy satellites, teachers' salaries, cops salaries, |
| Government spending does not include | transfer payments |
| Transfer payments | welfare; if you do not work for it, it is not counted as GDP. Any payment that is not compensation for supplying goods and services. i.e. food, stamps, unemployment benefits, etc. |
| Net Export | Nx = Export(x) minus Import (M); Nx = X minus M |
| 2nd method of calculating GDP | the factor payment approach: Here, GDP is measured by adding up all the income earned by all households in the economy. The earnings are categorized as rent by owners of land, wages and salaries by labor, interest by owners of capital and profits. |
| Resources/factors of production | land gives rent; labor gives wages; capital gives interest; entrepreneurship gives profit = added all up gives GDP |
| Value Added Approach Method | GDP is calculated by summing up the value added @ each stage of production in the economy. (Insert the Lumber firm illustration in your previous class notes) |
| Draw backs of GDP as a measure of total production | 1.) Household production are excluded from GDP because they are not produced for the market place; 2.) The underground economy is not included in GDP, i.e. proceeds from prostitution, sales of marijuana (not in all states), etc. |
| Shortcomings of GDP as a measure of well being or living standard | 1.) The value of leisure is not included in GDP; 2.) GDP is not adjusted for pollution and other negative effects of production. 3.)GDP is not adjusted for crimes and other social problems. 4.) GDP is not a measure of the distribution of income |
| Unemployment rate | the percentage of the labor force that is out of work i.e. unemployed. UR = number of the unemployed divided by labor force times 100 (UR= #of the unemployed/ labor force x 100) |
| Labor Force | unemployed + employed |
| The government openly that complies unemployment data is the Bureau of Labor Statistics (BLS) | BLS releases the unemployment rate of the previous month on the first Friday of every month. The unemployment rate for April 2013 is 7.5% |
| The BLS counts a person as unemployed if the person | 1.) looked for work but cannot find one during the previous month; 2.) is actively seeking a job |
| The Labor Force does not include | 1.) people who are in institutions like hospitals, prisons, etc. 2.) People who are under 16 years of age. 3.) People who are serving in the military; 4.) People who are not in the labor force, i.e. Retirees, full |
| Important points about GDP definition | a.) when dealing with GDP, quantity and quality is more important than prices. Quantity and quality determine standard of living. See notes |
| Important points about GDP definition 2 | b.) Only final goods are included in GDP by including final goods, we avoid double counting (pp. 136) See notes. |
| Important points about GDP definition 3 | c.) GDP includes only goods produced for the market place. i.e. if you paint your own house, cook for your family, etc. your service will not be included in GDP. d.) GDP only includes goods produced in the USA. e.) GDP does not include fairly used goods. |
| Nominal GDP | the value of final goods and services evaluated at current year price. |
| Real GDP | Real GDP is the value of final goods and services evaluated at base year prices |
| GDP Deflator | GDP Deflator = nominal GDP divided by Real GDP times 100 |
| Example of GDP deflator (2013) | $180/$95 x 100 = $189.47 |
| Example of GDP deflator (2012) | $110/$110 x 100 = $100 |
| what do we use to compute economic growth? | Real GDP is what we use to compute economic growth, not nominal GDP |
| To find changes in price level | % = (new |
| Approaches to calculating GDP | there are three approaches to calculating GDP. 1.) The expenditure approach; 2.) The value |
| Expenditure Approach | The expenditure approach is the widely used method of calculating GDP. Under this approach, GDP is measured by adding up the value of goods and services purchased by each type of final user. |
| Final users | households; firms; government; trade i.e. exports |
| GDP = C + I + G + Nx | C = Consumption expenditure, spending; I = investment expenditure, spending; G = government expenditure, spending; Nx = export expenditure; Nx = X |
| The basic problem addressed in economics is | scarce resources and unlimited wants |
| All the problems studied in economics arise from | the scarcity of resources |
| The four main categories of resources are | land, capital, labor, natural resources, and entrepreneurship |
| Macroeconomics is the study of | what is happening in the economy as a whole |
| Which of the following would be studied in macroeconomics? | total output in the nation |
| Macroeconomics studies the determination of | total output, total employment, the general price level, and the general level of interest rates |
| An economic model | simplifies reality in order to focus on crucial elements |
| Economic models come in the form of | mathematical equations |
| An economic model is a(n) | abstract representation of reality |
| Carl is considering attending a concert with a ticket price of $35. He estimates that the cost of driving to the concert and parking there will total an additional $20. In order to attend the concert, Carl will have to take time off from his part | time job. He estimates that he will lose 5 hours at work, at a wage of $6 per hour. Carl's opportunity cost of attending the concert equals |
| Which of the following is a major macroeconomic goal? | Stable prices |
| Rapid economic growth has increased the economic well | being of U.S. citizens because |
| Economists monitor economic growth by keeping track of | the total quantity of goods and services produced in the United States each year |
| In only one of the following situations is a nation's standard of living certain to increase. Which one? | Real GDP rises faster than population. |
| Which of the following indicates that the average standard of living is rising? | Real GDP increases faster than the population. |
| The phase of the business cycle characterized by rising output is called a(n) | Expansion |
| Recessions are identified by | decreasing output |
| Refer to Figure 5 | above. If the economy moves from point A to B on the graph, it is going through a(n) |
| A measure that economists use in order to keep track of employment is | the unemployment rate |
| When we study macroeconomics, | we employ aggregation to reduce the number of markets we need to understand |
| Aggregation is important in macroeconomics because | we need to consider the entire economy at once with a model as simple as possible |
| Which of the following is the best example of an intermediate good? | flour purchased by a bakery for the production of bread |
| Which of the following would be included in a year's GDP? | A college professor purchases a new computer. |
| If we included the purchases of used goods in GDP, | we would be overestimating GDP |
| In the expenditure approach to measuring GDP, we add the values of all | goods and services purchased by each type of final user |
| Which of the following would be included in the consumption component of GDP? | Movie ticket sales |
| A Texas oil company extracts petroleum and sells it to a refinery for $1,000. After processing, the refinery sells the gasoline to a wholesaler for $1,500, who then sells it to a gas station for $1,700. The gas station sells it to customers for $2,500. In | $2,500 |
| A midwestern farmer grows wheat and sells it to a miller for $500. After processing, the miller sells the flour to a baker for $800, who then sells it to a grocery store for $1,000. The grocery store sells it to customers for $1,200. In these transactions | $1,200 |
| The largest component of private investment expenditure is | purchases of newly |
| Private investment during a year includes | spending on plant and equipment, new housing construction, and changes in inventories |
| In the language of economics, which of the following would be defined as investment? | The accumulation of inventories by a firm |
| Which of the following would be included in the expenditures approach to calculating U.S. GDP? | Purchases of new trucks by Federal Express |
| Transfer payments are important for society because | they serve to redistribute money from one group of citizens to another |
| Which of the following describes the relationship between net exports and imports? | Net exports = exports |
| Using the table below, calculate GDP for a particular year. | Consumption spending $1,000 |
| Based on the above information, GDP in this year was | $1,450 |
| If output rises, then income | rises by an equal amount |
| If GDP is $1,000, consumption is $750, interest payments are $200, rent payments are $400, and profits are $200, what must wages and salaries equal? | $200 |
| What is the difference between nominal and real GDP? | Real GDP is adjusted for changes in the price level; nominal GDP is not. |
| As a large number of students graduate from college, which category of unemployment would increase? | Frictional unemployment |
| Kara is a construction worker. Because of adverse weather during the winter, she has been laid off from her job. She is available for work and has even sought work with other construction companies. Kara is | experiencing seasonal unemployment |
| Structural unemployment | arises from a mismatch between available jobs and workers' skills or geographic location |
| Which of the following categories of unemployment arises from macroeconomic causes? | Cyclical unemployment |
| Cyclical unemployment | does not exist when the economy is at full employment |
| The primary macroeconomic cost of unemployment is | lost output |
| In 2008, Computers, Inc. produced personal computers worth $20 million. If $16 million worth were sold and $4 million worth remained unsold at year end and were added to inventories, how much did Computers, Inc. contribute to GDP in 2008? | $20 million |
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