Unit 2 Macroeconomics

GDP

Measures all FINAL goods and services produced within a country over a given time period

GDP Formula (expenditure approach)

G + I + C + (X - M)

G (government spending)

I (business spending)

C (consumer spending)

(X - M) (net expenditures)

Intermediate Good

Goods that are used in the production of other goods—not part of the GDP!

ex. Computer chips

Circular Flow Model

Households - Purchase goods + provide services to market

Firms - Sell products to households + gain products (revenue)—used to buy factors of production

The Business Cycle

Recurring pattern of expansion and contraction in an economy over time. At 0% unemployment, the business cycle is at its peak.

Unemployment

% of people who don’t have a job and are currently looking for one. Structural, frictional, and cyclical

Unemployment rate formula

(# unemployed/ # in labor force) x100

Employment rate formula

(# employed/ # in labor force) x100

Labor force

Number of people 16 and over (not institutionalized) who are employed and unemployed.

Labor force formula

employed + unemployed

Labor force participation rate formula

(# in the labor force/ working age population) x100

Frictional unemployment

In-between jobs, looking for a better job, graduated

Structural unemployment

skills not currently in demand

Cyclical unemployment

Contractionary period of the business cycle

Inflation

Change in the general price level. Demand-pull, Cost-push, and built-in.

Natural Rate of Unemployment (NRU)

Baseline unemployment rate in a healthy economy when the market is at equilibrium

NRU Formula

Structural UR + Frictional UR

Cyclical unemployment %

Actual UR - NRU

Consumer Price Index (CPI)

Average change in prices paid for goods/services. Base year = 100

CPI Formula

(Market basket of goods for current year/ Market basket of goods for base year) x100

Inflation Rate formula

(CPI new - CPI old/ CPI old) x100

Okun’s Law

A 1% change in cyclical unemployment = 2% inverse change in real output

Demand-Pull Inflation

When demand exceeds capacity to produce those goods.

Cost-push Inflation

When firms experience an increase in the costs of production

Built-in Inflation

When people believe the economy will change in some way, they negotiate to exceed those expectations.

Real GDP

GDP adjusted for inflation (using GDP deflator)

Nominal GDP

GDP as calculated

GDP Deflator

Adjustment for inflation

GDP formula (income approach)

W + i + R + P

W (wages/consumption)

i (interest)

R (rent)

P (profit)

Real inflation

Nominal inflation rate - rate of inflation

Nominal inflation

Unadjusted, face-value inflation rate

GDP Value added approach

Price of outputs - Cost of inputs = value added at each stage of production

Full employment

All resources being used efficiently + 0 cyclical unemployment.

Market Basket

Consumption bundle used to measure changes in price level over time.