macro exam 1

conclusion of how america produces

highly educated workforce and capital-intensive production -> highly productive ... but gov't plays an important role

conclusions of real GDP:

holds prices constant through price index to adjust for price level changes (inflation)

GDP comparisons:

in 2018, the U.S. economy produced about $20.5 trillion worth of output compared to the second largest economy, China, which produced $13.6 trillion

the full-employment goal:

in the employment act of 1946, congress committed the federal gov't to pursue a goal of 'maximum' employment, but didn't specify what the rate was -avoid as much cyclical and structural UE as possible -keep frictional within 'reasonable bounds'

personal income [PI]

income received by hh before payment of personal taxes [A]

unemployment varies over time and can occur for many reasons observe that unemployment tends to __________ during recessionary time periods [like the great depression and great recession]

increase

what america produces:

-we produce a lot! -the US has less than 5% of the world's population, yet it produces over 20% of the world's output

okun's law

1% more unemployment results in 2% less output -> dollar value for aggregate cost of unemployment

unemployment rate is found by

# of people unemployed / # of people in labor force * 100%

unemployment rate =

# of unemployed / # in labor force * 100%

not all GDP is available for us, as consumers, to spend other measures of income:

-GDP -NDP (net domestic product) -NI (national income) -PI (personal income) -DI (disposable income)

does a higher GDP mean an increase in the standard of living? per capita GDP:

-GDP divided by population, often used as an indicator for standard of living -Q2 2019: U.S. per capita GDP: $57,800

national income accounting was developed by _________________ and it answers questions such as:

-Simon Kuznets and the US department of commerce 1. how much output is being produced? what is it being used for? 2. how much income is being generated in the marketplace? 3. what's happening to prices and wages?

unemployment measures miss

-discouraged workers -underemployed -phantom employed and vary by: race, sex, age, education, location, etc.

other contributing characteristics of the US that lead to high productivity:

-factor mobility: resources can be easily moved from one location to another where they are needed, example: drilling rigs used for fracking -technological advancement: makes resources more productive, example: hydraulic fracking vs. conventional -outsourcing and trade: global resource use allows for comparative advantage [specialization]

examples of goods the US produces:

-food -oil/natural gas -cars

do comparisons of per capital GDP between countries tell you which population is better off? GDP growth:

-if GDP per capita grows faster than population: higher standard of living, or GDP growth -if GDP per capita grows slower than population: lower standard of living

most people who become unemployed don't stay jobless for long...how long a person remains unemployed is also affected by the nature of joblessness the reasons for unemployment include:

-job losers [fired or laid-off = ran out of work] -job leavers [quitting] -job re-entrants [been away from paid work for awhile] -new entrants [16th birthday, college grad]

the 4 factors of production are

-land -labor -capital -entrepreneurship

examples of services the US produces:

-medical -transportation (uber, lyft, buses) -insurance -tourism -landscaping

how america produces:

-regardless of how much output a nation produces, every nation ultimately depends on its resources - its factors of production - to produce goods and services. so differences in GDP must be explained in part by HOW those resources are used

factors of production:

-resource inputs used to produce goods and services

labor force participation rates [LFPR]

-the % of the population working or seeking employment -FFPR = labor force / population

what America produces

-the mix of output -the mix of output in any nation always includes both goods and services (g/s)

the flow of income the dollar value of output will always equal the dollar value of income; total income is distributed:

-to households (disposable income) -to businesses in form of retained earnings + depreciation -to the gov't in the form of taxes

GDP per capita is

-total GDP divided by total population ... often used as an indicator of standard of living, but it is imperfect as it does not account for: income inequality -> access to goods and services

production is limited by two factors:

1. availability of factors of production 2. technological know-how [i.e. education and training]

important characteristics of the factors of production that contribute to GDP growth:

1. human capital: the knowledge and skills possessed by the workforce the US (on average) is highly educated 2. capital stock: capital available for production US generally utilizes capital intensive production: high capital-to-labor ratio -which leads to high productivity: output per unit of input, example: output per labor unit [# of cakes per baker]

national accounts measurement problems: what shouldn't we include?

1. non-market activities: GDP excludes g/s not sold in the market, example: the homemaker who cooks, cleans, etc. is unpaid (so not in GDP) BUT: of homemaker goes to work and hires a maid and cook, now GDP has increased because of the increase in market transactions 2. unreported income: 'underground economies' - GDP fails to capture market activities not reported to tax or census authorities...motivated by tax avoidance -2/3 of activities are legitimate g/s [IRS estimate] so official GDP is understated

US labor force has more than doubled since 1950 because:

1. population growth 2. increase in female labor force participation

the role of gov't *continued*

1. providing a legal framework: establish and enforce the 'rules of the game' example: ownership rights, contract rights ->lays foundation for market transactions 2. protecting the environment: legal system designed to protect buyers and sellers, but must also consider third parties, see externalities definition 3. protecting consumers: limit market power to protect consumers from unreasonably high prices, see monopoly definition 4. protecting labor: regulations on how labor is used in production, example: child labor, safety standards [not all countries have this]

four types of unemployment:

1. seasonal unemployment: UE due to seasonal changes in employment -> labor supply and demand -must find new job at the end of the season examples: raft guide, ski instructor, holiday shopping, farm hand 2. frictional unemployment: brief periods of UE experienced by people moving between jobs or into the labor force frictional unemployment exists when: -there is adequate demand for labor -individuals have adequate skills -the period of the job search is short ->job matching, which makes up for ~2-3% of unemployed examples: graduate in june, job starts in august 3. structural unemployment: UE caused by a mismatch between the skills [or location] of job seekers and the requirements [or locations] of available jobs {#2 is different due to skill or location mismatch} examples: coal mine shuts down, workers do not have skills for other jobs in the area changes in structural unemployment: -societal changes -changes in product demand -changes in production process -increase in # of women and youth in the work force during periods of change, structural unemployment increases if changes are fully absorbed, structural unemployment decreases 4. cyclical unemployment: UE due to lack of job vacancies - inadequate level of aggregate demand caused by business cycle [=periods of economic growth or contraction] examples: ford layoffs after 2008 recession due to decreased car demand

measuring GDP there are 3 main ways to conduct our national accounting, all yield the same result:

1. value added approach: not all transactions are included at full value in GDP, many products have stages of production, so don't want to double count a. intermediate goods: g/s purchased for use as an input in the production of final g/s b. value added: the increase in the market value of a product that takes place at each stage of the production process 2. the uses of output: what to produce -> GDP account tells us what mix of output was selected a. consumption goods: g/s used by households (hh) ~ 2/3 of annual output b. investment goods: expenditures on production of new equipment, plants, capital, machinery, and changes in business inventories, in a given time period ~ 1/6 of output c. government spending: resources purchased by gov't sector...are then unavailable for consumption or investment purchases ~ 1/5 of output d. net exports: exports: (x) g/s sold to international buyers, and imports: (m) g/s purchased from international sellers net exports is the value of exports - imports 3. measures of income: the value of total expenditure must equal the value of total income. but why? every $1 spent on output becomes $1 of income for someone else.

3 ways to measure:

1. value added in production process 2. value of all final g/s produced within borders (GDP) 3. value of all incomes

US income distribution income quintile:

1/5 of population, ranked by income ... unequal distribution of income in US [top 20% = 50%+ of income, bottom 20% = 3% of income]

a century ago, about 2/3 of US output consisted of goods while 1/3 of output consisted of services, but today:

80% is services

if our economy's PPC was represented by the green PPC, unemployment would be represented by the economy producing inside the PPC at point ______

A

the economy would be fully employed if we were producing at either _________

F or D

NDP =

GDP - depreciation

calculating GDO by the uses of output:

GDP = C + I + G + (X-M)

changes in depreciation reduce GDP to the level of

NDP (net domestic product) before any income is available to current factors of production

personal income =

NI - A hh income = transfer payments + capital income

disposable income [DI]

after tax income of hh DI = personal income - personal taxes -consumption + savings ~70% of revenue generated in GDP

conclusion of what america produces

a lot! $20+ trillion annually, more services than goods in US today

national income [NI]

add net foreign factor income to NDP -total income earned by current factors of production NDP + net foreign factor income = NI

the labor force is

all civilian non-institutional "non-participant" population (16 years+) currently working for pay (employed) or actively seeking paid work (unemployed) -count as employed if on leave from work or work for self/family -as of august, 2019, ~64% of the US population participated in the labor force

the labor force -

all civilian non-institutional population [over 16 years old] currently working for pay [employed] or actively seeking paid employment [unemployed]

economic growth:

an increase in output; an expansion in production possibilities

inflation is

an increase in price levels -> real GDP growth < nominal GDP growth

for whom america produces as we have seen, america produces a huge quantity of output, using high-quality labor and capital resources. that leaves one basic question - for WHOM is all this output produced? how many goods and services one gets largely depends on how much income one has to spend. the US economy uses the market mechanism to distribute most goods and services

but not ALL goods, example: K-12 education, national defense, etc.

labor force growth, unemployment, and our productive capacity: our productive capacity can be represented by our country's production possibility production possibilities:

combos of final g/s that can be produced with available resources and technology in a given time period

C = I = G = X = M =

consumption investment gov't spending exports imports

personal taxes [A]

corporate taxes, indirect business taxes, retained earnings, and social security payments owed by individuals

examples of workers that are not fully captured in our current measure of unemployment:

discouraged workers: persons not actively seeking employment, but would look for or accept a job if one were available -> people who gave up on their job hunt after so many rejects ~29% -if we included these workers in our unemployment statistics, the unemployment rate would be higher underemployment: people seeking full-time paid employment who work only part-time or are employed at jobs below their capacity ~38% -if we included these workers in our unemployment statistics, the unemployment rate would be higher the phantom unemployed: people counted as unemployed with low interest in actually finding a job i.e. welfare and other social program recipients ~7% none of the above ~23%

okun's law states a 1% increase in unemployment leads to 2% less output. this allows us to put a __________ value on the aggregate costs of unemployment

dollar

unemployment rates vary:

economic conditions, sex, race, age, education, location, etc.

the real human costs of unemployment no paycheck -> financial insecurity -> (food, housing, etc.) ->

financial disaster -> -stress -self-esteem issues -social setbacks studies have shown that unemployment is associated with crime, health problems, divorce and other problems...in Japan, the suicide rate jumped by 50% in 1999 when the economy plunged into a recession

income and expenditure:

flow of income that starts with GDP ultimately returns to the market in the form of new consumption (C), investment (I), and gov't purchases (G)

'full' employment is a macroeconomic goal what level of unemployment is 'ideal'? what level does the gov't target?

full employment does NOT mean zero unemployment

unemployment & the PPC: all points on the PPC ->

full employment!

to reach a point on the production-possibilities curve, the labor force must be _______________

fully employed

note: GDP's __________________ focus allows for easier international comparisons

geographical

GDP vs. GNP

gross domestic product focus: geographical, produced within our borders example: honda's ohio plant gross national product focus: ownership of factors of production example: apple's singapore factory

LFPR =

labor force / population * 100%

LFPR is calculated by

labor force / population * 100%

for whom america produces

market mechanism -> need money to buy things ... but large income inequality in US

gross national product (GNP) is the

market value of final outputs produced by american owned factors of production, regardless of location

the gov;t wants to tackle

measurable problems

the impact of changing prices on GDP -> real vs. nominal GDP

must distinguish increases in quantity from increases in prices...price level changes can distort economic indicators

real GDP target year = *target year is current year*

nominal GDP in target year / price index

saving is the part of DI that is

not spent on consumption S = DI - consumption

externalities are

the cost or benefit borne by third party -environmental laws attempt to limit external costs, example: FoCo's ban on fracking in city limits

poor nations:

often lack resources needed for economic growth

labor force growth as the labor force grows, the production possibilities curve shifts ______________

outward

an increase in labor force pushes the production possibilities curve *picture example included*

outward continuing growth of the labor force increases both our capacity to produce g/s and the need to keep creating jobs for people who want to work

example of price index calculation and real GDP for 2013: BASE: 1933: nominal GDP *in billions* = $57 price index = 100 TARGET: 2013: nominal GDP *in billions* = $16,800 price index: 1400

price index = price level in 2013 / price level in 1933 = 1400 / 100 = 14 real GDP 2013 = nominal GDP 2013 / price index = $16,800 / 14 = $1,200 billion

price index is calculated by

price level in target year / price level in base year

conclusions of GNP:

produced with US owned factors of production

inflationary pressures: the council of economic advisors (created by the employment act of 1946) decided that the proximity to 'full' employment could be gauged by watching prices

rising prices are signals that employment is nearing capacity - low UE -> increase in price level

depreciation is

the consumption of capital in the production process...the wearing out of plants and equipment

striking a balance:

the gov't attempts to correct market failures, but if made worse -> gov't failure

unemployment [UE] is

the inability of labor force participants to find jobs -> people not actively employed and seeking work

unemployment is

the inability of labor force participants to find jobs -> people not actively employed and seeking work

national income accounting:

the measure of aggregate economic activity -> GDP calculations

labor force participation rate is the % of

the population working or seeking work

measuring unemployment: the US census bureau surveys about 60,000 households a month to determine how many people are actually unemployed unemployment rate [UR] =

the proportion of the labor force that is unemployed = # of unemployed people / # of people in the labor force

microeconomics is

the study of individual behavior example: 1 car slows down

macroeconomics is

the study of the aggregate economy and behavior example: traffic jam with 100+ cars

base period is

the time period used for comparative analysis; the basis for indexing price level changes

role of government: the US economy relies heavily on the market mechanism. market mechanism:

the use of market prices and sales to signal desired outputs i.e.: resource allocation

real GDP is

the value of final output produced in a given time period, adjusted for changing prices

nominal GDP is

the value of final output produced in a given time period, measured in the prices of that period -"current price" -nominal GDP increases -> an increase in price level or an increase in output

conclusions of GDP:

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

gross domestic product (GDP) is

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

gross domestic product is the

total market value of final output produced within a nation's borders, in a given time frame it uses prices to value output -> allows us to summarize and compare output activities

gross domestic product (GDP) and national income accounting to

track economic performance

chain weighted price adjustments:

uses a moving average of price levels in consecutive years as an inflation adjustment

a monopoly is

when 1 firm produces entire market output ->pricing power...antitrust laws aim to prevent this