Macroeconomics ECO1301 - Topic 2

full slides from topic 2

What is the primary focus of macroeconomics?

The functioning of the economic system as a whole.

What does macroeconomics aim to explain?

Levels of output & income, employment & unemployment rates, economic growth, and price level changes (inflation & deflation).

What are business cycles?

Recurrent fluctuations in national production (output, GDP) with alternating periods of contraction and expansion.

What happens during an economic downturn?

Unemployment rises as GDP falls until it hits the trough.

What is Okun's Law?

An empirical inverse relationship between the unemployment rate and real GDP growth.

What occurs during an economic expansion?

GDP rises from a trough until it reaches a peak, and unemployment falls.

What are flow variables?

Variables measured over an interval of time, such as income, expenditure, and production.

What are stock variables?

Variables measured at a specific moment in time, such as capital stock, wealth, and money supply.

What is the difference between the Federal Deficit and National Debt?

The deficit is the difference between government revenues and spending (a flow), while the national debt is the total of past deficits and surpluses (a stock).

What does GDP stand for?

Gross Domestic Product.

How is GDP calculated using the Expenditures Approach?

GDP = C + Ig + G + (X - M), where C is consumption, Ig is investment, G is government spending, X is exports, and M is imports.

What does the Incomes Approach to GDP focus on?

The total income earned by factors of production in an economy.

What is included in Gross Private Domestic Investment (Ig)?

Purchases of new plant & equipment, construction, R&D spending, and changes in inventories.

Why are changes in inventories included in GDP?

To account for goods produced but not yet sold, affecting the measurement of economic output.

What is the significance of the NIPA accounts?

They provide a systematic way to measure national income and product, essential for understanding economic activity.

Who were the key economists behind the development of NIPA accounts?

Richard Stone and Simon Kuznets.

What is the relationship between production and income according to NIPA?

All income originates in production.

What is a recession?

A period of economic contraction characterized by falling GDP and rising unemployment.

What is meant by 'full-employment' output?

An economy not suffering from cyclical unemployment, though some frictional unemployment may exist.

What is the role of the Bureau of Economic Analysis?

To compile estimates for the NIPA accounts from survey data.

What is the impact of a strong economic recovery on inflation?

It tends to raise the inflation rate.

What happens to inflation during an economic downturn?

Pressure on inflation eases off, and inflation may fall or become negative.

What is the definition of GDP?

The monetary value of goods and services produced by an economy over a specific period, typically a year.

What is the significance of measuring economic activity?

It helps to understand the health and performance of an economy.

What is the Job Quality Index?

A measure that assesses the quality of jobs available in the economy over time.

What is the Gini Index used for?

To measure income inequality within a population.

What does the term 'trough' refer to in the business cycle?

The lowest point of economic activity before a recovery begins.

What does 'peak' refer to in the business cycle?

The highest point of economic activity before a downturn begins.

What is the formula for GDP according to the Expenditures approach?

GDP = C + Ig + G + (X − M)

What component of GDP includes household purchases?

Consumption (C)

How should unsold goods produced by a company be accounted for in GDP?

They should be included under Investment (Ig) as they are treated as bought by the producer for future sale.

What happens to GDP when a firm reduces its inventory?

It is treated as negative investment (disinvestment) and adjusts GDP accordingly.

What is the difference between gross investment (Ig) and net investment (In)?

Net investment (In) measures investment after accounting for depreciation of capital.

How is net investment calculated?

In = Ig − Depreciation

What does a positive net investment indicate?

It indicates that the economy's capital stock is growing.

What does a negative net investment indicate?

It indicates that the economy's capital stock is shrinking.

What levels of government are included in government spending for GDP?

Federal, state, and local governments.

Why are government transfer payments excluded from GDP?

They do not reflect the purchase of goods and services.

Why are imports subtracted from GDP?

Imports are not produced domestically and should not be included in GDP.

What is the formula for Net Exports?

Xn = (X − M)

What does a trade surplus indicate?

Exports exceed imports (X > M).

What does a trade deficit indicate?

Imports exceed exports (X < M).

What is the Incomes Approach to GDP?

GDP is viewed as the sum of incomes generated by production.

What are the components of the Incomes Approach to GDP?

Wages & Salaries, Corporate Profits, Proprietors Income, Interest, Rents, plus Depreciation and Indirect Business Taxes.

What is the relationship between the Expenditures Approach and the Incomes Approach to GDP?

They should yield the same GDP result.

What is Gross National Product (GNP)?

GDP + Income received from Rest of World - Income Paid to Rest of World.

What is Net National Product (NNP)?

GNP - Depreciation.

What is National Income (NI)?

NNP - Corporate Income Taxes - Undistributed Corporate Profits - Payroll Taxes + Government Transfer Payments.

What is Disposable Income?

Personal Income - Personal Income Taxes.

What is a limitation of GDP as a measure of economic activity?

It does not capture non-market activities like household work and volunteerism.

What is another limitation of GDP regarding environmental impact?

GDP does not account for negative externalities like pollution and resource depletion.

How did World War II affect GDP, and what does this indicate?

GDP increased significantly, but it did not correlate with improved wellbeing for the population.

What is the significance of 'Social Reproduction' in economic activity?

It refers to unpaid activities essential for sustaining labor and production.

What is the primary limitation of GDP as a measure of economic wellbeing?

GDP does not account for social wellbeing factors such as healthcare access, education, and inequality.

Who authored the report on the Measurement of Economic Performance & Social Progress?

Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi.

What does the Human Development Index (HDI) measure?

it measures factors such as life expectancy, education, and per capita income to assess human development.

What is Per Capita GDP?

its calculated as GDP divided by the population, providing an average economic output per person.

What can be misleading about Per Capita GDP?

It does not reflect income distribution among society members, thus not indicating the typical standard of living.

Define inflation.

a general rise in the average level of prices in money terms.

Define deflation.

a general fall in the average level of prices.

How do inflation and deflation affect economic measurements?

They distort measurements of economic variables expressed in money terms, complicating comparisons over time.

What is a price index?

it measures the average level of prices for a set of goods and services over time.

What are the three basic steps in constructing a price index?

1. Select a comparison basket of goods and services. 2. Choose a base year. 3. Calculate the price index by comparing costs.

What does a price index of 107.3 indicate?

It indicates that the average level of prices is 7.3% higher than in the base year.

What is the Consumer Price Index (CPI)?

it measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

What is the GDP Deflator?

a measure of the level of prices of all new, domestically produced, final goods and services in an economy.

What is the Core Personal Consumption Expenditures Price Index (Core PCE)?

it excludes food and energy prices to gauge core inflation, as these prices can be volatile.

What is nominal GDP?

its measured in current monetary terms without adjusting for inflation or deflation.

What is real GDP?

its adjusted for inflation or deflation, providing a more accurate reflection of an economy's size and how it's growing over time.

What is frictional unemployment?

occurs due to routine turnover in the labor market, such as people entering or leaving the workforce.

What is structural unemployment?

results from changes in the economy that make certain skills obsolete.

What is cyclical unemployment?

caused by fluctuations in the business cycle, often linked to insufficient aggregate demand.

What defines the labor force?

it includes individuals at least 16 years old, not institutionalized or in the military, and either employed or actively seeking employment.

What is the 'Official' or 'Headline' Unemployment Rate (U-3)?

it measures the percentage of the labor force that is unemployed and actively seeking work.

How can inflation affect borrowers and lenders?

Borrowers benefit from inflation as they repay loans with less valuable dollars, while lenders lose because the money repaid has less purchasing power.

Who tends to be hurt by inflation?

People on fixed incomes and workers whose wages rise more slowly than prices are typically hurt by inflation.

What is the significance of the Bureau of Labor Statistics (BLS) in relation to price indexes?

it compiles various price indexes, including the CPI, to monitor inflation and cost of living changes.

What is the purpose of constructing a price index?

To filter out the effects of price level changes on measurements of economic activity, allowing for accurate comparisons over time.

What is an experimental Consumer Price Index (CPI-E)?

is designed for elderly consumers, reflecting their different consumption patterns, particularly in healthcare.

What organization reports the unemployment rate in the US?

The Bureau of Labor Statistics (BLS)

What survey does the BLS use to collect unemployment data?

The Current Population Survey

What is the sample size of the Current Population Survey?

60,000 US households

What is the U-4 measure of unemployment?

It includes discouraged workers who have stopped looking for work.

How does the headline unemployment rate treat part-time workers?

It counts them as fully employed, regardless of their desire for full-time work.

What are the two surveys used by the BLS?

The Household Survey and the Payroll Survey

Which survey is the basis for calculating the unemployment rate?

The Household Survey

What does the Payroll Survey provide information about?

The number of people employed and the number of jobs created or lost.

What is the Phillips Curve?

It illustrates the inverse relationship between inflation and unemployment.

What does NAIRU stand for?

Non-Accelerating Inflation Rate of Unemployment

What is the relationship between NAIRU and inflation?

NAIRU is the unemployment rate that stabilizes inflation.

What is full employment according to William Beveridge?

Having more vacant jobs than unemployed individuals, with fair wages and reasonable job location.

What does productivity measure?

Output per unit of input.

How is productivity calculated?

Real GDP / (number of labor hours worked)

What are two reasons for productivity growth?

Increased capital stock and technical change.

Why does productivity growth matter?

It enables improvements in living standards and supports a larger non-working population.

What is potential GDP?

The output the economy could produce at full employment and full capacity.

What factors influence the rate of growth of potential GDP?

The rate of productivity growth and the rate of growth of the labor force.

How can productivity growth help contain inflation?

By allowing units of output to be produced with fewer inputs.

What is a downside of productivity growth?

It can eliminate jobs if new jobs are not created to absorb displaced workers.

What did economists presume about NAIRU in the 1990s?

They presumed it was high due to high unemployment in the 1980s.