U3 ECON

Macroeconomics

The study of the performance of national economies and the policies governments use to try to improve that performance.

Macroeconomic Policies:

Government actions designed to affect the performance of the economy as a whole, rather than the market for a specific good or service.

Standard of Living:

The degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable.

Average Labor Productivity:

Output per employed worker. It is a crucial determinant of the standard of living.

Economic Growth:

A process of steady increase in the quantity and quality of the goods and services the economy can produce.

Monetary Policy:

f the nation’s this is controlled by the Federal Reserve System It affects variables like interest rates and inflation.

Fiscal Policy:

Refers to decisions that determine the government’s budget, including the amount and composition of government expenditures and government revenues (taxes).

Deficit:

When government spending exceeds tax collections.

Surplus:

When tax collections exceed government spending.

Structural Policy:

aimed at changing the underlying structure or institutions of the nation's economy.

Positive Analysis: (factual)

Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable (e.g., "What will happen to the unemployment rate if we cut taxes?").

Normative Analysis: (opinion)

Addresses the question of whether a policy should be used; this inevitably involves the personal values of the person doing the analysis (e.g., "Should we cut taxes to help the economy?").

• Final Goods and Services: Only goods consumed by the ultimate user are counted. Intermediate goods (goods used up in the production of other goods, like flour for bread) are not counted to avoid "double counting."

Labor Income: .

Wages, salaries, and self-employment income (approx. 75% of GDP)

• Capital Income: Payments to owners of physical capital (factories/machines) and intangible capita

COUNT IN GDP

financial investment"—a transfer of ownership of existing assets. It does not count as "Investment" in GDP because it doesn't create new physical capital.

Transfer Payments

• Social Security, unemployment benefits, and welfare are transfer payments. These are not included in Government Purchases (G) because the government receives no current goods or services in return.

Nominal GDP:

Measures the value of output at current-year prices. It can rise simply because prices went up (inflation), even if production stayed the same.

Real GDP:

Measures the volume of output by using prices from a fixed base year. This allows economists to see if the actual physical production of the economy has grown.

Frictional:

Short-term unemployment aka regular

Structural:

due to lack of skills, language barriers, or discrimination.

Cyclical:

occurs during periods of recession

Price Level:

A measure of the overall level of prices at a particular point in time (measured by the CPI).

*inflaiton is in price level

Indexing:

Automatically increasing a nominal quantity (like Social Security benefits) by the rate of inflation to prevent a loss in purchasing power.

Relative Price:

The price of one specific good in comparison to the prices of other goods.

Nominal Quantity:

price without inflation

III. The True Costs of Inflation

• Shoe-leather costs: The resources wasted when people change their behavior to hold less cash (e.g., more frequent trips to the bank).

• Noise in the price system: When general inflation makes it hard for buyers and sellers

• Distortions of the tax system: If tax brackets aren't indexed, inflation can push people into higher tax brackets even if their "real" income hasn't increased.

• Unexpected redistribution of wealth: High inflation helps borrowers

• Interference with long-term planning: Erratic inflation difficult for families and firms for the future (like retirement).

Quality Adjustment

overestimate inflation due to failing to include improvements in the quality of goods and services (e.g., a new computer costs more but is significantly faster).

Real Quantity: ).

Price after inflation