Macroeconomics

Inflation Rate

-the percentage change in the price index from the preceding period *doesn't mean that all goods are rising it means that prices on average are rishing

Unemployment Rate

-the percentage of labor fore that is unemployed

Labor-Force Participation Rate

-the percentage of the adult population that is in the labor force

Collective Bargaining

-the process by which unions and firms agree on the terms of emplyment

Labor Force

-total number of workers including both the employed and the unemployed

Structural Unemployment

-unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one *workers skills do not match the job available* -3 reasons for structural unemployment is minimum-wage laws, unions, and efficiency wages

Real GDP

-uses constant base-year prices to value the economy's production of goods and services --(P*Q)+(P*Q):for P you always use the base year

Nominal GDP

-uses current prices to value the economy's production of goods and services -(P*Q)+(P*Q)

Introduction of New Goods

-when new good is introduced consumers have a wider variety of goods and services to choose from -this makes every dollar more valuable which lowers the coast of maintaining the same level of economic well-being -since the market basket is not revised often enough these new goods are left out of the bundle of goods and services included in the basket

For an economy as a whole

total income must equal total expenditure

What are the 3 categories of unemployment?

labor force, unemployment rate, and labor-force participation rate

Calculate the Cost of Basket

(P*Q)+(P*Q)

GDP Deflator

-measures the level of prices in the economy

Union

-worker association that bargains with employers over wages and working conditions

Calculating GDP Deflator

GDP Deflator = (Nominal GDP/Real GDP)*100

Calculating GDP

Y = C+I+G+NX

Calculate Real Interest Rate

nominal interest rate - inflation rate

Nominal Interest Rate

-the interest rate as usually reported without a correction for the effects of inflation

Real Interest Rate

-the interest rate corrected for the effects of inflation

Calculate Inflation Rate

(CPI(Year2)-CPI(Year1)/CPI(Year1))*100%

Fix the Basket

-the Bureau of Labor Statistics uses surveys to determine a representative bundle of goods and services purchased by a typical consumer

Choose a Base Year and Compute the Index

-the base year is the benchmark against which other years are compared

Unemployment Insurance

-A government policy designed to protect workers' incomes -Get 50% of their previous income

Is GDP a Good Measure of Economic Well-Being?

-GDP says nothing about the distribution of income -A higher GDP does help us achieve a good life

Unemployment Rate

-Percentage of those who would like to work but do not have jobs -Calculated monthly -Divided into 2 categories

Cyclical Unemployment

-Year to year fluctuations in unemployment around its natural rate

PPI (Product Price Index)

-a measure of the cost of a basket of goods bought by firms -firms eventually pass on higher cost to consumers in the form of higher prices on products, the PPI is believed to be useful in predicting changes in the CPI

CPI (Consumer Price Index)

-a measure of the overall cost of the goods and services bought by a typical consumer -the percentage change in the consumer price index measures the inflation rate -fixed basket price *it is possible for CPI to fall if deflation is present such as during the Great Depression

Efficiency Wages

-above equilibrium wages paid by firms in order to increase worker productivity

Natural Rate of Unemployment

-amount of unemployment that the economy normally experiences -the normal rate of unemployment around which the unemployment rate fluctuates

Computer the Basket's Cost

-by keeping the basket the same, only prices are being allowed to change -allows to isolate the effets of price changes over time

Sectional Shifts

-changes in the composition of demand across industries or regions of the country

What are the three reasons that CPI is an imperfect measure of the cost of living

-doesn't account consumers' ability to substitute toward goods that become relatively cheaper overtime -doesn't account increases in the purchasing power of the dollar due to the introduction of new goods -it is distorted by unmeasured changes in the quality of goods and services and because of these measurement problems the CPI overstates annual inflation by about one percentage point

What are 2 reasons for total spending to rise from one year to the next?

-economy may be producing a larger output of goods and services -goods and services could be selling at higher prices

Theory of Efficiency Wage

-firms find it profitable to pay wages about the equilibrium level -higher wages can improve worker health, lower worker turnover, raise worker quality, and increase worker effort

Unmeasured Quality Change

-if the quality of a good falls from one year to the next the value of the dollar falls; if quality rises the value of the dollar rises -attempts are made to correct prices for changes in quality, but it is often difficult to do so because quality is hard to measure

Discouraged Workers

-individuals who would like to work but have given up looking for a job -not counted in labor force and will not show up on unemployed statistics

GDP

-measures an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. -divided among 4 components -Represented with a (Y)

Find the Prices

-prices for each of the goods and services in the basket must be determined for each time period

Consumption

-spending by households on goods and services -basically something you buy for yourself

Investment

-spending on capital equipment, inventories, and structures

Net Exports

-spending on domestically produced goods by foreigners(exports) *minus* spending on foreign goods by domestic residents (imports) -export(X)-import(M)

Government Purchases

-spending on goods and services by local, state, and federal government -basically something that government spends its money on

Substitution Bias

-when the price of one good changes consumers often respond by substituting another good in its place -CPI doesn't allow for this substitution; it is calculated by using a fixed basket of goods and services -implies that the CPI overstates the increase in the cost of living over time

Frictional Unemployment

-when workers spend time searching for the job that best suits their skills and taste -often occurs because of the change in demand among different firms

Calculate CPI

100*(cost of basket in current year/cost of basket in base year)

How the Consumer Price Index is Calculated

4 steps

Calculate Labor Force

Labor Force=Number of employed+Number of Unemployed

Factors of Production

Labor hours the person put into that job

Calculate Labor-Force Participation Rate

Labor-Force Participation Rate=(Labor Force/Adult Population)*100

Which GDP isn't influenced by price change?

Real GDP which makes it a more accurate measure of an economy's production -economist like to know if output changed and not prices

Problems in Measuring the Cost of Living

There are 3

Calculate Unemployed Rate

Unemployed Rate=(Number of unemployed/labor force)*100

Calculate Dollar Value from Previous Year

Value in Year 2 Dollars = (Price level in year 2/Price level in year 1)*Value in Year 1 dollar