Macroeconomics 218

Economic Agent

Any group or individual that makes choices

Scarce resources

Things that people want where the quantity that people want exceeds the quantity that is available. Just isn’t enough for everyone

Economics

The study if how agents choose to allocate scarce resources and how those choices affect society.

Positive Economics

Describes what people actually do. Describing what has happened or predicting what will happen

Normative Economics

Recommends what people, including society, ought to do (future tense). Depends on peoples personal feelings, tastes, or opinions.

Microeconomics

The study of how individuals, households, firms , and governments make choices and how those choices affect prices, the allocation of resources, and the well being of other agents. Focus on when we want to understand one particular piece of the overall economy.

Macroeconmics

The study of the economy as a whole. Ex. studying the growth rate of a country’s total economic output, the inflation rate, or the unemployment rate.

Try to identify the best policies to help an economy that is in recession, and how to anage an economy that is growing well.

Optimization

First principle of economics

Trying to pick the best feasible option or the best choice possible

Equilibrium

Second principle of economics

When everyone is doing the best they can, given what everyone else is doing

Empiricism

Third principle of economics

Evidence based analylsis that uses data to analyze the world.

• This date is used to test and develop theories, and to determine what is causing things to happen in the world.

Price Mechanism

Prices tell buyers and sellers what to do

Ex. Since the inputs used to produce goods are​ scarce, the total amount produced of most goods is below the amount that consumers would like to buy. To allocate the goods produced to the people who value them the​ most, we use the price mechanism.

Imagine lemonade:

• Too many cups left over
  → price goes down
  → more people buy

• You sell out instantly
  → price goes up
  → fewer people buy and you make more lemonade

Trade-Offs

When some benefits must be given up to gain others

Budget Constraints

The set of things that a person can choose to do or buy without breaking their budget

• Help quantify trade offs

Cost-Benefit Analysis

A calculation that identifies the best alternative by summing benefits and subtracting cost

Opportunity Cost

What you give up when you choose one thing instead of another

Monetary Value

How much something is worth in money

Net Benefit

The sum of benefits of choosing an alternative minus thhe sum of the costs of choosing that alternative

Model/Theory

A simplified description of reality

Empirical Evidence

Facts that are obtained through observation and measurement

Causation

When one thing directly affect another through a cause and effect relationship

Correlation

Two variables tend to change at the same time, as one changes, so does the other,

Omitted Variable

Something that has been left out of a study that, if included, would explain the correlation between two variables.

Reverse Causality

Mix up the direction of cause and effect

Ex. Wealthy people or healthy

• Actually healthier people are more wealthy because they can work harder, retire later, and have fewer healthcare issues

Experiment

Controlled method of investigating casual relationships among variables

Market

Where economic agents come to sell and trade

Market Price

The price at which buyers and seller conduct transactions

If buyers agree to pay, and sellers agree to accept

Perfectly Competitive Market

sellers all sell an identical good or service, and any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price of that good or service.

Price Takers

Those who accept the market price and cannot bargain for a better price

Quantity Demanded

The amount of the good or service that buyers are willing to purcharce

Demand Schedule

Reports the quantity demanded at different prices, holding all else equal

Demand Curve

Plots the relationship between prices and quantity demanded, or the demand schedule

Law of Demand

When the price goes up people by less, but when it goes down, people buy more

Ex. Gas

Diminishing Marginal Benefit

As you consume more of a good, your willingness to pay fro an additional unit decreases

Demand shifts when one of the following changes:

• Tastes and preferences

• Income and wealth

• Availability and prices of related goods

• Number and scale of buyers

• Buyers expectation about the future

The only reason for a movement along the demand curve:

A change in the product’s own price

Quantity Supplied

The amount of a good that sellers are willing to sell at a given price

Supply Schedule

A table that reports the quantity supplied at different prices

Supply Curve

Plots the quantity supplied at different prices

Market Supply Curve

Plots the relationship between the total quantity supplied and the market price, holding all else equal

Law of Supply

The quantity supplied rises when price rises

Shifts of the Supply Curvr:

• Input prices

• Technology

• Number and scale of sellers

• Sellers’ expectations about the future

The only reason for movement along the supply curve:

A change in the product’s own price

Input

A good or service used to produce another good or service

Competitive Equilibrium

The point at which the market comes to an agreement about what the price will be and how much will be exchanged at that price

Excess Demand

When consumers want more than suppliers provide at a given price; shortage

Excess Supply

When suppliers provide more than consumers want at a give price; surplus

Income per capita

Average income per person

Recession

An economic downturn lasting at least two quarters (a quarter is ¼ of a year)

Market Value

The price something sells for in the market right now

• what people are paying for it

Quantity of units x quantity produced

Gross Domestic Product (GDP)

The market value of the final goods and services produced in a country during a given period of time

Expenditure

Amount of money spent on goods or services

• Money you spend

Value Added

Sales Revenue - Purchases of intermediate products

Consumption

The market value of consumption goods and services that are bought by domestic households

Ex. foot massages, frisbees

Investment

The market value of new physical capital that is bought by domestic households and firms

Money spent on new machines, buildings, or equipment by people and businesses in the country.

Is the change in capital stock

Government Expenditure

The market value of the government purchases of goods and services

Ex. Tanks, hospitals, birdges

Exports

The market value of all domestically produces goods and services that are sold to households, firms, and governments in foreign countries

Imports

The market value of all foreign produce goods and services that are sold to domestic households, firms, and governments

Capital Income

Any form of payment that derives from owning physical or financial capital

Labor Income

Any form of payment that compensates people for their work

Underground Economy

Transactions that are intentionally hidden from government statisticians

Negative Externalities

Occur when an economic activity has a spillover cost that does not affect those directly engaged in the activity

Positive Externalities

Occur when an economic activity has a spillover benefit that does not affect those directly engaged in the activity

Gross National Product (GNP)

The market value of production generated by the factors of production (capital and labor), possessed or owned by the residents of a particular nation

Leisure

Time not spent working

Nominal GDP

The total market value of production using current prices to determine value per unit produced

Quantity and Price

New prices and new quantities

Real GDP

Summing up the market value of the quantities of final goods and services using the base year

How I’m doing in any given year

Old price, new quantities

GDP Deflator

The measure of how much prices of goods and services produced in a country have risen since the base year

Nominal GDP / Real GDP x 100

GDP per capita

GDP / total population

GDP per Worker

GDP / Number of people employed

Human Capital

Each person’s stock of skills to produce output or economic value

Physical Capital

Any good including machines and building used for production

Capital

Tools and equipment used to make other goods or services

Savings

Income that is not consumed

Open Economy

Do business with the rest of the world

• exports

• imports

Closed Economy

Don’t do business with the rest of the world.

National Income Accounts

A measure of the level of aggregate economic activity in a country

Consumer Price Index

The cost of buying a basket of goods and services in the current year divided by the cost of the same basket in the base year

Measures how much everyday prices changes over time

Economic Growth

The increase in DGP per capita of an economy

Growth Rate

The change in a quantity between 2 dates, relative to the beginning of the period quantity.

Exponential Growth

Something that grows faster and faster over time because it increases by a percentage and not a fixed amount

Ex. if something doubles, 1,2,4,8,16

Catch-up Growth

Poor countries tend to grow faster, or “catch up”, to rich countries as they adopt the production and technologies of the richest countries

Sustained Growth

Some countries experience positive and relatively steady growth rates over 50,100, and even 200 years

Ex. US, Uk, France, Spain

How can we increase GDP

• Increasing its stock of physical capital, K

  • Buy more tools and machines. Ex. building factories, computers, and opening new warehouses

• Increasing the total efficiency units of labor, H

  • More skilled workers. Ex. people going to college, healthier workers, learning new skills

• Improving its technology, A

  • Find faster and smarter ways to produce. Ex. robots, GPS for trucks, new medical machines

  • Research and Development`````

Debtors or Borrowers

Economic agents who borrow funds

• businesses, home buyers, college students

Credit

The amount of funds that the debtor receives

Interest Rate

The additional cost of borrowing money or the return earned on saving money

Nominal Interest Rate (i)

Stated interest rate that does count for inflation

Total interest payments = i x $L

Real Interest Rate

The nominal rate adjusted for inflation

• what is left after prices rise

r = i - inflation

Quantity of Credit Demand

The amount of loans that borrowers are willing to borrow at a given real interest rate

• if rate is low, people borrow a lot

• if its high, borrow less

Credit Demand Schedule

A table that reports the quantity of credit demanded at different real interest rates

• Basically a chart that lists the interest rate, and how much people borrow

Credit Demand Curve

A curve that plots the quantity of credit demanded at different real interest rates

• Interest rate on y

• Loans on x

• slope downwards because the higher the interest rate, less people borrow

Credit Market

Where people and businesses borrow money, and banks and lenders provide money

Credit Supply Curve shifts when:

• Saving motives of of household change

• Saving motives of firms change

Quantity of Credit Supply

The amount of funds that people and firms save at a given real interest rate

Credit Supply Schedule

A table that reports the quantity of credit supplied at different real interest rates

Credit Supply Curve

A curve that plots the quantity of credit supplied at different real interest rates

Credit Demand Curve shifts when:

• Perceived business opportunities for firms changes

• Houses preferences changes

• Government policies change

Bank Reserves

Vault cash and holding on deposit at the Federal Reserve Bank

Cash Equivalents

Riskless, liquid assets that a bank can immediately access

Long-term Investments

Loans to households and firms and the value of the bank’s properties