Macro Econ Midterm 2 Equations Labor Force 𝐿 = 𝐸 + 𝑈 L=E+U

Labor Force

L=E+U

Total people working or actively looking for work
Used in: participation rate

Population Identity

Pop=E+U+N

Total population = employed + unemployed + not in labor force
Key for reconstructing missing values

Unemployment Rate

u = U/E+U

Fraction of labor force that is unemployed
Used in: ALL labor questions

Labor Force Participation Rate

E+U/Pop

Share of population that is working or searching
Can also be:

Pop−N/Pop

Employment-Population Ratio

E/Pop

Share of population that is employed

Unemployment (Flow Model)

u = s/s+a

Steady-state unemployment

• s = separation (losing jobs) rate

• a = accession (job-finding) rate

Unemployment Flow Effects

• s↑→u↑

• a↑→u↓

Key intuition: unemployment depends on flows

Asset Pricing Formula

P = D+Pt+1/1+r

Price = discounted future payoff
Used for: stocks, bonds

Gordon Growth Formula

P = D/r−g

Price of asset with constant growth

• D= dividend

• r = interest rate

• g = growth

Interest Rate Relationship

• r↑→P↓

• r↓→P↑

Opportunity Cost

OC = other good/this good

How much of one good you give up to produce another
Used to determine comparative advantage

Comparative Advantage Rule

Lower opportunity cost → comparative advantage

World Price Condition

OClow < pG < OChigh

Trade only works if price lies between opportunity costs

PPF Slope

slope = −OC

Tradeoff in production

CPF Slope

slope = −pG

Trade line slope = world price

Trade Openness

X+M/GDP

Measures how much a country trades

Tariff Effect

• price ↑

• imports ↓

• consumers worse

Quantity Equation

MV = PY

Money × velocity = total spending

Growth Version

gM+gV = π+gY

Links money growth to inflation

Inflation Formula ⭐

π = gM−gY

MOST IMPORTANT
Inflation = money growth − output growth

Nominal GDP Growth

gPY = gM

If velocity constant

CPI Adjustment

New price = Old price×CPInew/CPIold

Used to convert prices across time

Money Functions

• Medium of exchange

• Unit of account

• Store of value

Fiat Money

No intrinsic value (paper money)

Commodity Money

Has intrinsic value (Cigs at P.O.W Camp)

Double Coincidence of Wants

Barter requires both people want each other's goods

GDP Identity

GDP Identity

Y = C+I+G+NX

Total spending in economy

Production Function

Y = AF(K,L)

Output depends on:

• productivity

• capital

• labor

RBC vs Keynes

RBC → supply shocks
Keynes → demand shocks

Procyclical variables

Move in the same direction as GDP

MEMORIZE THESE:

• Consumption (C)

• Investment (I) ⭐ (VERY IMPORTANT)

• Employment

• Hours worked

• Housing starts

• Durable goods purchases (cars, appliances) ⭐

Countercyclical variables

Move opposite GDP: Unemployment rate ⭐ (MOST IMPORTANT)

Leading indicators

Change before the economy changes

✅ MEMORIZE:

• Stock market returns ⭐

• Housing starts ⭐

• Building permits

• Consumer confidence

• New orders (especially durable goods)

• Initial unemployment claims

Lagging indicators

Change after the economy changes

MEMORIZE:

• Unemployment rate ⭐

• Employment