Macroeconomics - Chapter 5 Introduction to Macroeconomics

Informal Economy

1. "Underground" or "black market". Includes all transactions that are conducted but not licensed, generate income and are not reported to the government. 2. Estimated to be around 10% of US GDP.

National Activity Index

1. A weighted average of 85 indicators of national economic activity. 2. An index of ZERO indicates that the economy is growing at its historical rate. 3. Negative indices mean that the economy is growing slower. a. an index below -0.7 following a period of expansion suggests high likelihood of recession 4. Positive indices mean that the economy is growing faster than its long-term trend.

Miscellaneous Adjustments

1. Adjustments must account for business taxes and foreign income earned in the US; neither are paid to US factors of production and must be excluded.

GDP-Purchasing Power Parity - GDP-PPP

1. Adjusts the GDP for the differences in the cost of living between countries. 2. GDP-PPP is higher in countries with lower cost of living than countries with higher cost of living.

National Income

1. All income to include wages, salaries and benefits; profits, rental income and interest.

Keynesian Economists

1. Believe that an active government role is needed to ensure economic activity is promoted. 2. Believes that government policies will spur growth.

Classical Economists

1. Believes that raising debt is unsustainable. 2. Believes in relying more on the market forces to dictate economic actions. 3. Was the dominant form of thinking when macroeconomics was based upon microeconomic thought.

Proprietors' Income

1. Current income of all sole, partnerships, tax-exempt co-ops. 2. Less than 8% of GDP.

Yield Curve

1. Curve that shows the interest rates for bonds (y-axis) with different maturity rates (x-axis). 2. If the IR on a 10-year T-bond is less than the IR on a 3-month T-bill, a recession is likely to occur. a. true for 7 of last 8 recessions

Shortfalls of the GDP

1. Does not include benefits and costs from environmental and natural resources. 2. Does not include nonmarket activities or the informal economy. 3. NIPA does NOT account for nonmarket transactions, investments in human capital, and the use of people's time.

Leading Economic Index - LEI

1. Established by The Conference Board; uses ten important indicators to produce a weighted index. 2. LEI predicts a recession whenever the index falls for three consecutive months. a. successfully predicted the last 7 recessions since 1969

Net Exports

1. Exports minus imports. 2. Net exports is typically a negative percentage of the GDP.

GDP Per Capita

1. GDP / total population. 2. Measures the relative standard of living of people in different countries. 3. Does NOT account for differences in wealth between the rich and poor.

Gross Domestic Product - GDP

1. GDP is a measure of total economic output. 2. Defined as the total market value of all FINAL goods and services produced by resources in the country within a given year. 3. Is the value of all FINAL goods and services; does not count intermediate inputs to other goods. 4. Goods must have been produced in the US borders to count towards GDP. 5. NIPA uses market values to compute GDP; uses final sales prices regardless if final price leads to loss.

Real GDP

1. GDP that is adjusted for inflation. 2. Measures the total value of final goods and services produced in a country in a year, measured using prices in a base year. 3. Does a better job of measuring actual growth in output.

Personal Consumption Spending

1. Goods and services purchased by residents of the US; individuals or businesses. 2. Includes durable goods, nondurable goods and services. 3. Accounts for nearly 70% of GDP; services are the largest part of personal consumption spending.

Circular Flow Diagram

1. Illustrates how households and firms interact through product and resource markets. 2. Demonstrates that economic aggregates can be determined either by spending flows or income flows to households. 3. Shows how every dollar spent in the economy becomes a dollar of income to someone else.

Government Spending

1. Includes wages and salaries of government employees (fed, state, local) and the purchase of products, structures, equipment and services from private businesses, and foreign countries. 2. Accounts for 17.7% of GDP.

Corporate Profits

1. Income that flows into corporations, adjusted for inventory valuation and capital consumption allowances. 2. Less than 10% of GDP.

Rental Income

1. Income that flows to individuals engaged in renting real property (rent collected, less depreciation, taxes, maintenance, repairs and mortgage interest).

Net Interest

1. Interest paid by business minus the interest they receive domestically and foreign. 2. Interest expense is the payment for the use of capital.

Gross Private Domestic Investment - GPDI

1. Investment into fixed investments such as residential and nonresidential structures, equipment, software and changes in private inventories. 2. Accounts for 16.7% of GDP. 3. During recessions, GDPI turns down; when recession ends, GDPI turns up.

Benefits of the NIPA

1. May be used to judge economic performance over time, compare the economies of different countries, measure national saving and investment, and track business cycles. 2. The NIPA gives an overall picture of the state of the economy.

Three Methods to Predict Business Cycles

1. National Activity Index 2. Leading Economic Index 3. Yield Curve

National Income and Product Accounts - NIPA

1. National accounts that allow economists to judge the nation's economic performance, compare US income and output to other nations, and track the economic condition across business cycles. 2. Developed by the Department of Commerce - DOC. 3. Developed by Simon Kuznets - helped by developing methods to calculate the size and change in national income.

Double-dip Recession

1. Occurs when a recovery falls short and the economy enters another recession before full recovery. 2. Occurred in the early 1980s.

Employee Compensation

1. Payment, wages, salaries and benefits. 2. 54% of GDP.

Two Major Components of the NIPA

1. Spending 2. Income

Business Cycles

1. The alternating increase and decreases in economic activities that include periods of peak, trough, recession and recovery. 2. Peaks occur when the economy is functioning at capacity. 3. Phases of the cycle can vary by intensity and duration; measured by the NBER and DOL. 4. Cycles are dated by the National Bureau of Economic Research (NBER)

Macroeconomics

1. The field of economic study that describes how individuals, businesses, financial institutions and government interact to achieve the goals of job growth, low inflation and economic growth.

National Income and GDP

1. To use national income to calculate GDP, two more measures must be included: a. add allowance for the depreciation of fixed capital b. add adjustment for statistical error of measuring and computing many large factors

Income Approach to GDP

Components: 1. Employee Compensation 2. Proprietors' Income 3. Corporate Profits 4. Rental Income 5. Net Interest 6. Miscellaneous Adjustments National income is the SUM of these components; not equal to GDP.

Expenditures Approach to GDP

Components: 1. Personal Consumption Expenditures 2. Gross Private Domestic Investment - GPDI 3. Government Spending 4. Net Exports GDP = C + I + G + (X - M)