10/31 Econ Quiz

Macroeconomics

Macroeconomics

The study of aggregate economic behavior.

Circular Flow Markets

Households, gov sector, foreign sector, banking sector, firms

Leakage

Money leaving circular flow

Injection

Money entering circular flow

Income/leakages examples

Taxes (gov), imports (foreign), savings (banking)

Expenditures/injections

Gov spending (gov), exports (foreign), firm investments [aka spending] (banking)

Income approach

Measures household income on resource market in exchange for providing FOP (adds wages, interest, rent, and profit)

Output approach

Measures value of goods and services produced by nation (primary, secondary, and tertiary sector)

Expenditure approach

Counts total household spending on final goods and services

National Income Accounting

System of stats and accounts that tracks production, consumption, savings, and investment

Gross Domestic Product (GDP)

Expenditure approach; dollar value of all final goods and services produced within a country’s borders within a year (used goods and financial transactions dont count)

GDP equation

C + I + G + (X-M)

C

Consumption (amount households spent on goods & services)

I

Investment (spending by firms on capital)

G

Gov spending (gov purchase of goods and services)

X - M

Net exports

Normal GDP

Value shown with current prices (subject to inflation)

Real GDP

Value adjusted for price changes, allows year-by-year comparison

Real GDP formula

(Nominal / Price deflator) * 100

Green GDP

Subtracts an assigned monetary value of environmental loss from GDP

GNI/GNP

Gross national oncome/product attempts to measure value of goods & services produced by US no matter where

GNI formula

GDP + abroad US income - foreign domestic affairs

Net National Income

GNI - depreciation

Depreciation

Loss of value due to wear and tear

National Income

NNI - indirect business taxes

Personal Income

NI - corporate taxes - retained earnings - social insurance taxes + transfer payments + net interest

Disposable Personal Income

PI - personal taxes

Why analyze measures of economic activity?

Info is power for consumers & policy makers Allows for comparisons across countries

GDP weaknesses

Overestimates well-being (measures val, not whats actually produced) Underrepresents loss of natural resources Underestimates well-being (black market, volunteering, housework/kids) Lacks info (what, quality, income distribution, living conditions) Contains inaccuracies (needs lots of data, govs purposefully dont share)

The business cycle

Reflects ups and downs of real GDP

Expansion

Short term econ growth, real GDP rises

Peak

Height of econ expansion, real GDP stops rising

Contraction

Short term econ decline, real GDP falls

Trough

Lowest point, real GDP stops falling

Recessions

Two consecutive quarters if declining GDP, negative growth rate, typically lasts 6 - 8 months

Aggregate demand

Total quantity demanded of a nation’s goods and services

Wealth effect

Lower prices make the public feel richer so they buy more

Interest rate effect

As price levels fall so do interest rates which causes
consumers to borrow more in order to purchase more

Net export effect

If domestic goods are more expensive, then consumers
will choose to purchase more less expensive foreign goods

Components of AD - Consumption

• Interest rates: ↑ means AD ↓

• Consumer Confidence: ↑ means AD ↑

• Wealth: ↑ means AD ↑

• Personal Income Taxes: ↑ means AD ↓

• Level of household debt: Short term ↑ means AD ↑; Long term ↑ means AD ↓

Components of AD - Investment

• Interest Rates: ↑ means AD ↑

• Business Confidence: ↑ means AD ↑

• Technology: ↑ means AD ↑

• Business taxes: ↑ means AD ↓

• Corporate indebtedness: Short term ↑ means AD ↑; Long term ↑ means AD ↓ (?)

Components of AD - Government Spending

• Economic priorities: ↑ means AD ↑

• Political priorities: ↑ means AD ↑

Components of AD - Net Exports

• Foreign income: Foreign household ↑ means AD ↑

• Exchange rates: Value of country’s currency in another currency; ↑ means AD ↓ ( X ↓ & M ↑)

• Trade protection: ↑ means M ↓ and X ↑; AD ↑

Aggregate Supply

Total quantity of goods and services produced by firms in a nation during a certain time period

Determinants of SRAS

• Change in input prices: Energy & transport costs

• Gov regulations & taxes: Changes cost of production

• Changes in productivity

• Exchange rates: ↓ means AS ↓

Neo Classical/Flexible Wage Model

• Long term; vertical

• Labor markets are responsive to changes; Self correcting

• Left unregulated, weak econ can recover on its own

• Firms can lower/raise wages to maintain output

Keynesian/Sticky Wage Model

• Short term; horizontal

• Full employment not attainable

• No self correction bc inflexible wages

Shifts in AS

New resources/tech means AS ↑

Aggregate equilibrium

• When AD & [SR]AS intersect

• Fully optimized/on PPC

Recessionary gap

• SRAS < LRAS

• Contraction in business cycle & rising unemployment

Inflationary gap

• LRAS < SRAS

• Peak, unsustainable