Principles of Economics - Ch. 7 + Ch.8 + Ch.9

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Gross

earn before taxes, expenses, etc

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Net

earn after taxes, expenses, etc

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GDP

  • as proxy for individuals' wealth

  • to increase GDP increase fundamentals in a country

  • to increase a country's standard of living you increase GDP

  • it is seen as focusing only on 'price signals'

  • difficult to compare across borders

  • difficult to turn into 'quality of life'

  • as proxy for military might and cultural and political dominance

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National Accounts

  • Now kept mostly by national governments

  • These are basis for GDP figures, and others

  • They Measure: • Consumer spending • Producer sales • Business Investment • Government Purchases

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How to calculate GDP

  • Total Sales. Amount received = total value. Add up the value of all goods and services produced (which means, surveying companies, and asking them to add up their total sales of goods and services… but only the value added*) -> requires firms to list total sales, minus intermediate goods (This means, companies only report ‘value added’)

  • Total Spending. Adding up spending on goods and services in the goods andservices market (called aggregate spending) -> discounts intermediate goods and looks at final products only

  • Total Income. Adding up the total factor income earned by households(wages, profit, interest, and rent) (because all sales are income forsomeone). (NB we mostly focus on 1 and 2 in the lecture.) -> GDP = C + I + G + X - IM

  • BE CAREFUL!: you cannot compare GDP figures because there can be inflation involved -> you counter inflation (nominal rate vs real rate)

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Real GDP

  • In order to see whether your economy is actually producing more or less goods and services, you have to compare all prices with a base year price.

  • To calculate any real measure, such as Real GDP, Real Wages, you need a price level indicator, so you can turn the nominal figures into real ones: • If prices increased by 5%, you have to remove that 5% from year 2 figures.

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Aggregate price level

used to measure the overall price level in an economy

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Market Basket

average pool of goods and services for a household

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consumer price index

an index of the cost of all goods and services to a typical consumer

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price index in a given year

(cost of market basket in a given year ÷ cost of market basket in base year) x 100

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Inflation rate

(price index year 2 - price index year 1 ÷ price index year 1) x100

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Labor force participation rate

(labor force ÷ population older than 16) x 100

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Unemployment rate

  • (number of unemployed people ÷ labor force) x 100

  • the unemployment rate is an indicator of how easy or difficult it is to get a job in the current economic climate

  • can be overstated, because many looking for a job take several weeks to find one, even if they have good prospects

  • can be understated, because many who really would like to find a job are counted as having given up, if they haven’t been looking actively within the last 4 weeks

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Producer price index

measures changes in the prices of goods purchased by producers

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GDP deflator

100 times the ratio of nominal GDP to real GDP for a given year

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Fed Open Market Committee

  • sets interest rates for the US economy (this is the price of money: determines how much will be spent)

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Normal unemployment rates

Between 4-5%

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Discouraged workers

Those who have given up hope (source of unemployment that is not measured)

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Marginally attached workers

People who have looked in the recent past, but not currently (discouraged workers are a subset of this group)

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Underemployed

Frustrated workers who are more skilled than the job they currently have, and believe that they are qualified to take on more responsibility and/or be paid more

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Correlation GDP and unemployment

  • whenever GDP growth was below average, then unemployment rose

  • when GDP goes into actual negative territory (recession), then unemployment can spike

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Natural rate of unemployment

  • There will always be some unemployment, and this is called the Natural Rate of unemployment

  • The Natural Rate is considered to be the sum of two additional types of unemployment: • Frictional and Structural

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Cyclical unemployment

The deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle.

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Actual unemployment

Natural unemployment + Cyclical unemployment

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Factors affecting natural rate

  • changes in government policies

  • changes in institutions

  • changes in labor force characteristics such as children not working till they are 18

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Frictional Unemployment

  • Frictional Unemployment is due to the amount of time that workers spend in a job search

  • Since workers are qualified to do different things, and jobs are different, it takes time for workers to match themselves up with an appropriate job

  • There can be frictional unemployment even when the number of seekers = number of jobs

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Structural Unemployment

  • This is what happens when there is a persistent surplus of workers in a particular labour market, who are looking for scarce jobs, at the given wage rate

  • Your book argues that minimum wage scenarios can create structural unemployment in some markets

  • At the same time, without this, there might be even more exploitation (at least a minimum wage law encourages people to move to try their luck elsewhere, or to move above this market level)

  • Also, unions can create structural unemployment (though, again; I see unions as positive because the book doesn’t take into account that companies and governments can often pay higher wages, by removing profits elsewhere, or raising taxes, or changing spending priorities)

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Gross National Product

  • former measure of the United States economy; the total market value of goods and services produced by all citizens and capital during a given period

  • excludes foreign companies in own country, includes foreign companies owned by your country in other places (GDP includes everything in own borders + foreign companies)

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3 methods to calculate GDP

  • expenditure method: consumption + investment + government + new exports

  • income method: wages + rental rate on capital + firm profits

  • production method: final value of all goods and services - intermediate costs

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how to calculate value added

sales - cost of input

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number of years for variable to double

70 divided by annual growth rate of variable

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Good economy

rising inflation, declining unemployment

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Bad economy

low inflation, rising unemployment

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Real wage

nominal wage divided by the price level (i.e. inflation rate)

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Real income

same as real wage, but for income, whether this is salary or total income from all factors

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shoe-leather costs

the idea that at high rates of inflation people will have to find ways to hold money that will keep their value, e.g. real estate, gold, foreign currency, etc., so people have to turn their money wages and earnings into something else, and this takes a lot of time and energy and people take commissions

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menu costs

Physically changing prices in a supermarket., etc., actually costs money, and this can be big for big corporations who have to print labels etc. With online commerce this is easier, but it still requires effort and vigilance and thus time and this adds up

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unit-of-account costs

the economy as a whole will suffer when people cannot make good economic decisions based on the future value of the unit-of-account

costs that we face when our economy experiences inflation

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Interest rate

price that lenders charge borrowers the use of their savings of one year

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nominal interest rate

interest rate expressed in dollar terms

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real interest rate

nominal interest rate minus rate of inflation

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Deflation

when price levels drop

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disinflation

  • a reduction of prices intended to improve the balance of payments (intended to bring the inflation rate down)

  • problem: you have to deal with high unemployment for a significant period of time (politically risky)

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Median

The median is the middle number in a sorted, ascending or descending list of numbers and can be more descriptive of that data set than the average. It is the point above and below which half (50%) the observed data falls, and so represents the midpoint of the data.

  • For example, in a data set of {3, 13, 2, 34, 11, 26, 47}, the sorted order becomes {2, 3, 11, 13, 26, 34, 47}. The median is the number in the middle {2, 3, 11, 13, 26, 34, 47}, which in this instance is 13 since there are three numbers on either side.

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Gini index

measures income distribution

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productivity

  • Productivity is really just measured by looking at how many people are working, for how long, and looking at how many goods they collectively produce (measured in units-of-account)

  • physical capital: machines, buildings, tools (savings and investments spending!!)

  • human capital (roughly equated with education levels)

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Growth accounting

Estimates the contribution of each major factor in the aggregate production function to economic growth

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Total factor productivity

the amount of output that can be achieved with a given amount of factor inputs

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Convergence hypothesis

, international differences in real GDP per capita tend to narrow over time

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sustainable long-run economic growth

long-run growth that can continue in the face of the limited supply of natural resources and with less negative impact on the environment

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