Basic Macroeconomics Concepts

labor force participation rate

= (# of people in the labor force)/(working-age population)

unemployment rate

= (# of unemployed workers)/(# in the labor force) x 100

subsidy

A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. Usually given to remove some type of burden and is often considered to be in the interest of the public.

money illusion

The tendency of people to think of currency in nominal, rather than real, terms. The numerical/face value (nominal value) of money is mistaken for its purchasing power (real value) at a previous point in the general price level (in the past).

natural rate of unemployment

about 5% in the US (when the economy is functioning normally) = frictional + structural unemployment

macroeconomics

branch of economics that deals with the whole economy and issues--inflation, unemployment, GDP, national income, interest rates, exchange rates-- that affect most of society

microeconomics

branch of economics that looks at decision making at the firm, household, and individual levels and studies behavior in markets for particular goods and services

shoe leather costs

cost of time and effort that people spend trying to counter-act the effects of inflation Example: holding less cash on hand and having to make frequent trips to the ATM

depreciation

decline in the value of capital over time due to wear or obsolescence

Okun's law

for every one percentage point increase in the unemployment rate *above* the natural rate, output falls by 2 to 3 percentage points

full employment

level of employment that corresponds with the natural rate of unemployment ∙NOT 100% employment ∙there is no cyclical unemployment

disposable income (DI)

personal income (PI) − personal income taxes or national income (NI) − taxes + government transfers

seasonal unemployment

result of changes in hiring patterns due to the time of year Examples: ∙ski instructors ∙lifeguards

structural unemployment

result of skills mismatch Example: as voice recognition software is perfected, skilled typists may find themselves out of work.

cyclical unemployment

results from downturns in the business cycle Example: during recessions and depressions, firms are likely to hire fewer workers or let others go. When the economy recovers many of these unemployed workers will find jobs again.

economics

study of how to allocate scarce resources among competing ends

national income (NI)

sum of income earned by the factors of production owned by a country's citizens. Includes: ∙Wages ∙Salaries ∙Fringe benefits paid for labor services ∙rent paid for the use of land and buildings ∙interest paid for the use of money ∙profits received for the use of capital resources

deflation

sustained *decrease* in the general price level

Inflation

sustained *increase* in the overall price level ______ between years Y and Z (more recent year) = [(*CPI* in year Z/ *CPI* in year Y) - 1] x 100 or ______ between years Y and Z (more recent year) = [(*GDP deflator* in year Z/ *GDP deflator* in year Y) - 1] x 100

nominal salary

the actual number of dollars

price level

the average level of all prices--what a price index like the CPI or the GDP deflator measures

menu costs

the costs associated with stores having to change price listings on signs, shelves, computers, and wherever else they are recorded to keep up with inflation

consumer price index (CPI)

the government's gauge of inflation ∙used to adjust tax brackets and social security payments for inflation. ∙may overestimate the inflation rate due to its inflexible dependency on the *base year market basket* ∙calculated as: = (cost of base year market basket at current prices)/(cost of base year market basket at base year prices) x 100 ∙Things excluded from ____ inflation estimates: --substitutions for less expensive goods and services --quality improvements --prices changes in new products that were not in the base year basket

real salary

the purchasing power of the dollars _____ (GDP) = (Nominal GDP)/(*CPI* for the same year as the nominal figure) x 100 or _____ (GDP) = (Nominal GDP)/(*GDP deflator* for the same year as the nominal figure) x 100

unit of account

the standard monetary unit of measurement of value/costs of goods, services assets

discouraged workers

those who are willing and able to work, but become so frustrated in their attempts to find work that they stop trying ∙not included in unemployment statistics as they are not making an effort to find work at least once every 4 weeks ∙understate the true unemployment problem

unemployed

to be considered as such, a labor force participant must be willing and able to work, and must have made an effort to seek work in the past *4* weeks

aggregate demand (AD)

total demand for goods and services in the economy ∙horizontal axis measures the real value of all goods and services produced domestically in a given period--real GDP (& NI), changes only when the quantity of goods and services produced changes

gross domestic product (GDP)

total value of all final goods and services produced in a year within that country Things excluded: ∙value of intermediate goods (i.e. lumber and steel that go into the production of homes) ∙repurchase of used goods ∙financial transactions (i.e. buying and selling of stocks and bonds, since there is no productive activity associated with them to measure) ∙public and private transfer payments ∙underground economic activities (both legal and illegal) ∙home production

aggregate supply (AS)

total value of output that producers are willing and able to supply at alternative price levels in a given time period, holding other influences constant ∙vertical axis measures the price level ∙Includes --Keynesian stage (flat depression range) --Positively sloped intermediate range

price indexes

used to measure inflation and adjust nominal values for inflation to find real values

Detrimental effects of inflation

∙Menu costs ∙Fixed incomes & incomes that increase at a rate less than the inflation rate decrease in value, adds burden on the recipients ∙Value of interest payments that do not increase in step with inflation decrease, hurting lenders & savers ∙Social tensions tend to increase with inflation ∙increase shoe leather costs ∙the unit of account are unstable because of inflation

gross domestic product deflator

∙alternative general price index that reflects the importance of products in *current market baskets* ∙reflects both price changes and substitutions away from expensive goods (*registers lower inflation rate than CPI) ∙Calculated as: = (cost of current year market basket at current prices)/ (cost of current year market basket at base year prices) x 100

producer price index (PPI)

∙similar in calculation to the CPI, but it applies to the prices of *wholesale goods* (i.e. lumber and steel) ∙sometimes a good predictor of future inflation because producers often pass their cost increases on to consumers

Net domestic product

Indicates how much output is left over for consumption and additions to the capital stock after replacing capital used up for the production process GDP − Depreciation

labor force

includes employed and unemployed adults

dishonest workers

individuals claim to be unemployed in order to receive unemployment benefits, when, in fact, they do not want a job or are working for cash in an unreported job ∙bias the unemployment figure upwards

expenditure approach

method of calculating GDP by adding up spending by households, firms, the government, and the rest of the world using the following formula GDP = C + I + G + (X − M) *C*= personal consumption expenditures by households (i.e. purchase of durable and nondurable goods and services) *I*= investment in new capital, new construction (both commercial and residential), and additions to business inventories *G* = government purchases *X*= exports *M*= imports

income approach

method of calculating GDP using the fact that expenditures of GDP ultimately become income GDP = NI + Depreciation − Subsidies + Net Income of Foreigners Net income of foreigners = Income of foreign workers in country whose GDP is being calculated − Income of citizens working abroad

personal income (PI)

money income received by households before personal income taxes are subtracted

frictional unemployment

occurs as unemployed workers and firms search for the best available worker-job matches Examples: ∙new labor force entrants looking for their 1st jobs ∙workers who are temporarily between jobs because they are moving to a new location or a more productive occupation

benefits of inflation

∙those who borrowed money at fixed interest rates pay back amounts that are worth less in real terms due to inflation Example: Stephanie's $100 loan is fixed at 5%, meaning that she makes a nominal interest payment of $5/year. If the price of apples is $1, the real purchasing power of her interest payment is 5 apples. If inflation takes the price of apples to $1.25, the real value of her interest payment decreases to 4 apples.