Macroeconomics Ch. 5-8

Money Market

(Financial Market) Households purchase stocks and bonds from firms. Whole world borrows and lends to the money market. Borrowing: governments sign treasury bonds, notes or bills as promises. Firms issue corporate bonds.

Structural Unemployment

portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

Frictional Unemployment

portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems.

Unemployment Rate

ratio of number of people employed to the total number of people in the labor force. (Unemployed/employed+unemployed)

Business Cycle

recurring fluctuations in economic activity consisting of recession and recovery and growth and decline

GNP

total market value of all goods/services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced.

Discouraged-Worker Effect

decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force

Labor Market

Firms and governments purchase labor from households.

GDP Deflator

GDP Price Index (Nominal GDP)/(Real GDP) x 100 Under-estimates inflation because the basket of goods is always changing, prices of capital goods is included, does not include imported goods.

Inflation

increase in overall price level - does not necessarily reduce ones purchasing power

Value Added

the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.

NIPA (National Income and Product Accounts)

Data collected and published by the government describing the various components of national income and output in the economy.

Real Interest Rate

Difference between the interest rate on a loan and the inflation rates.

Calculating GDP

Expenditure Approach: measures the total amount spent on all final goods and services during a given period. (C+I+G+(ex-im)) Income Approach: measures the income -- wages, rents, interest, and profits-- received by all factors of production in producing final goods and services.

GNI (Gross National Income)

GNP converted into dollars using an average of currency exchange rates of inflation.

Fiscal Policy

Government policies concerning taxes and spending.

Net Investment

Gross investment minus depreciation.

Goods-and-Services Market

Household and governments purchase good/services from firms and firms purchase goods/services from each other.

Monetary Policy

The tools used by the Federal Reserve to control the quantity of money, which in turn affects interest rates.

GDP

The total market value of all final goods and services produced within a given period by factors of production located in a country. GDP= Final sales+change in business inventories. - Real GDP=values the production of goods and services at constant prices. P(base year) x Q(current year) - Nominal GDP=values the production of goods and services at current prices. P(current year) x Q(current year) * does not count transactions in which money or goods changes hands but in which no new goods and services are produced.

Cyclical Unemployment

increase in unemployment that occurs during recessions/depressions (business cycle)

Labor Force

The number of people employed plus the number of unemployed.

Natural Unemployment

5% unemployment - structural/frictional (cannot fix) - can only change cyclical

Deflation

A decrease in the overall price level.

Recession

A period during which aggregate output declines. Conventionally, a period in which aggregate output declines for two consecutive quarters.

Hyperinflation

A period of very rapid increases in the overall price level.

Not in the Labor Force

A person who is not looking for work because he or she does not want a job or has given up.

Stagflation

A situation of both high inflation and high unemployment.

Employed

Any person 16 years or older who works for pay for at least an hour a week, who works without pay for 15 or more hours per week, who has a job but is temporarily absent with or without pay.

Labor Force Participation Rate

Labor Force/Population

CPI (Consumer Price Index)

Measure of the average prices paid by urban consumers for a fixed market basket of consumer goods/services. (Cost of basket @ current prices)/(Cost of basket @ base prices) x 100 Doesn't allow consumers to consider substitutes, does not consider producers, includes prices of imported goods.

Three Major Macroeconomic Concerns

Output growth, Unemployment, Inflation and deflation

Unemployed

Person 16 years or older who is available for work but is not working, and has made efforts to find work in the previous 4 weeks.

Sticky Prices

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

Keynesian Economics

Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms - focuses on aggregate demand.

Unemployment

Unemployment rate: Unemployed/labor force. Unemployment implies that the aggregate labor market is not in equilibrium.

Seasonal Unemployment

Unemployment that arises because of seasonal weather patterns

Interest Rate

a fixed quantity or charge for borrowed money, generally a percentage of the amount borrowed. The interest rate of a given loan reflects the length of the loan and the perceived risk to the lender. Movement reflects conditions of financial market.

Depression

a long-term economic state characterized by unemployment and low prices and low levels of trade and investment - long term recession