Macro

• Expenditures approach to GDP

  Looks at all the purchases made on goods and services produced in the United States in a given year
• Income approach to GDP

  Looks at all the income earned by all those purchases
• Value-added approach to GDP


  Involves adding up the value added at each stage of the production process
• The financial sector is the lifeblood of the economy
• Circular flow matrix/model


  Shows how products, resources and money flow in the economy
• Participants in the circular flow

  • Households - sell factor of production & buy products
  • Businesses - buy factor of production & sell products
• Product market


  Where businesses sell goods and services to households
• Factors of production


  • Land
  • Labour
  • Capital
  • Entrepreneur
• Resource market


  Where households sell resources to businesses
• Factor payments


  • Rent (for land)
  • Wages (for labour)
  • Interest (for capital)
  • Profit (for entrepreneurship)
• The circular flow shows how products, resources and money flow between households and businesses
• The government also participates in the circular flow by buying goods and services, and providing public goods and services
• The government funds its spending through taxes on businesses and households
• Unemployment rate


  The number of people who are unemployed divided by the number of people in the labor force, times 100
• Who is counted as unemployed


  • People who are actively looking for work, at least 16 years old, not institutionalized, and not in the military
• Labor force


  The number of people who are actively looking for a job or have a job
• Labor force participation rate


  The number of people in the labor force divided by the working age population, times 100
• Part-time workers are considered fully employed, even if they are looking for another job to make ends meet
• Discouraged workers, who have stopped looking for a job, are no longer considered unemployed
• Types of unemployment


  • Frictional (temporary)
  • Structural (long-term due to skills mismatch or technological changes)
  • Cyclical (due to economic downturn)
• The natural rate of unemployment, consisting of frictional and structural unemployment, is 4-6% in the U.S.
• Cyclical unemployment


  Caused by a downturn in the economy, such as people losing jobs in the restaurant industry during the pandemic
• Scarcity


  Unlimited wants and limited resources, forcing us to make choices
• Tradeoffs


  The things you give up when you make a decision
• Opportunity cost


  The most desirable alternative given up when a choice is made
• Capital goods


  Tools, machines, and other resources used to produce consumer goods
• Human capital


  The knowledge and skills required to produce things
• Four factors of production

  • Land
  • Labor
  • Capital
  • Entrepreneurship
• Economic system


  The methods a society uses to produce and distribute goods and services
• Mixed economy


  An economic system with both free market and centrally planned elements
• Production possibilities curve


  A model showing the alternative ways scarce resources can be used
• Production possibilities curve


  • Points on the curve represent efficient use of resources
  • Points inside the curve represent inefficiency
  • Points outside the curve are not possible with current resources
• Constant opportunity cost


  When the opportunity cost of producing one good is the same for each additional unit
• Law of increasing opportunity cost


  As more of a good is produced, the opportunity cost of producing it increases
• Opportunity cost


  The cost of an alternative that must be given up to pursue a certain action
• Increasing opportunity cost


  As more of a product is produced, the opportunity cost of producing an additional unit increases
• As more of a product is produced

  The opportunity cost of producing an additional unit increases
• Constant opportunity cost


  The opportunity cost of producing an additional unit remains the same
• Absolute advantage


  The ability to produce more output or use fewer resources to produce the same output as another producer
• Comparative advantage


  The ability to produce a good at a lower opportunity cost than another producer