Macroeconomics Chapters 1-7

Measurement Problems with Unemployment

Does not include the discouraged workers, does not measure underemployed, does not measure the quality of work, does not measure skill level associated with work.

Per Capita GDP

Dollar value of GDP divided by the country's population.

Cost-Push Inflation

Due to higher production costs putting pressure on suppliers to push up prices.

Law of Increasing Opportunity Cost

Each time we give up one truck, we get less back in tank production.

Investment

Factory machinery and equipment produced

Consumer's Basket of Goods

Housing, Transportation, Food, Clothing, Insurance and pensions, Healthcare, Entertainment, Miscellaneous

Law of Demand

If price increases, ceteris paribus, then quantity demand decreases.

Law of Supply

If the price of a good increases, ceteris paribus, then quantity supplied increases

Optimal Mix of Output

Most desirable combination of output attainable using existing resources, technology, and social values.

Sources of Market Failure

Public goods, Externalities, Market Power, and Inequality

Demand

Quantity of goods people are willing and able to buy

Factors of Production

Resource inputs used in the production of goods and services. Includes Land, Labor, Capital, and Entrepreneurship.

Government Spending

Resources purchased by the public sector

Demand-Pull Inflation

Results from excessive pressure to buy on the demand side of the economy.

Gross Domestic Product

The total market value of all final goods and services produced within a nation's borders in a given time period.

Cyclical Unemployment

Unemployment caused by a decline in economic activity.

Personal Consumption Expenditures

Citizen Purchases

Mixed Economy

Combination of market signals and government directives to monitor economic outcomes

Frictional Unemployment

Brief periods of unemployment experienced by people moving between jobs or into the labor market.

Gross Private Domestic Investment

Business purchases

GDP Components

C + I + G + (X-M) Consumption Expenditure, Investment expenditure, government expenditure, exports and imports.

Computing the CPI

CPI in current year / CPI in base year = Basket price in current year / Basket price in base year

Consumer Price Index

CPI nes - CPI original / CPI original

Externality

A two-party transaction occurs, but there are costs or benefits borne by a third party.

Market Power

Ability of a firm to manipulate the price of a good in the market.

Aggregate

"Total"

Inflation Rate

(CPI new - CPI old / CPI old) x 100

Price Index

100 + Percentage change / 100

Positive Externality

3rd Party benefits because of a market transaction

Okun's Law

A 1% increase in unemployment results in a 2% decrease in GDP.

Public Good

A good or service whose consumption by one person does not exclude consumption of others (roads, parks, national defense, a lighthouse, snow removal, etc.)

Private Good

A good whose consumption by one person excludes consumption by others (most goods and services)

Factor Mobility

Agility to reallocate resources

Land

All natural resource.

Labor Force

All persons age 16+ who are either employed or actively seeking work. Does not include prisoners, mental patients, and the institutionalized

Nominal Income

Amount of money income received in a given time period measured in current dollars

Market Failure

An imperfection in the market mechanism that prevents optimal outcomes.

Free Rider

An individual who reaps direct benefits from someone else's purchast of a public good

Out of Labor Force

Anyone not applying for jobs (college students, retired, discouraged workers, etc.)

Positive Analysis

Based on data; disregards judgments on what is "best".

Monopoly

Firm that produces the entire market supply of a particular good or service.

Outsourcing and trade

Foreigners working for US companies

Nonmarket Activities

GDP measures exclude most goods and services produced but not sold in the market

Legal Framework

Gives legitimacy to written contracts by establishing rules and enforcing provisions.

Ment good

Good that society believes everyone is entitled to some minimal quantity of (food, clothing, shelter)

Consumption

Goods and services consumed by households

Capital

Goods produced for use in further production.

Complementary Goods

Goods that are consumed together. Vodka and Cranberry Juice

Complements in Supply

Goods that are naturally produced together (donuts and donut holes)

Substitutes in Supply

Goods that are produced in place of one another (parachutes OR parachute pants)

Substitute Goods

Goods that can be used to the same purpose

Government Consumption expenditures

Government Spending

Employed

Have to have been paid for at least one hour in the past month

Real Income

Income in constant dollars; nominal income adjusted for inflation.

Normative Analysis

Incorporates subjective judgments about what ought to be done.

Economic Growth

Increase in output.

Inflation

Increase in the average level of prices, not a change in any specific price of a good

Technological Advance

Increase workforce productivity and potential output.

Cause of Economic Growth

Increased input, New technology, Trade, and Increasing resources.

Scarcity

Lack of enough resources to satisfy all desired uses of those resources.

Natural Rate of Unemployment

Long-term rate of unemployment determined by structural forces in labor and product markets

Human Costs of Unemployment

Loss of income, Loss of confidence, Social Stress, Declining health.

Imports

Made in foreign lands and purchased in the US

Real GDP

Nominal GDP in year t / Price Index

Unemployment Rate

Number of unemployed people / Labor Force

Productivity

Output per unit of input

Unemployed

People applying for jobs, but who currently do not have a job

Discouraged workers

People who have given up on finding a job

Income Effects

People with nominal income rising more slowly than inflation end up worse off. People with nominal incomes rising faster than inflation end up better off.

Components of GDP

Personal Consumption Expeditures, Gross Private Domestic Investment, Net Exports of Goods and Services, and Government Consumption Expenditures.

Relative price

Price of one good compared to hte price of other goods

Determinates of Demand

Price of the good, Price of other related goods, Price expected for the good, Income, Number or composition of people in the marketing region, and Tastes and preferences.

Exports

Produced in US and sold in foreign lands

Supply

Producers' ability to produce a product.

Capital Intensive

Production Processes that use a high ratio of capital to labor inputs

Income Distribution

Provides a minimum amount of ment goods.

Net exports of goods and services

Selling to foreign consumers

Labor

Skills and abilities of all humans at work.

Human Capital

Skills of the workers.

Microeconomics

Study of how individuals choose to allocate the scarce resources available to them.

Production Possibilities Curve

Summarizes hypothetical choices. Each point depicts an alternative mix of output that can be achieved. Illustrates scarce resources and opportunity cost.

Determinants of Supply

Supplier input prices (resources used to produce the product), Technology, Number of suppliers, Government taxes (\/ in supply), tarrifs (\/ in supply), or subsidies (/\ in supply), and Prices of other relate products in production (Complements or substitutes in production).

Invisible Hand

The Market that decides how much of something is produced.

Entrepreneurship

The assembling of resources to produce new or improved products and technologies.

Ceteris Paribus

The assumption of nothing else changing.

Free-Rider Dilemma

The communal nature of public goods may cause some consumers to try for a free ride

Laissez-Faire

The government doesn't involve itself in the market.

Full Employment

The lowest unemployment rate compatible with price stability; zero cyclical unemployment. Both frictional and structural unemployment still exist

Macroeconomics

The study of how groups of individuals choose to allocate the scarce resources available to them.

Opportunity Cost

The value to you of the next most desired good forgone to obtain some other higher good. What is given up to undertake a chosen activity. For example, instead of attending class, one could be working and making money.

Production Possibilities

The various combinations of final goods and services that could be produced in a given time period with all available resources and technology.

Negative Externality

Third parties are hurt.

Price Effects

Those who buy products that are increasing in price the fastest end up worse off. Those who sell products that are increasing in price the fastest end up better off.

Wealth Effects

Those who own assets that are declining in real value end up worse off. Those who own assets that are increasing in real value end up better off.

Protecting the Environment

To reduce external costs of production, the government limits air, water, and noise pollution.

Structural Unemployment

Unemployment caused by mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (shorthand writers, assembly line workers, etc.)

Seasonal Unemployment

Unemployment due to seasonal changes in employment (Farm workers, construction workers, lifeguards, etc.)

Money Illusion

Using nominal dollars rather than real dollars to gauge in one's income or wealth.

Net Exports

Value of exports minus value of imports

Real GDP

Value of final output produced in a given period, adjusted for changing prices

Nominal GDP

Value of final output produced in a given period, measure in the prices of that period (current prices)

Three Economic Questions

What to Produce, How to produce it, and for whom to produce.

Equilibrium

When Quanitity demanded equals Quantity Supplied

Inferior goods

When income goes up, you consume less of it. Ramen Noodles.

Recession

When real GDP is falling for two consecutive quarters

Government Failure

When the government fails to improve market outcomes, or makes them worse.

Market Failure

When the market mechanism fails to achieve the best possible outcomes.