Macro Foundations

Positive statement

A statement of ‘what is’. It is based on testable evidence.

Normative statement

Says ‘what ought to be’. A value judgement that is subjective.

Recession

A minimum of 2-3 months of consecutive economic decline. Lower GDP, employment, consumption etc

1930s Great Depression

Bank failures, excessive borrowing, high interest rates causing a lack of growth.

GDP

The market value of all final goods and services produced in a given period.

Difference between real and nominal GDP?

Real GDP accounts for inflation by working from a base year.

3 limits of GDP

Doesn’t account for the environment, unpaid work or income distribution.

Labour force

The amount of people employed or actively seeking work.

Unemployment rate

Unemployed / Labour force.

Frictional unemployment.

Short-term unemployment where workers are moving between jobs.

Structural unemployment

Long-term mismatch of skills to role due to changes in technology or poor education.

Cyclical employment

Unemployment due to cycles of demand falls in certain industries.

CPI

Tracks the cost YoY of a fixed basket of household purchased goods.

GDP Deflator

A broad measure of prices YoY of all domestically produced goods.

Fisher equation

Nominal interest rate = real interest rate + inflation.

1920s German Hyperinflation

Aggressive expansionary monetary policy of printing money devalued the currency leading to hyper inflation.