Macro Economics Exam 1

GDP (Gross Domestic Product)

Total dollar value of everything the country produces in a year. Measures both total income and total spending.

GDP Formula

Y=C+I+G+NX (NX= Exports - Imports)

What does these letteres stand for? C, I, G, NX.

C=Consumption, I=Investments, G=Government Spending, NX=Net Exports

Nominal GDP

this is the CURRENT prices of items

Real GDP

this is ADJUSTED prices for inflation

What does GDP not include?

Unpaid work, Environmental damage, Income inequality

What does a higher GDP usually mean?

Better health, Education, Quality of life

CPI (Consumer Price Index)

Measures average prices of goods and services people buy.

CPI Formula

CPI= (Cost of basket this year / Cost of basket base year) x 100

Inflation Rate Formula

Inflation Rate= (CPI this year - CPI last year) / (CPI last year) x 100

What are some problems with CPI?

Substitutional Bias, New Goods, Quality Change

Nominal VS Real

Nominal= Money value, Real= Value adjusted for inflation

Real GDP/Income Equation

Real Value= Nominal Value / (CPI / 100)

Real Interest Equation

Real Interest= Nominal - Inflation Rate

What does a country’s standards depend on?

It depends on productivity (Output per worker)

What are the four main factors that affect productivity?

Physical Capital, Human Capital, Natural Resources, Technology

What does Physical capital include?

Machines, Tools, Buildings

What does Human capital include?

Education, Training, Experience

What does Natural resources include?

Land, Oil, Minerals

What does Technology include?

Efficient ways of producing goods

Rule of 70

70 / Growth rate= Years to double GDP

The financial system connects who?

Savers and Borrowers

Financial Markets

Direct Financing (Bonds, Stocks)

Financial Intermediaries

Indirect Financing (Banks, Mutual Funds)

What are the three types of savings?

Private Savings, Public Savings, National Savings

Private Savings Equation

Private Savings= (Y-T) -C

Public Savings Equation

Public Savings= T-G

National Savings Equation

National Savings= Y-C-G =Investment (In closed economy)

Interest rate balances what?

Saving and Borrowing

If the interest rate is higher is there more saving or borrowing?

More Saving

If the interest rate is lower is there more saving or borrowing?

More Borrowing

How does crowding out happen?

Budget deficits lower savings which makes higher interest rates which causes crowding out

Positive Relationship (Direct)

Both variables increase together, upward sloping line. Points move together.

Negative Relationship (Inverse)

One variable increases the other decreases, downward sloping line. Points move opposite.

Slope Equation

Slope= Vertical Change / Horizontal Change between two points

Positive Relationship Equation

Y= a + bX (a & b are the numbers, Y and X are the names on the graph)

Vertical Intercept

This is the number the graph STARTS on.

Risk Adverse

Reluctant to take risks, someone who chooses options or makes decisions that limit loss.

Risk Adverse Investor

Someone who doesn’t like taking big risks with their money, they prefer safety over high returns.

Risk Neutral Investor

Someone who doesn’t care about risk as long as the expected return is the same.

Risk Loving Investor

Someone who is agressivly seeking high risk with a higher return. 

Utility Function

Is a measure of well-being that depends on wealth.

Diminishing Marginal Utility

As wealth rises, the curve becomes flatter. The more wealth a person has, the less extra utility he would get from an extra dollar.

Risk adverse people can manage risk by what three things?

1.) Insurance, it spreads the risk around more efficiently. 2.) Diversification 3.) Choosing a portfolio with a lower risk but with a lower return.

How do you manage risk with Insurance?

Using insurance to protect against financial loss from unexpected events by transferring risk to an insurance company.

Adverse Selection

People with higher risks are more likely to buy insurance, raising costs for insurers.

Moral Hazard

When someone takes more risks because they don't bear the full consequences.

Standard Deviation

A statistic that measures a variable’s volatility, how likely it is to fluctuate.

Diversification

Reduces overall risk by replacing a single risk with a large number of smaller unrelated risks.

Firm-Specific Risk

Diversification reduces this, only affects a SINGLE company. Increasing the number of stocks reduces this.

Market Risk

Diversification can not reduce this, affects ALL companies in the stock market.

Tradeoff

High Risk High Returns VS Low Risk Low Return

Unemployment Rate (U-Rate)

% of the labor force that is unemployed

U-Rate Formula 

U-Rate= 100 x (# of the unemployed/ labor force)

Labor Force Participation Rate

% of the population that is in the labor force/ actively working.

Labor Force Participation Rate Formula

Labor force participation rate= 100 x (labor force/ adult population)

Institutionalized

People under 16, people in prison, or the military. People who don’t add to the labor force.

Criticisms of Unemployment Statistics

Involuntary part time workers counted as full time, discouraged workers are not counted as employed. (These both understate unemployment and overstate employment.)

Natural Rate of Unemployment

The normal rate of unemployment around which the actual unemployment rate fluctuates.

Cyclical Unemployment

Unemployment caused by business fluctuations.

Frictional Unemployment

Occurs when workers spend time searching for the jobs that best suit their skills and tastes.

Structural Unemployment

Occurs when there are fewer jobs available than workers.

The Natural rate of unemployment consists of?

Frictional unemployment and structural unemployment

What unemployment type causes short term fluctuations in the business unemployment rate?

Cyclical Unemployment

Job Search

The process of matching workers with appropriate jobs.

Sectoral Shifts

Changes in the composition of demand across industries or regions of the country, causes frictional unemployment to rise. (Ex: from offline shopping to online)