Macroeconomics Chapters 1-8

Production Function

A graph depiction of the relationship between inputs and outputs. depicts how technology affects the relationship between outputs and inputs. more capital or better technology will SHIFT the production function up.

Monetary Policy

Control over money and interest rates

Price Ceilings

A maximum price set for a good by the government. an effective price ceiling is set below the current market price. EX: rent-controlled apartments in NYC hurts people because landlords try to make up the price loss and has created a black market of sub leasing, etc..

Price Floor

A minimum price set for a good by the government. an effective price floor is set above the market price.

What does a price ceiling cause?

A shortage

Budget Deficit

A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer to government spending rather than business or individual spending. - The opposite of a budget deficit is a budget surplus, and when inflows equal outflows, the budget is said to be balanced.

What does a price floor cause?

A surplus

Circular Flow

DI goes to consumers. Consumers either spend(C) or save(S) usually spend less than they learn. Savings are taken out of the flow of money Investors add money (I) to the circular flow along with the consumers money The government adds its demand for goods (G) NET Exports can be either positive or negative and affects the flow accordingly. The flow arrives at businesses, which produce goods according to demand (domestic product).

Supply Schedule

A table showing how the quantity supplied of some product changes as the price of that product changes during a specified period of time, holding all other determinants of quantity supplied constant.

SHIFTERS OF THE DEMAND CURVE

Expectations Tastes & Preferences Income Number of Buyers Complements & Substitutes

Consequences of price fixers...

Black Market (Ceiling) Long Lines (Ceiling) Illegal suppliers take a large sum as opposed to the producers (Ceiling) Investment in price fixed industries dries up (Ceiling) Disposal problem (Price Floor) Disguised Discounts (Price Floor) Overinvestment (Floor) Favoritism and Corruption (both) Unenforceability - to many sellers to regulate (both) Auxiliary Restrictions - too many rules (both) Limitation of Volume of Transactions - less sales (both) Misallocation of Resources (both)

GDP = C + G + I + NX

C is equal to all private consumption, or consumer spending, in a nation's economy, G is the sum of government spending, I is the sum of all the country's investment, including businesses capital expenditures and NX is the nation's total net exports, calculated as total exports minus total imports (NX = Exports - Imports).

The Three Pillars of Productivity Growth:

Capital Technology Labor Quality

Determinants of Productivity Growth Rate:

Capital labor productivity rises as capital stock increases Tech labor productivity rises as technology increases Labor Quality: Education and Training labor productivity rises with better educated/trained workers

Cyclical Unemployment

Caused by a decline in the economy's production Government try to fix cyclical it occurs during a recession For example, an auto worker may be laid off during a recession, when people are buying fewer cars. When people buy fewer cars, the auto makers don't need as many employees to meet the consumer demand. So as the demand for cars decreases, so does the demand for auto workers.

Growth Rate = ?

Growth rate of labor inputs + Growth rate of labor productivity

Efficiency

The absence of waste. Produces the maximum amount of output that its technology permits. unemployment = wasted resources assigning resources to the wrong task is inefficiency

Production Possibilities Frontier

The different combinations of various goods any one of which a producer can turn out, given the available resources.

Real Rate of Interest

The percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing. It indicates the increased ability to purchase goods and services that the lender earns. used for borrowing when inflation is expected. accounts for decline in purchasing power

Progressive Taxation

The ratio of taxes to income rises as income rises tax the rich more

Invisible Hand

The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.

Real Wage Rate

The wage rate adjusted for inflation. It is the nominal wage divided by the price index. Indicates the number of goods/services real wages will buy EX: wage rises 5% a year 2% for high productivity, 3% for higher prices, real wage only increases by 2%

When GDP declines...?

There is a recession

Effects of Inflation

Those who lend are hurt ex: pensioners, banks Borrowers do well the money has less purchasing power, than when it was borrowed People whose wages aren't adjusted are hurt

Determinants of Consumption Function:

Wealth total assets, not just current income Price Level money-fixed assets = value is a fixed number of dollars value declines when price level goes up Real Interest Rate DOES NOT SHIFT CONSUMPTION FUNCTION Future Income Expectations Permanent tax cuts in income taxes cause greater increases in consumer spending than temporary cuts of equal magnitude.

Supply Curve

a graphical depiction of the supply schedule

Demand Curve

a graphical version of the demand schedule

Economic Model

a representation of a theory used to find cause and effect uses abstraction and assumptions

Theory

a simplification of relationships used to explain how those relationships work. - used to prove a hypothesis - statistical data does not imply causation - we must use theoretical analysis not just statistical data to understand how government policies will work.

Demand Schedule

a table showing how the QD of a product during a certain time period changes as the price changes.

GNP

accounts for goods/services produced by domestic firms abroad. does not account for transfer payments or stocks

Research and Development

activities aimed at inventing new products or processes, or improving existing ones. spurs invention and innovation.

Inflation

an increase in price level

Relative Price

an item's price in terms of some other item rather than dollars some goods become more expensive relative to others because real inflations are at uneven rates.

Discouraged Worker

an unemployed person who gives up looking for work and is therefore no longer counted as part of the labor force.

PPF bowed outward because...?

as larger quantities of one good are transferred to the other, the additions to the opposing product decline.

Capital Formation

building up capital stock. Also called investment.

How do you combat unemployment?

caused by deficient aggregate demand government spending, monetary policy are focused on shifting AD outward

How do you combat inflation?

caused by too much AD government cuts spending, decrease monetary policy to shift AD in.

Real GDP

considers inflation the better measure

Fiscal Policy

control over taxes and government spending

Nominal GDP

current prices increases with price

How to enhance labor productivity:

enhance pillars of growth

economic cost

explicit and implicit costs

accounting cost

explicit costs

Closed Economy

exports < imports

Open Economy

exports > imports

What gets counted in GDP?

goods/services produced in that year only final goods and services only market interactions only domestic goods

Structural Unemployment

lost jobs because of automation or lack of skills OR SKILLS NO LONGER NEEDED For example, hundreds of thousands of well-paying manufacturing jobs have been lost in the U.S. over the past three decades as production jobs have migrated to lower-cost jurisdictions in China and elsewhere.

Trade Off between unemployment and inflation

low unemployment = high inflation and vice versa

Best way to increase investment =

lower real interest rates.

Role of GOVT in market economy

making and enforcing laws regulating business providing public goods - military taxes redistributing income

Real GDP per capita

real GDP divided by population economy must grow faster than its population to have real growth

Scarcity

resources are always limited

PPF slopes downward because...?

resources are limited

Inflation Effects:

risky for long contracts hurts economic efficiency because consumers are hesitant to buy with changing prices.

Disposable Income

sum of the incomes after transfer payments and taxes DI = NI - taxes + transfer payments

Transfer Payments

sums of money that people receive as grants from the government as payment

Frictional Unemployment

temporarily between jobs caused by normal turnover in the labor market For example, a first-time job seeker may lack the resources or efficiency for finding the company that has the job that is available and suitable for him or her. As a result this person does not take other work, temporarily holding out for the better-paying job.

Absolute Advantage

the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.

Comparative Advantage

the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals.

CPI - Consumer Price Index

the cost of a basket of goods relative to its cost in a base period. Used for comparison. CPI = COST OF MARKET BASKET IN YEAR Z / COST OF MARKET BASKET IN BASE YEAR * 100 used to calculate inflation

Economic Growth

the notion that standards of living rise from one year to the next caused by an increase in output

Unemployment Rate

the number of unemployed people in a labor force.

Quantity Supplied

the number of units that sellers want to sell over a specific period of time. ∆QS is a movement along the curve only determinant is price

Nominal Rate of Interest

the percentage at which the borrower pays back the lender. Makes no adjustment for any decline in the purchasing power of the money.

GDP Deflator

the price index used to deflate nominal GDP. Real GDP = Nominal GDP / GDP Deflator * 100

Potential GDP

the real GDP that the economy would produce it ifs resources are fully employed. (particularly the labor force).

National Income

the sum of the incomes that all individuals in the economy earn in the forms of wages, interest, rents, and profits. It excludes government transfer payments and is calculated before any deductions are taken for income taxes. Equals AD

Aggregate Demand

the total amount that all consumers, business firms, government agencies, and foreigners spend on all final goods and services. downward sloping is a schedule not a fixed number

Gross Domestic Product (GDP)

the total output of an economy the sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time (1 year)

Opportunity Cost

the value of what must be given up in order to acquire the item the value of the next best alternative

When GDP growth rate > potential

unemployment rate decreases

Abstraction

unrealistic assumptions are made in economics necessary due to complexity of the economic world must use abstraction to avoid unimportant details makes graphs easy to read with only important information degree of abstraction depends on the model

Opportunity Cost

value of the next best alternative.

Ceteris Paribus

with other conditions remaining the same

Why is demand downward sloping?

Law of demand As price goes up, demand goes down and vice versa.

Determinants of Net Exports

National Incomes our imports rise when our GDP rises and fall when our GDP falls exports are relatively insensitive to our own GDP, but are quite sensitive to the GDP of other countries Relative Prices and Exchange Rates a rise in the price of a country's goods decrease exports and increases imports and vice versa. price increases abroad increase a country's net exports and vice versa.

NRU

Natural unemployment is the lowest rate of unemployment that an economy can sustain over the long run. Keynesians believe that a government can lower the rate of unemployment (i.e. employ more people) if it were willing to accept a higher level of inflation (the idea behind the Phillips Curve). However, critics of this say that the effect is temporary and that unemployment would bounce back up but inflation would stay high. Thus, the natural, or equilibrium, rate is the lowest level of unemployment at which inflation remains stable. Also known as the "non-accelerating inflation rate of unemployment" (NAIRU).

SHIFTERS OF THE SUPPLY CURVE

Number of sellers Technology Price of inputs Price of related outputs EX: demand for beef goes up, so more cattle are produced, so more cowhides are available even though the leather market was not affected. This will shift demand for cow hides/leather outward.

PPF is a good representation of...

OPPORTUNITY COST

When the economy growth rate < potential growth rate...

it fails to generate new jobs for the growing labor force unemployment rate increases

Principle of Increasing Costs

- As production of one good expands, the opportunity cost of producing another unit of this good increases. - Due to inputs being specialized.

Circular Flow diagram

- Firms employ workers, who spend their income on goods produced by the firms. This money (income spent by workers which turns into revenue by firms) is then used to compensate the workers and buy raw materials to make the goods. - In essence, the circular flow diagram displays the relationship of resources and money between firms and households.

Subjective (Normative)

- Normative economics is subjective and value based. - Normative economic statements are opinion based, so they cannot be proved or disproved.

Positive Approach

- Positive economics is objective and fact based. - Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved.

Labor Productivity

- The amount of output a worker turns out in an hour of labor, if output is measured by GDP it is GDP per hour of work. - counts in the long-run - important for considering leisure time, education, health, and other standards of living. - The growth rate of productivity determines if living standards are rising fast or slow.

Why does GDP not indicate well-being

- only considers organized market interaction - underground economy is ignored - no value placed on leisure - natural disasters and war will raise GDP - does not account for ecological costs

The Three Coordination Tasks of an Economy (how to deal with scarce resources)

How to utilize resources effectively Which Combination of Goods to Produce How Much of the total output of each good to distribute to each person.

4 basic concepts of an Economy

Production Consumption Reproduction Distribution

Ways to increase investment / build up capital formation?

Provide tax-benefits to investing businesses. Develop new technology Increase Demand Political Stability and Property Rights Property Rights = laws/conventions that assign owners the right to use their property as they see fit. Can do what you want with your property. Deters investment from third world countries because they are unstable. Spending on education = investments in human capital On - the - job training = skills acquired on the job

Consumption Function

Relationship between total consumer expenditure and total disposable income in the economy has a constant slope

Seasonal

Seasonal unemployment occurs when people are unemployed at certain times of the year, because they work in industries where they are not needed all year round. Examples of industries where demand, production and employment are seasonal include tourism and leisure, farming, construction and retailing.

Unemployment Insurance

gov't program that replaces some of the wages lost by eligible workers who lose their jobs. used to reignite spending and increase AD / consumption spending. helps during recessions to restart the economy spreads the costs to many instead of allowing it to fall on one person. Downside: Makes people less eager to find new jobs

The Law of Supply and Demand

in a free market: supply and demand push the price towards equilibrium. This is where quantity supplied and quantity demanded are equal.

Shifters of the PPF

increase in the workforce increase in technology, education increase in resources

Disguised Unemployment

involuntary part time work

lower interest rates lead to...?

more borrowing

Convergence Hypothesis

nations with low levels of productivity tend to have high productivity growth rates. International productivity differences will shrink over time. low productivity countries learn from higher, more productive ones.

Quantity Demanded

number of units of a good that consumers are willing and can afford to buy over a period of time. only determinant is price ∆QD = a movement along the demand curve As price goes up QD goes down and vice versa.

recessions

periods of declining economic growth