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
