Macro Chapters 5-8
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| What is GDP? (Gross Domestic Product) | Market value of all final goods and services produced in a country in a given year.
Measured quarterly
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| average price level? | Measure of the overall level of prices at a PARTICULAR POINT IN TIME
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| What are the phases of the business cycle? | Expansion
Peak
Contraction
Trough
Expansion again
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| Expansions | Expansions are longer than contractions
Economy grows over time
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| Contractions | Contraction = recession
REALLY bad contraction = depression
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| What phase are we in right now? | Expansion
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| What is a leading indicator? | Variables predicting turns in business cycle.
EX.
Orders of equipment
Stock market
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| What is a coincident indicator? | Reflecting the business cycle as it occurs
EX. Total employment
Personal income
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| What is a lagging indicator? | These variables change as a result of the business cycle
EX. Interest rates
The unemployment rate
The duration of unemployment
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| What relationship is shown by the AD (Aggregate Demand) curve? | Relationship between price level and real GDP demanded
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| Why does the AD (Aggregate Demand) curve slope down? | Higher price level reduces wealth and spending
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| What relationship is shown by the AS (Aggregate Supply) curve? | Relationship between price level and real GDP supplied
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| Why does the AS (Aggregate Supply) curve slope up? | Short Run- firms do not adjust their price instantly to changes in the economy.
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| 2007-09 recession | Fall in housing prices 18 months
Falling in wealth
Financial crisis for lenders
Falls in spending and AD
GDP Decline 5%
Employment fell 6.1%
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| Great Depression | Post WWII average: 11 months
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| 1973-75 Stagflation | Widespread inflation
Result: higher production costs decrease AS
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| What is measured in GDP | The total value of all final goods and services produced in a country in a given year.
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| How often is GDP Measured? | Every Year
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| Calculating GDP--expenditure approach What are the components? | Consumption (70%)
Investment
Gov’t purchases
Exports - Imports
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| GDP Expenditure What is the largest component? | Consumption (70%)
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| GDP Expenditure What is the most volatile component? | Investment
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| Calculating GDP--income approach | Calculated by summing the value of resource costs and incomes generated during the measurement period.
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| Calculating GDP--income approach What is the largest component? | Income
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| What are the limitations of GDP as a measure of output & social welfare? | GDP only one measure of well-being for a nation
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| Other factors affecting well-being, equity, the environment | Crime rate
Education
Health
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| The underground economy | Unreported production of goods and services
Drugs, Tips
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| Exclusion of nonmarket activities | Unpaid work
Housework
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| Nominal vs. real GDP--what’s the difference? | Real GDP measures changes in production only
Nominal GDP measures changes in prices AND production
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| Nominal GDP increases when.. | • Price level rises
• Output rises
• Or both
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| Real GDP Increases When... | • Output rises
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| CPI (Consumer Price Index) --What does it measure? | Measures price level for goods and services used by typical urban consumer
“market basket”
Measured Monthly by Bureau of Labor Statistics (BLS)
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| CPI (Consumer Price Index)- How is it measured? | Cost of basket in year Z (Divided by) Cost of basket in base year X 100
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| What are some problems with the CPI as a measure of the cost of living? | CPI overstates true inflation
Imperfect accounting of quality improvements
Fixed market basket
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| What is GDP Price Index | A measure of the overall price of goods and services related to some base year.
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| How does GDP Price Index differ from CPI? | -The GDP price index uses the prices of all the goods and services in GDP.
-The CPI uses prices of consumption goods and services.
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| What is better? Real or Nominal GDP | Real GDP
Measures of changes in an economy’s productive capacity over time
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| Real GDP per Capital | Real GDP (divided by) population
Standard of living
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| Nominal GDP 2012 | Value of 2012 output in 2012 prices
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| Real GDP 2012 | Value of 2012 output in base yr. prices (2005)
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| Economic Growth | % change in Real GDP/ (Divided by) Time economic growth
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| US unemployment Percentage | 6%
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| Bureau of Labor Statistics (BLS) Household survey | Monthly Survey
60,000 Households
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| Who is in the labor force? | working for pay OR
actively looking for work
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| Who is not in the labor force? | children
homemakers
retirees
prisoners
full-time students
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| Calculating unemployment rate | # Unemployed (Divided by) Labor Force (Times) 100
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| Labor force participation rate | # labor force (Divided by) adult population (times) 100
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| What is the duration of unemployment? | During a recession, median duration rises
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| Fricctional Unemployment | People switch jobs
Takes time, info to match people to jobs
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| Seasonal Unemployment | Seasonal changes in labor demand
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| Structural Unemployment | More Serious
Changing economy and what/where skills are in demand
Solution: retrain or relocate
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| Cyclical Unemployment | Not enough jobs in total
Due to a recession
We are inside the PPF
Solution: government stimulus
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| What do we mean by full employment? | 4-6% unemployment
No cyclical unemployment
structural, frictional at minimum
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| Why is the goal of unemployment NOT zero? | Frictional unemployment will always exist
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| What is inflation and how is it measured? | increase in the average price level
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| What is the current Inflation Rate | 2%
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| What causes inflation? | Demand Pull, Cost Push
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| Cost Push Inflation | supply side
increase in cost of production
cost increase passed on
all prices rise
stagflation
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| Demand Pull Inflation | demand side
production cannot keep up with consumer demand
“too many $ chasing too few goods”
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| Why is Inflation a Problem? | NOT BECAUSE COST INCREASE
Redistributes income
Creates uncertainty
Causes inefficiencies
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| Shorter Time horizons (Inflation) | Consumers, lenders, firms less willing to commit long-term
GDP growth slows
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| Real interest rates | = nominal interest rate – inflation rate
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| Nominal Interest Rates | Stated interest rate
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| Problem with Unemployment | Personal costs
Lost output
Lower tax revenue
Loss of human capital
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| Deflation | Decrease in Price Level
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| Disinflation | Reduce the RATE of inflation
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| Uncertainty (Inflation) | When inflation is high & variable
Uncertainty about future prices
Some investment not undertaken
Some purchases not made
Result: lower growth of GDP
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| What is GPD Per Capita | measures improvements in the standard of living of a nation?
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| What causes GDP per capita to rise over time? | Real GDP must increase more rapidly than population.
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| Short Run PPF | Temporary
Better use of existing production possibilities
Move from INSIDE PPF to OUTSIDE PPF
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| Long Run PPF | Lasting increase in output,& rising living standards
Increase in productive capacity
PPF shifts out
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| Measure economic growth by | Percent change in real GDP annually
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| What is productivity? | total output per unit of input (Times) Labor productivity*
= total output per unit of labor
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| Why do we use labor productivity to measure productivity? | Labor is largest production cost
Labor is more easily measured
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| What is the per worker production function? | Relationship between-
Labor productivity
Capital per worker
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| What is physical capital? | Tools, factories, machines, computers, infrastructure
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| What is human capital? | Knowledge and skills of labor
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| As capital per worker rises | capital deepening
Increases in labor productivity and economic growth
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| What affects productivity in practice? | Intense Labor
Capital Intensive
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| What do we mean by rules of the game? | Institutions that promote economic activity
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| The role of research | Expand base of knowledge
Particular questions & product development
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| What is industrial policy? | Government takes active role in nurturing domestic industries
Tax breaks and subsidies
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| US Productivity Slowdown in 1970s | Oil prices and stagflation
Environmental regulation
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| US productivity Rebound in 1990 | Information revolution
Computer chips, internet
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| Formal Rule of game | laws, governance
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| Informal Rule of game | Corruption, Money Lending
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