economics module 4

macroeconomics

the study of the entire economy

major 3 contributors of an economy

GDP, inflation rate, unemployment rate

GDP

gross domestic product, measures the value of the production of new goods, =C+I+G+X^N

recession

when a GDP is still in decline for more than 2 quarters

depression

a really bad recession

unemployment rate

unemployed people/labor force x 100

frictional unemployment

someone is in between jobs or looking for a job

structional unemployment

no demand for a service/job

cyclical unemployment

unemployment caused by recession

nominal GDP

Measured in current prices, not adjusted for inflation

real GDP

measured in general prices, adjusted for inflation

inflation

a rising overall level of prices

deflation

a falling overall level of prices

open economy

an economy that trades goods and services with other countries

price stability

prices change slowly or don’t change

trade deficits

value of goods and services bought from foreigners has higher value than what’s sold

trade surplus

value of goods and services bought from foreigners has lower value than what’s sold

national accounts

keep track of spending the flows of money between different sectors of the economy

stock

a share in the ownership of a company

bond

a loan in form of an IOU, pays interest

government transfers

payments that the government makes to individuals without expecting anything in return

disposable income

(gov transfers-taxes) + income, household income available to use

private savings

disposable income- consumer spending, disposable income not spent on consumptions

financial markets

banking, stock, and bond markets that channel private savings to foreign and government borrowing

government purchases of goods and services

total expenditures on goods and services by federal state and local government

inventories

stocks of goods and raw materials held to facilitate business operations

investment spending

spending on new productive physical capital and changes in inventories

final goods and services

goods and services sold to the final user

intermediate goods and services

goods and services bought from one firm by another to be used as inputs into the production of final goods and services

aggregate spending

total spending domestically produced final goods and services in the economy = C+I+G+(X-IM)

net exports

the differences between the values of exports and imports X^N/X-IM

aggregate output

the total quantity of final goods and services produced within an economy

chained dollars

the method of calculations changes between real GDP using the average between the growth rate calculated using a late base year

GDP per capita

GDP/size of the population

real GDP per capita

average real GDP per person

GDP deflator

nominal GDP/real GDP x 100

labor force

the sum of employed and unemployed

labor force participation rate

the percentage of the population 16+ that is in the labor force, labor force/population 16+ x100

discouraged workers

unemployed who have given up on looking for a job

marginally attached workers

would like to be employed and have looked for a job but aren’t currently

underemployed

people who work part time because they can’t find full time jobs

jobless recovery

period in which the GDP growth rate is positive but the unemployed rate is still rising

efficiency wages

wages that employers set above the equilibrium wage rate as an incentive for better employee performance

natural rate of unemployment

frictional + structural unemployment

actual unemployment

natural employment + cyclical unemployment

real wage

the wage divided by price level

real income

income divided by price level

inflation rate

the percent change per year on a price index, typically the consumer price index = price level year 2-price level year 1/ price level year 1

shoe leather costs

the increased costs of transactions caused by inflation

menu costs

the real costs of changing listed prices

unit of account costs

arise from the way inflation makes money a less reliable unit of measurement

nominal interest rate

interest rate paid for a loan

real interest rate

nominal interest rate-inflation rate

aggregate price level

measure of the overall level of prices in the economy

market basket

hypothetical set of consumer purchases

price index

measured cost of purchasing a given market basket in a given year, cost of mkt. bskt. in given year/cost of mkt. bskt. in base year x 100

consumer price index

measures cost of market basket of average American family

producer price index

measures changes of things purchased by producers

disinflation

decrease in the inflation rate, slowing down but still going forward

rule of 70

number of years for variable to double =70/annual growth rate of variable

labor productivity

output per worker

aggregate production function

how productivity depends on the qualities of physical capital and human capital per worker and the state of tech

diminishing returns to physical capital

holding the amount of human capital per worker and state of tech fixed, each successive increase in physical capital per worker allows for a small increase in productivity

growth accounting

estimates the contributions of each major in the aggregate production function to economic growth

total factor productivity

amount of output that can be achieved with a given amount of factor inputs

sustainable long run growth

growth that can continue in the face of limited natural resources and environmental impact

keynes

“government knows best”

hayek

“free country free market”

research and development

spending to create and implement new tech

infrastructure

roads, power lines ports, info networks, and other underpinnings for economic activity

convergence hypothesis

international differences in real GDP per capita tend to narrow over time

peak

high point in the business cycle

trough

low points in a business cycle

value added

the value of its sales- value of its purchases of inputs