• Microeconomics


  The study of individual household and firm behaviour,

  individual markets and industries
• Macroeconomics


  The study of aggregate behaviour at the country or

  world level
• income must equal

  expenditure because


  - Every transaction has a buyer and a seller.

  - Every dollar of spending by some buyer is a dollar of

  income for some seller.
• Circular flow diagram

  
• Gross domestic product (GDP)


  is a measure of

  the income and expenditures of an economy; it is the total market value of all final goods and

  services produced within a country in a given time

  period
• Six important features of GDP

  • Market prices.

  • Final goods, not intermediate goods.

  • Goods and services.

  • Only goods and services currently produced.

  • Production within the geographic confines of a country.

  • Production within a specific interval of time.
• GDP formula


  Y=C+I+G+NX
• Y


  output/GDP
• C


  consumption; the spending by households

  on goods and services.
• Ig


  investment; the spending on capital

  equipment, structures and inventories
• G


  government purchases; the spending on

  goods and services by local and central

  governments (excluding transfer payments).
• NX (or Xn)


  net exports; exports minus imports
• Nominal GDP


  production of goods and services

  at current prices.

  Σ(price per good x quantity of good)
• Real GDP


  production of goods and services at

  constant prices. Σ(base year price per good x quantity of good)
• Higher GDP per person indicates

  a higher

  standard of living.
• Factors that contribute to well-being that are not included in GDP

  The value of leisure

  The value of the environment

  The value of home production

  The effects of unequal income distribution
• The consumer price index (CPI)


  measure of the overall cost of the goods and services in a fixed basket bought by a typical consumer; used to monitor changes in the cost of

  living over time; used to correct for inflation for comparing cost of living over time

  (base year basket quantities x current year prices/base year basket quantities x base year prices)x 100
• Inflation equation


  100% x (CPI2-CPI1)/CPI1
• Factors that contribute to cost of living that are not taken into account in the CPI

  Substitution bias

  Introduction of new goods

  Unmeasured quality change
• Interest


  represents a payment in the future

  for a transfer of money from the past.
• Nominal interest rate


  the interest

  rate not corrected for inflation (i)
• Real interest rate


  the nominal

  interest rate that is corrected for inflation (r)

  Real interest rate = Nominal interest rate - Inflation
• Factors of production


  capital and labor
• K


  capital; tools, machines, and structures

  used in production
• L


  labour; the physical and mental efforts of

  workers
• Production function


  Y=F(K,L) Shows how much output (Y) the economy can produce from

  K units of capital and L units of labour; reflects the economy's level of technology; exhibits constant returns to scale
• Wage


  price of L
• Rental rate


  price of K
• diminishing marginal returns


  As one input is increased (holding other inputs constant), its marginal product falls. If L increases while holding K fixed machines per worker falls, worker productivity falls.
• Aggregate demand


  Demand for goods and services

  C = consumer demand for goods and services, I = demand for investment goods, G = government demand for goods and services

  (if closed economy: no NX)
• Marginal propensity to consume(MPC)


  The change in C when disposable income increases by one dollar
• The real interest rate

  the cost of borrowing; the opportunity cost of using one's own funds to finance investment spending
• Budget surplus


  Taxes >Government Spending
• Budget deficit


  Taxes <Government Spending
• natural rate of unemployment

  the average rate of unemployment around which the economy fluctuates (U/L)
• U


  unemployed workers
• L


  workers in the work force, endogenously fixed
• frictional unemployment


  caused by the time it takes workers to search for a job; even when wages are flexible and there are enough jobs to go around because workers have different abilities and preferences, jobs have different skill requirements, geographic mobility of workers is not instantaneous, flow of information about vacancies and job candidates is imperfect
• unemployment insurance


  pays part of a worker's former wages for a limited time after the worker loses his/her job, increases frictional unemployment. May lead to better matches between jobs and workers, leading to increased productivity and higher incomes
• structural unemployment


  unemployment resulting from real wage rigidity and job rationing, minimum wage, unions, efficiency wages, hiring and firing costs