Unit 2: Macro Measures and International Trade

Inflation (Hyperinflation) - Definition

A situation where the price increases are so out of control that the concept of inflation is meaningless. (Ex. Zimbabwe 2008).

Economic Goals - List

All countries attempt to: promote economic growth; limit unemployment; and keep prices stable (limit inflation).

Economic Growth - Notes

Economic growth is an increase in real GDP over time and in real GDP per capita over time (usually used to determine standard of living).

Economic Growth (Purpose) - List

Economic growth: provides better goods and services; increases wages and standard of living; allows more leisure time; economy can better meet wants.

Measuring INflation (CPI vs. GDP Deflator) - notes

An increase in the price of goods bought by firms or the government will show up in the GDP deflator but not in the CPI. The GDP deflator includes only those goods and services produced domestically. Imported goods are not a part of GDP and therefore don't show up in the GDP deflator.

Promote Economic Growth (Analysis of Economy) - Notes

Economists collect statistics on production, income, investment, and savings. This is called national income accounting. The most important measure of growth is GDP.

Inflation (COLA) - Notes

Cost-of-Living-Adjustment (COLA). Some works have salaries that mirror inflation. They negotiated wages that rise with inflation.

Causes of Inflation (Demand-Pull Inflation) - Notes

Demand increases but supply stays the same, resulting in a shortage's driving prices up. An overheated economy with excessive spending but same amount of goods.

Unemployment (Criticisms): Race/Age Inequalities- Notes

Ex. = Hispanics - 5.8% for January African American- 8.9% for January Teenagers- 15.3% for January

Expansions (6 Characteristics) - List

Expansions typically have: less unemployment; increase in real GDP; rapid job growth; increasing interest rates; increasing prices; fewer social problems.

Unemployment (NRU): Normal Unemployment - Notes

Full employment means NO Cyclical unemployment! Economists generally agree that an unemployment rate of around 4 to 6 percent is normal. 4-6% Unemployment = Full Employment

Measuring Inflation (GDP Deflator) - Formula

GDP Deflator = 100 x Nominal GDP/Real GDP

Measuring Inflation (GDP Deflator) - Notes

GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.

Promote Economic Growth (Analysis of Economy): Final Goods- Defintion

GDP does not include the value of intermediate goods. Intermediate foods are those used in the production of final goods and services.

Promote Economic Growth (Analysis of Economy): Dollar Value - Defintion

GDP is measured in dollars.

Promote Economic Growth (Analysis of Economy): One Year - Defintion

GDP measures annual economic performance.

GDP (Productivity): TECHN - List

Some countries have higher GDPs because of differing: technology; economic system; capital; human capital (knowledge); natural resources.

Unemployment (Criticisms): Disgruntled job seekers- Notes

Some people are no longer looking for a job because they have given up.

Unemployment (Criticisms): Part-time Workers - Notes

Someone who wants more shifts but can't get them is still considered employed.

GDP (Standard of Living) - Notes

Standard of living (or quality of life) can be measured, in part, by how well the economy is doing, but needs to be adjusted to reflect the size of the nation's population.

Unemployment (NRU) - Notes

The first two of the three types of unemployment are unavoidable. Together they make up the natural rate of unemployment (NRU).

Promote Economic Growth (Expenditure Approach): Four Components of GDP - List

The four components of GDP: consumer spending; investments; government spending; net exports. GDP is the sum.

Unemployment (Frictional): Seasonal - Notes

This is a specific type of frictional unemployment which is due to time of year and the nature of the job. These jobs will come back. (Ex. Santa Claus impersonator).

Real GDP - Notes

This is expressed in constant, or unchanging, dollars. It adjusts for inflation and is the best measure of economic growth.

Nominal GDP - Notes

This is measured in current prices. It does not account for inflation from year to year.

Real GDP per capita - Definition

This is real GDP divided by the total population. It identifies on average how many products each person makes. Real GDP per capita is the best measure of a nation's standard of living.

Promote Economic Growth (Calculating GDP) : Income Approach - Notes

To calculate GDP this way, add up all the income that resulted form selling all final goods and services produced in a given year.

Promote Economic Growth (Calculating GDP) : Expenditures Approach - Notes

To calculate GDP this way, add up all the spending on final goods and services produced in a given year.

Promote Economic Growth(Annual Growth) - Notes

To calculate year-to-year growth, take the difference of years divided by the FIRST year (growth is measured in the forward direction so it makes sense to use the first year in the calculation of change).

Promote Economic Growth(How to Use GDP) - List

To use GDP: Compare to previous years (Is there growth?); Compare policy changes (Did a new policy work?); Compare to other countries (Are we better off?).

Wage-Price Spiral - List

1.Workers demand raises 2.Owners increase prices to pay for raises 3. High prices cause workers to demand higher raises 4. Owners increase prices to pay for higher raises 5. High prices cause workers to demand higher raises 6. Owners increase prices to pay for higher raises

Recession - Definition

A Recession is 6 month period of decline in output, income, employment, and trade.

Measuring Inflation (3 Problems with the CPI): Substitution Bias - Notes

As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.

Causes of Inflation (Quantity Theory): Result - Notes

Banks refuse to lend and GDP falls.

Promote Economic Growth (Calculating GDP) : Both Approaches - Notes

Both ways generate the same amount since every dollar spent is a dollar of income.

Measuring Inflation (Consumer Price Index) - Formula

CPI = 100 x Price of market basket/Price of market basket in base year

Measuring Inflation (3 Problems with the CPI): Product Quality[Result] - Notes

CPI may suggest that prices stay the same though the economic well being has improved significantly.

Unemployment (Structural) - Notes

Changes in the structure of the labor force make some skills obsolete. Workers DO NOT have transferable skills and these jobs will never come back. Workers must learn new skills to get a job. The permanent loss of these jobs is called "creative destruction." (Ex. VCR repairmen).

Causes of Inflation (Quantity Theory) - Notes

Governments that keep printing money to pay debts end up with hyperinflation. There are more "rich" people but the same amount of products.

Promote Economic Growth (Analysis of Economy): GDP - Defintion

Gross Domestic Product (GDP) is the dollar value of all final goods and services produced within a country's borders in one year.

Causes of Inflation (Cost-Push Inflation) - Notes

Higher production costs increase prices. A negative supply shock increases the costs of production and forces producers to increase prices.

Inflation (Benefit) - Notes

Inflation benefits debtors and renters, and businesses where the price of product increases faster than price of resources.

Inflation (Hurt) -Notes

Inflation hurts creditors, recipients of fixed annuities, non-invested savings.

Inflation - Notes

Inflation reduces the "purchasing power" of money. When inflation occurs, each dollar of income will buy fewer goods than before.

Macroeconomics (What is Macro) - Notes

Instead of analyzing one consumer, we analyze everyone. Instead of one business we study all businesses.

Promote Economic Growth(What Does GDP Reveal) - Notes

Just like calculating your own income, GDP measures how well the U.S. is doing financially.

GDP (Productivity): Capital Stock - Definition

Machinery, tools, and man-made resources. Capital can produce more than people, so countries with more capital can produce more than those without.

Macroeconomics (Purpose) - Notes

Macro was created to measure the health of the whole economy and guide government policies to fix problems.

Macroeconomics - Definition

Macroeconomics is the study of the large economy as a whole. It is the study of the big picture.

The Business Cycle (Who Cares?) - Notes

Macroeconomics measures these fluctuations and guides policies to keep the economy stable.

Unemployment (Criticisms): Illegal Labor- Notes

Many people work under the table.

Promote Economic Growth (Non-included in GDP): Intermediate goods - Notes

Not included in the calculation of GDP, counting intermediate goods would be multiple counting. (EX: Price of finished car, not the radio, tire, etc. )

Promote Economic Growth (Non-included in GDP): Nonproducition transactions - Notes

Not included in the calculation of GDP, these are the activity of financial transactions and used goods.

Promote Economic Growth (Non-included in GDP): Non-market activities- Notes

Not included in the calculation of GDP, this includes illegal drugs, black market, and unpaid work.

Real GDP (Deflation) - Notes

Real GDP "deflates" nominal GDP by adjusting for inflation in terms of a base year prices.

Recessions (6 Characteristics) - List

Recessions typically have: more unemployment; decrease in real GDP; reduced job growth; lower interest rates; decreasing prices; more social problems.

Measuring Inflation (3 Problems with the CPI): Substitution Bias [Result] - Notes

Result: CPI may be higher than what consumers are really paying.

Measuring Inflation (3 Problems with the CPI): New Products [Result] - Notes

Result: CPI measures prices but not the increase in choices.

Unemployment (Frictional) - Notes

Temporarily unemployed" or being between jobs. Individuals are qualified workers with transferable skills but they aren't working. (Ex. Recent graduate looking for a job).

Measuring Inflation (3 Problems with the CPI): Product Quality- Notes

The CPI ignores both improvements and decline in product quality.

Measuring Inflation (3 Problems with the CPI): New Products - Notes

The CPI market basket may not include the newest consumer products.

Inflation (Rate): Notes

The Inflation Rate is the % change in prices in 1 year. The government also compares changes in prices to a given base year (usually 1982). Prices of subsequent years are then expressed as a percentage of the base year.

The Business Cycle (Why does the economy fluctuate?) - List

The economy fluctuates as a result of: retailer and producers sending misleading information about consumer demand; advances in tech, productivity, or resources; outside influences (wars, supply shocks, panic).

Macroeconomics (Why the Whole Economy) - Notes

The field of macroeconomics was born during the Great Depression. Government didn't understand how to fix a depressed economy with 25% unemployment.

The Business Cycle (Who Cares?): Government Responsibility - List

The government has the responsibility to: promote long-term growth; prevent unemployment (resulting from a bust); prevent inflation (resulting form a boom).

Inflation (Measurement): Market Basket - Notes

The government tracks the prices of the same goods and services each year. This "market basket" is made up of about 300 commonly purchased goods.

Labor Force (Criteria) - List

The labor force is: Above 16 years old; Able and willing to work; Not institutionalized (jails, hospitals); Not in military, in school full time, or retired.

Measuring Inflation (Consumer Price Index) - Notes

The most commonly used measurement inflation for consumers is the Consumer Price Index. In this process, the base year is given an index of 100. To compare, each year is given an index number as well.

The Business Cycle - Notes

The national economy fluctuates resulting in periods of boom and bust.

Unemployment Rate - Definition

The percent of people in the labor force who want a job but are not working.

Measuring Inflation (3 Problems with the CPI) - List

The problems with the CPI are: substitution bias; new products; and product quality.

Inflation - Definition

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Unemployment (Structural): Technological - Notes

Type of structural unemployment where automation and machinery replace workers causing unemployment. (Ex. Auto assemblers fired as robots take production).

Unemployment (3 Types) - List

Unemployment is either: Frictional unemployment( including seasonal unemployment); Structural Unemployment (including technological unemployment); or Cyclical Unemployment.

Unemployment (Structural) - Notes

Unemployment that results from economic downturns (recessions). As demand for goods and services falls, demand for labor falls and workers are fired.

Unemployment (NRU): Full Employment - Notes

We are at full employment if we have only the natural rate of unemployment. This is the normal amount of unemployment that we SHOULD have. The number of jobs seekers equals the number of jobs vacancies.

Nominal GDP vs. Real GDP - Notes

When comparing two different dollar values, there must be a consideration of inflation. This is also true when comparing GDP's.