Macroeconomics Exam 2

GDP (Expenditure Approach)

GDP = C + Ig + G + (X - M)

GDP (Income Approach)

GDP = Compensation of employees + rents + interest + proprietors' income + corporate profits + taxes on production and imports + depreciation - net foreign factor income + statistical discrepancy

Net Exports (Xn)

Xn = Exports (X) - Imports (M)

Gross Investment (Ig)

Ig = Net Investment (In) + Depreciation (D)

Net Foreign Factor Income

Factor payments from the world - Factor payments to the world

National Income (NI)

NI = GDP - Depreciation + Net Foreign Factor Income - Statistical discrepancy

Personal Income (PI)

PI = NI - corporate taxes - indirect taxes - retained earnings - social security contributions + transfer payments

Disposable Income (DI)

DI = PI - personal taxes

DI alternate

DI = Consumption (C) + Savings (S)

GDP growth rate

(GDP in year 2 - GDP in year 1) / GDP in year 1

Per capita GDP

GDP / Population

Unemployment rate

Unemployed / Labor force

Labor force

Employed + Unemployed

Price Index (current year)

Basket price in current year / Basket price in base year × 100

Inflation rate

(Year 2 index - Year 1 index) / Year 1 index

Nominal interest rate

Real interest rate + Inflation rate

Real income

Nominal income / (Price index / 100)

Average Propensity to Consume (APC)

Consumption / Income

Average Propensity to Save (APS)

Saving / Income

APC + APS

= 1

Marginal Propensity to Consume (MPC)

Change in consumption / Change in income

Marginal Propensity to Save (MPS)

Change in saving / Change in income

MPC + MPS

= 1

Multiplier

1 / (1 - MPC) or 1 / MPS

What is excluded from GDP?

Used goods, purely financial transactions, transfer payments, and non-market household production

Why are imports subtracted?

They are not produced domestically, so including them would overstate GDP

Full employment output

Also called potential output; the level of output when unemployment is at the natural rate

Types of unemployment

Frictional (between jobs), Structural (skills mismatch), Cyclical (due to recession)

Demand-pull inflation

Caused by too much spending chasing too few goods

Cost-push inflation

Caused by rising costs of production (e.g., wages, raw materials)

Business cycle phases

Peak, recession, trough, expansion

Investment demand curve

Shows amount of investment demanded at each interest rate; slopes downward

Real vs nominal GDP

Nominal uses current prices; real uses constant base year prices

Disposable income

Personal income minus personal taxes

When inventories increase

Investment increases, boosting GDP

When inventories decrease

Investment decreases, lowering GDP

Government purchases in GDP

Includes goods/services purchased by federal, state, local gov; excludes transfer payments

GDP price index

Base year = 100; measures average price level changes over time

Personal taxes impact

Reduce disposable income

Multiplier effect

An initial change in spending leads to a larger change in total income/output

What shifts consumption schedule?

Wealth changes, expectations, taxes, indebtedness (but not current income)

Wealth effect

Increased wealth shifts consumption schedule upward

Real GDP per capita

GDP divided by population; measures average standard of living

National income components

Wages + rents + interest + proprietors' income + corporate profits + indirect business taxes

Nominal vs real interest rate

Real = nominal - inflation

Net private domestic investment

Gross investment - depreciation

Consumption schedule slope

Equals MPC

Saving schedule slope

Equals MPS

If MPC = 0.8

Multiplier = 1 / (1 - 0.8) = 5

Real GDP increases, population increases

Real GDP per capita may rise, fall, or stay constant depending on relative rates

Why measure real GDP?

To see actual growth in production, excluding price changes

PI vs DI

PI is before personal taxes; DI is after