Short version of econ exam #2

Economics

The study of production, consumption, exchange, and distribution of resources.

Positive economics

Describes what is, using facts and evidence.

Normative economics

Describes what ought to be, using opinions or value judgments.

Macroeconomics

Studies the economy as a whole

Adam Smith

Father of modern economics

John Maynard Keynes

Foundational figure in modern macroeconomics

Economic thought

influenced by the economic & historical context of its time

GDP formula

C + I + G + NX

net exports

exports - imports

Consumption

Household purchases of final goods and services

• total consumption expenditure

Investment

Spending on new capital, inventory, and newly built housing

• total profits paid to capitalist

Government expenditure

Government purchases of goods and services

• gov investment + gov consumption

• building an airport

• excludes welfare payments

exports

Domestic goods and services sold abroad

• A U.S. company sells products to Canada

Imports

Foreign goods and services purchased domestically

• A US consumer buys a product made abroad

GDP

measures final goods and services produced domestically during a period

Nominal GDP

Values output using current-year prices.

Real GDP

Adjusts for price changes to measure changes in production.

GDP per capita

GDP / by total population; a measure of average output per person.

Real GDP growth

new real GDP - old real GDP / old real GDP x 100

Chain-weighted real GDP

uses prices from adjacent years rather than relying on prices from just one fixed base year for all comparisons.

Chain weighting reduces …

some limitations of the constant-price method, but it does not completely remove all measurement problems or every effect of changing relative prices.

GNP

focuses on who earns the income, based on residency in the course's framework.

GNP formula

GDP + FNI (is income earned by domestic residents abroad minus income earned domestically by foreigners)

Weaknesses of GDP and GDP per capita

• Do not fully capture unpaid household work.

• Do not fully capture illegal economic activity.

• GDP per capita does not reveal how income is distributed.

Labour force formula

employed + unemmployed

Unemployment rate

unemployed / labor force x 100

Labour force participation rate

labour force / working age pop x 100

employment rate

employed / working - age pop x 100

Employed

Meets the official definition of employment, including qualifying paid work, self-employment, and certain unpaid family work.

Unemployed

Has no job, is available for work, and has actively searched for work within the specified period.

Not in the labor force

Neither employed nor officially unemployed.

• discouraged workers

Discouraged workers

Want a job but have stopped actively looking because they believe suitable jobs are unavailable.

They are classified as outside the labour force.

U-3

The headline unemployment rate commonly reported in the media.

U-6

A broader measure of labour underutilization that includes certain marginally attached workers and people working part-time for economic reasons.

frictional unemployment

Short-term job search or transition

• Looking for a new job after graduation

Seasonal unemployment

Predictable changes in employment during the year

• Seasonal agricultural work

Structural unemployment

Mismatch between available jobs and workers' skills or location

• A worker's skills no longer match local vacancies

Cyclical

Caused by insufficient aggregate demand, often during a recession

• Businesses lay off workers because sales fall

Inflation

is a sustained, sufficiently large increase in the general price level across all or nearly all markets.

General index formula

current year value / base year value x 100

Percentage change between 2 index values

new index - old index / old index x 100

Laspeyres - base weighted index

measures the current quantity purchased of each good and service in the basket as the weight to compile the average measure

Paasche _ current weighted index

measures the shift in prices of the basket of goods and services using the base period quantities purchased

cpi (consumer price index)

• most commonly used index to calculate inflation

• it is based on the cost of a fixed basket of consumer goods & services

PCE price index (personal consumption expenditure index)

consumer expenditures with broader coverage than CPI

PPI (producer price indexes)

selling prices recieved by domestic producers

Unemployment cost index

changes in employee compensation costs, including wages and benefits

Gini coefficient

measures income or wealth inequality, not inflation.

• Closer to 0: greater equality.

• Closer to 1 (or 100 on a 0–100 scale): greater inequality.

• A rising Gini generally indicates rising inequality.

Difficulties in measuring inflation

• Substitution bias: Consumers switch to alternatives as relative prices change.

• Quality changes: Prices can rise because a product has improved.

• New products: New goods may not be included immediately.

• Housing: Housing costs are difficult to measure accurately.

The macroeconomy has 3 main sectors

• Private domestic sector — households and firms.

• Government sector.

• Foreign sector.

The central principle

that one sector's expenditure is another sector's income. Their financial balances must add up to zero.

Private sector balance

• formula : GNP - (T+C+I) or (S-I)

• private income - private expenditure

• diagnal line on chart

Government sector

formula : T-G

• gov rev - gov expenditure

• horizontal line on chart

Foreign sector

• formula: M-X-FNI

• imports - exports - foriegn net income

Important expression

Private balance + government balance = current account balance

Surplus

Income exceeds expenditure; the balance is positive.

Deficit

Expenditure exceeds income; the balance is negative.

If the private sector has a surplus and the government has a deficit

the foreign sector balance must adjust so the three balances sum to zero.

A surplus tends to increase a sector's net financial assets;

a deficit tends to reduce them, subject to valuation changes and other adjustments.

Flow

measured over time

GDP during a year

Government deficit during a year

deficit

Stock

Measured at a point in time

debt on a particular date '

government debt outstanding

debt

The law of supply states

parallel relationship

supply increases when price increases

supply decreases when price decreases

Consumption expenditure in GDP measurement examples

• purchase by a household of a new car

• purchase by a household of house painting services on a new house

• purchase by a household of a house painting services on an old house

The government budget balance is

in deficit in most years