Macroeconomics Definitions + Equations

Macroeconomics

The study of the performance of the national economy

Business cycle

The fluctuations in real GDP

Two phases of the business cycle

Expansion and recession

Recessions

Phases of persistent decline in production

Expansions

Phases of persistent increase in production

Business Cycle Peak

turning point between expansion and recession

Business Cycle Trough

turning point between recession and expansion

Sequence of Business Cycle

Expansion, peak, recession, trough

Inflation

Increases in the overall level of prices

Deflation

Decreases in the overall level of prices

Nominal GDP

the market value of all the final goods and services produced within a country in a given time period

Market value

The price for which a good or service is sold in a market

Final goods and services

A good or service that is purchased by its final user

Intermediate goods and services

Items that are produced by one firm, bought by another firm, and used as a component of a final good or service

Expenditure Approach to measure GDP

Measure total expenditures on final goods and services produced within a country in a given time period

Income Approach to measure GDP

Measure total income received by factors of production operating within a country in a given time period

Personal Consumption Expenditures

Opening by domestic households on consumer goods and services

Gross Private Domestic Investment

Spending by domestic firms on new capital goods and additions to inventories, also included expenditure on new homes by households

Capital Goods

Goods that are used to produce other goods and services, but are not completely used up in the production of these other goods and services

Additions to inventories

Goods that are produced but are not sold to their final user inside of the period we are measuring GDP

Government Expenditure on Goods and Services

Purchases of goods and services by the domestic federal, state, and local governments

Transfer Payments

Cash transfers from governments to households and firms such as social security benefits, unemployment compensation, and subsidies

Net Exports of Goods and Services

The value of exports minus the value of imports

Exports

Sales of goods and services by the domestic economy to the rest of the world

Imports

Purchases of goods and services by the domestic economy from the rest of the world

Equation for Net Exports

Exports - Imports

Trade deficit

Net exports is negative (imports>exports)

Trade surplus

Net exports is positive (Imports<exports)

Equation for Expenditure Approach

Personal Consumption Expenditures + Gross Private Domestic Investment + Net Exports of Goods and Services

Stock of Capital Goods (or Capital Stock)

The total amount of capital goods currently operating in the economy

Depreciation

The decrease in the existing stock of capital goods that results from wear and tear and obsolescence

Net Private Domestic Investment

Gross Private Domestic Investment minus Depreciation (if positive, capital stock will increase)

Nest Domestic Product

GDP minus Depreciation

Factors of production

Produce goods and services, labor, capital equipment, land, entrepreneurship

Compensation of employees

Payment for labor services

Corporate Profits

Profits earned by corporations

Proprietor’s Income

Income of the non-incorporated self-employed

Rental Income

Payment for the use of land and other rented resources

Real Gross Domestic Product (real GDP)

Measures the market value of production in all years using a fixed set of market values from some common year (base year)

Household Production

Goods and services that are produced for personal use

Underground Economy

Market transactions for goods and services where the market isn’t observed

Standard of living

A comprehensive state of economic well being, including things such as income levels, quality of housing and food, medical care, educational opportunities, transportation, communications, and other measures

Real GDP per person

Real GDP divided by the population of the nation

Equation for CPI for year Z

(Total cost of CPI basket in prices of year Z / Total cost of CPI basket in the prices of base year) x 100

Equation for GDP Deflator for year Z

(Nominal GDP for year Z / Real GDP for year Z) x 100

Equation for Inflation Rate for year Z

([Price level for year Z - Price level for year before year Z] / [Price level for year before year Z]) x 100

Equation for Real Wage for year Z

(Nominal wage for year Z / Price level for year Z) x 100

Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the _____ equals _____.

Labor force; 75

Are discouraged worked considered unemployed?

Yes

The population of Tiny Town is 100 people and the labor force is made up of 75 people. If 5 of these people are unemployed, the unemployment equation is

(5/75) x 100

What is frictional unemployment the result of?

Normal labor market turnover

Using the information in the table, what is the unemployment rate?

4.3%

What is structural unemployment associated with?

The general decline of specific industries

What is the relationship of cyclical unemployment and the business cycle?

Cyclical unemployment fluctuates over the business cycle

What is the natural rate of unemployment?

The unemployment rate when the economy is at potential GDP, occurs when there is no cyclical unemployment present, and not a fixed percentage of the labor force.

What type of unemployment changes when a person reenters the labor force and looks for a job after spending time at home raising a child? Does it increase or decrease?

Frictional unemployment increases

Suppose the country of Tiny Town decided to open its borders to free trade. As a result, a number of its workers lost their jobs to international competition and can’t find new jobs because their skills don’t match what is required for job openings. The workers who lost their jobs would best be consider part of what type of unemployment?

Structural unemployment

The natural rate of unemployment rises with an increase in what types of unemployment?

Structural and frictional

When does full employment exist?

The economy is at the natural unemployment rate, there’s no cyclical unemployment, and there is only frictional and structural unemployment

When real GDP is _____ potential real GDP, the unemployment rate is _____ the natural unemployment rate.

Greater than; less than

What does the business cycle create a difference between?

Real GDP and potential GDP

Which of the following people would be considered unemployed by the Bureau of Labor Statistics?

I. Mrs. X returns fro, her job at the age of 55 and does not look for another job

II. Mr. Y was laid off from his job as a welder, but expects to be rehired very soon

II only

If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the labor force is

1100

Suppose that Matt quits a job with the XYZ Corporation in order to look for more rewarding employment. Matt would best be considered:

Frictionally unemployed

A recession causes a decrease in the demand for housing, resulting in substantial layoffs in the construction industry. The people laid off are considered:

Cyclically unemployed

When an individual who has not been working but has been looking for work decides to terminate the search process, the official unemployment rate will what?

Fall

Economic growth is measured by what?

Changes in potential real GDP

We are interested in long-term growth primarily because it brings what?

Higher incomes

If a nation’s population grows, then growth in real GDP per person will be _____ than the growth of real GDP.

Less

Suppose that in 2023, a country has a population of 1 million and real GDP of $1 billion. In 2024, the population is 1.1 million and the real GDP is $1.1 billion. The real GDP per person growth rate is:

Zero

Over the last 75 years, the average U.S. growth rate in real GDP per person was about what?

2 percent per year

Using the Rule of 70, if China’s current growth rate of real GDP per person was 7% a year, how long would it take the country’s real GDP per person to double?

10 years

If the price level falls by 5% and workers’ nominal wage rates remain constant, firms’ quantity of labor demanded will what?

Decrease

If at the prevailing real wage rate, the quantity of labor supplied exceeds the quantity demanded when?

The real wage rate is greater than the equilibrium real wage rate

The table above shows the labor market for the country of Pickett. When the labor market is in equilibrium, the real wage rate is _____ and _____ of labor a year are employed.

$30 an hour; 40 billion hours

In the figure, at a wage rate of $20 per hour, there is a _____ of labor.

A surplus of labor

If the labor and capital grow more quickly, then real GDP will what?

Grow more quickly

If the population increases, then potential GDP _____ and employment _____.

Increases; increases

If the price level rises by 3% and workers’ nominal wages increase by 3%, then what happens to labor?

Quantity of labor demanded does not change because there is not change in the real wage rate

Potential real GDP per labor hour can increase due to what?

Increases in labor productivity

How do you calculate labor productivity?

Real GDP divided by aggregate labor hours

In addition to saving and investment in capital, making an even larger contribution to long-term economic growth in real GDP per person is what?

Technological advances

The most direct way in which money eliminates the need for a double confidence of wants is through its use as a what?

Medium of exchange

Keeping $200 on hand for an emergency is an example of using money as what?

A store of value

A $45,000 price tag on a new car is an example of money as what?

A unit of account

If an economy trued to use bananas as money, which function would bananas likely have the most difficult time fulfilling?

A store of value

In the Unites States today, money consists of what?

Currency and deposits at banks

$500 in a savings account is a good example of what type of asset?

Liquid asset

What does a depository institution pools risk, what is it doing?

Spreading loan losses across many depositors so that no one depositor faces a high degree of risk

For a commercial bank, what does the term “reserves” refer to?

The cash in its vaults and deposits at the Federal Reserve

T/F: Most commercial banks maintain cash reserves equal to a fraction of deposits.

True

T/F: The U.S. Treasury is a depository institution.

False

What is the major role of a commercial bank?

Receive deposits and make loans

T/F: Commercial banks do NOT determine what assets are money.

True

What are the riskiest assets held by commercial banks?

Loans to businesses

According to table above, the value of M2 is what?

$3,660 billion

The Bank of Japan is Japan’s central bank. As part of its duties, the Bank of Japan does what?

Adjust the quantity of money in circulation in Japan

The United States is divided into _____ Federal Reserve districts, each having a Federal Reserve Bank.

12

This groups consists of seven members appointed by the President of the United States for 14-year terms:

The members of the Board of Governors

Which Federal Reserve Bank president is always on the Federal Open Market Committee?

New York