Macro 2nd Exam

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GDP

The market value of all goods and services produces within a country within a year. 

Formula of GDP:  

GDP = C + I + G + (X - M) 

GDP = Consumption + Investment + Government Spending + (Exports – Imports) 

Intermediate goods:

goods that are sold to firms and then bundled or
processed with other goods or services for sale at a later 
stage. They are not included in GDP.

Finished goods

goods that are sold to final users and then consumed or 
held in personal inventories.

Rule of 70

a shortcut to estimate the number of years it takes for a variable to double at a fixed annual growth rate. Divide 70 by the growth rate percentage.

Physical Capital

consists of tangible assets like machinery, buildings, and tools that are used to produce goods and services

Human Capital

a concept that refers to the combined knowledge, skills, experience, and health that an individual or workforce possesses, which can be used for economic and social production

Institutions

“rules of the game” that structure economic incentives.

Institutions of Economic Growth

1. Property rights 
2. Honest government 
3. Political stability 
4. A dependable legal system 
5. Competitive and open markets

Free Rider

someone who consumes a resource without contributing to the records upkeep 

Government crowding out principle (With a Graph)

Crowding-out: the decrease in private consumption and investment that occurs when government borrows more. 

Different kinds of U.S. bonds

• T-bonds

• T-notes

• T-bills

Bonds

A bond is a sophisticated IOU that documents who own how much and when payment must be paid.

A stock (or a share)

• a certificate of ownership in a corporation. 

• Stocks are traded in organized markets called stock exchanges. 

Banks

• Gather savings 

• Reduce risk by evaluating ability to pay off loans. 

• When a borrower defaults on a loan, the bank spreads the loss among many depositors.

Financial Crisis 2007-2008 

• Many mortgage loans were bundled and sold as if they had very low risk. 

• Some were sold on false terms. 

• Credit rating agencies failed at their job. 

• People expected housing prices to continue to rise. 

• Housing prices fell. 

• Many people defaulted on their mortgages.

Smoothing consumption

By borrowing, saving, and dissaving at different times in life, workers can smooth their consumption path, improving their overall satisfaction.

Unemployed worker:

an adult who does not have a job but is looking for work.

Discouraged Workers

workers that have given up looking for work who would still like to have a job.

Underemployment Rate

tells you how many people who have work just not what they want.

Frictional unemployment

Short-term unemployment caused by difficulties of matching employees to employers.

Structural Unemployment

Persistent, long-term unemployment caused by long-lasting shocks or permanent changes in the economy.

Cyclical Unemployment

unemployment correlated with the business cycle such as recessions. 

Labor force

all workers, employed plus unemployed

T-bonds

• 30 year maturity, pay interest every 6 months.

T-notes

• 2 to 10 year maturity, pay interest every 6 months. 

T-bills

• mature in 2 days to 26 weeks, pay interest only at maturity.