Macroeconomics exam 1

• Microeconomics vs Macroeconomics:

  1. Micro is the study of individual, household, and firm behavior
  2. Macro is the study of the economy as a whole. Types of questions asked include how many people are unemployed in the country right now
• Three facts about economic fluctuations:

  1. Economic fluctuations are irregular and unpredictable
  2. Most macroeconomics quantities fluctuate together. During recessions investment, income, consumer spending, profit, stock prices, tax revenue, and spending on imports all fall
  3. As output falls, unemployment rises. Since firms cut back on production, there isn't a need for as many workers, the opposite is true for expansions
• Measuring things: We need to measure prices and quantities. Prices is in the Y axis, quantities in in the X. There isn't just one market in macroeconomics but involves every market.
• Cambridge capital controversy: People debated if it was even possible to count items in macroeconomics. the conclusion is that it is possible to count in macroeconomics and you do this via market values and GDP. Market values relate to the value of 1 good, which makes it possible to compare it.
• How households and firms will interact with the market:

  1. Households buy and consume goods and services and own factors of production. Owning the factors of production doesn't mean households make anything.
  2. Firms are where the production happens: They produce goods and services and hire factors of production. No one lives in the firms but the productivity takes place there.
  3. Goods Market
  4. Factor market
  5. All must balance here assuming no growth
  6. The flow of money (GDP) is how things are compared in Macro
• Goods market:

  1. everything that households consume flows from firms to households.
  2. All the money firms need to keep producing comes from the households, which is the firm's revenue. The revenue from the goods and services and the goods and services themselves are equal.
• Factor market:

  1. Households sell the factors of production to firms. This includes land, labor, capital, and entrepreneurship, which is used to produce goods and services
  2. Firms pay the households wages, rent, and other expenses. Income is what the households receive. The expenses from the firms and the factors of production (land, capital, and labor) are equal
• Definition of GDP: The market value of all final goods and services produced within a country in a given period of time
• Final goods in reference to GDP:

  1. Anything that ends up in the hands of the consumer. Not counting intermediate goods at all in order to avoid double counting
• Goods and services in reference to gdp: Consisting of both tangible and intangible things
• Within a country in reference to gdp: The only thing that matters is the location of production, not where the good is purchased, consumed, nor the location of the consumer
• In a given period of time in reference to GDP: reported typically yearly or quaterly on an annual basis
• What does GDP represent:

  1. how much money it would take for you to buy everything a country produces
  2. It measures productivity, which only measures goods that are produced, bought and sold, and takes no account of informal or black markets
  3. GDP is based on market value which is represented by dollars
  4. GDP= Price * Units produced
• Real GDP: Used to eliminate the factor of price and only takes quantity changed into account Price is selected using a base year and GDP is in constant prices.
• Nominal GDP: GDP in current year prices, does not have a base
• Growth rate for GDP: A measure of how much GDP of an economy has increased or decreased in a given period
• GDP deflator:

  1. Formula: Nominal GDP/ Real GDP *100
  2. Shows how much larger nominal GDP is than real GDP
  3. Nominal and Real gdp is the same in the base year
  4. You can convert back and forth and change base years
• How to divide GDP in different categories:

  1. Equation: Y=C+I+G+NX
  2. C: consumption
  3. I: Investment
  4. G: Government purchases
  5. NX: Net exports, which is exports - Imports.
• The consumption part of GDP: Spending by households excluding new housing. Vast majority of GDP with 2/3s of consumption being services
• The investment part of GDP: Spending on new capital structures, equipment, and new housing. Capital refers to goods used but not used in producing in other goods. Buying something like land doesn't count because there is no production to make the land. contributes a small amount to gdp
• The government purchases part of GDP: all purchases by state, local, or federal government. Transfer payments, which are when the government gives people money without an exchange, is not GDP because the government doesn't get something back. Most purchases occurs at the state and local spending. Contributes about the same amount to GDP as investment
• The net exports part of GDP:

  1. Exports are goods produced domestically and sold abroad
  2. Imports are goods produced abroad and sold domestically
  3. Contributes a slight negative amount to GDP
• Gross national product (GNP): Similar to GDP but is based on the production by the people of a nation rather than where the production happens. If a nation's people produced in foreign lands, that would count as GNP
• Consumer price index:

  1. A measure of prices consumers pay. the primary way inflation is measured
  2. Based on a fix basket of goods that a typical urban consumer buys. Prices are measured for goods in the basket
  3. its an average for people, not an individual concept
• Problems/Biases with CPI

  1. substitution bias
  2. New good bias
  3. Unmeasured quality change
• Substitution bias (CPI):

  1. When prices change, people substitute towards relatively cheaper goods, which CPI does not take into account
  2. CPI doesn't take into account the shift in demand for goods that increase in price in 1 year in comparison to another good in the basket.
  3. Least apparent if you like one good in the basket (You will not substitute) and most apparent to those who like all goods in a basket and want to maximize output (You will substitute)
  4. In the most apparent cases, CPI drastically inflates someone's cost of living
• Unmeasured quality change (CPI): Improvement in the quality of goods make each dollar more valuable. Adjustments are made, but not frequently enough. If things increase in quantity, then CPI overstates the cost of living. If things decrease in quality, then the CPI would understate the cost of living
• New good bias (CPI)

  1. People will get excited over new goods and buy them
  2. CPI does not include new goods. New goods make consumer dollars more valuable
• Uses for CPI

  1. calculate inflation rate
  2. Constant dollar values allow you to calculate the value of past/future dollars to current dollars and vice versa
  3. Indexation: Automatic adjustment of dollar values for inflation by law or contract, sometimes called the cost of living adjustment
  4. Calculates real and nominal interest rates
• Real vs nominal interest rates:

  1. Nominal is the increase in dollars
  2. Real interest rate is the change in purchasing power
• Other price indexes:

  1. Producer price index: Basket of goods purchased by producers
  2. Chained CPI: CPI with a flexible basket
  3. Personal consumption: Expenses on behalf of housholds that uses a flexible basket
  4. GDP Deflator
• GDP Deflator vs CPI

  1. GDP deflater is a flexible basket, which is based on what people buy in a month. CPI is a fixed basket
  2. GDP deflator includes everything in GDP, CPI includes only consumer goods
  3. GDP inflator doesn't include imports while CPI includes consumer imports
• Unemployment:

  1. having a job is important for people's wellbeing
  2. The headline unemployment rate is the percentage of people willing and able to work who do not have a job. This does not include people not in the labor force.
  3. The labor force is split into two categories: Employed, (which is having a job and working for any amount of time, including being self-employed) and Unemployed
  4. Most unemployment spells are short but most observed is long term
  5. its possible for the number of jobs to go up and unemployment to go up
• Not in the labor force:

  1. Discouraged workers: are members of the adult population who would like to work but have given up looking for a job
  2. Discouraged workers aren't in the labor force, so if enough unemployed people become discouraged workers, unemployment will go down. Lower unemployment does not necessarily mean things got better
• Additional context for the unemployment rate:

  1. Labor force participation rate= Labor force/adult population
  2. Employment to population ratio= Employed/adult population
• Types of unemployment

  1. Cyclical: Deviations from the natural rate, which is caused by the business cycle. Is the difference between natural and actual unemployment. Caused by expansion and contraction
  2. Natural unemployment: long run average level of unemployment. There will always be some amount of unemployment. Changes, but changes slowly
• Why does unemployment occur

  1. frictional unemployment
  2. Structural unemployment
• Frictional unemployment:

  1. The idea that workers and employers do not fill openings right away
  2. It takes time for firms/workers to find the best match. It takes time to find a good match between workers and employers
• Structural unemployment:

  1. Features and structures in the economy that result in quantity of labor supplied exceeding quantity of labor demanded
  2. There are structures that keep wages high, which results in more people willing to work than people firms are willing to hire. Examples include minimum wage laws, unemployment insurance, unions, and efficiency wages
• Minimum wage laws: for a minimum wage law to cause unemployment, it has to be binding, which means the minimum wage is above the equilibrium wage. If a minimum wage is not binding the law does nothing