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.
