Economics: Unit 3 - Macroeconomics

business cycle

The repeated rise and fall of economic activity over time.

Measures changes in GDP, employment, income, and production.

GDP (gross domestic product)

the total market value of all final goods and services produced annually in an economy

expansion

part of the business cycle, real GDP rises

recession

contraction of whole economy, decrease of products, income, employment

stagflation

unemployment + decrease of economic growth + decrease in inflation

national income accounts (NIA)

a countries total economic activity plus production value

GDP per capita

GDP divided by population

externalities

effect felt beyond those whose decision caused the effect

labor force

employed + unemployed

unemployment rate

(unemployed divided by labor force) x 100

bureau of labor and statistics

The U.S. Department of Labor agency that creates career information statistics

frictional unemployment

arises from normal labor turnover, includes duration of labor search (natural rate of employment)

structural unemployment

occurs when number of people seeking jobs in the labor market is greater than the number of jobs available

DUE TO ADVANCEMENTS IN TECHNOLOGY

cyclical unemployment

unemployment that arises from where we are in the business cycle

deviation of the actual rate of unemployment from the natural rate

not part of the natural rate of employment (NRU)

ex: jesscia lost her job due to a recession, but her employer states that she will get her job back when the recession ends

undermployment

fewer hours than the worker wants

marginally attached workers

doesn't have a job (wants one) but has given up

discouraged worker

a marginally attached worker that has given up DUE to the business cycle

nominal vs real values

current prices vs adjusted prices from inflation

inflation

a sustained increase of the price of g/s

purchasing powers decrease

deflation

decrease in the price of g/s

g/s becomes less expensive, meaning purchasing power increases

disinflation

decrease in inflation rate

hyperinflation

rapid increase in overall price level (purchasing power decreases)

aggregate price level

average price in g/s of an economy

purchasing power

amount of g/s that money can buy

purchasing power increase when price level decreases

inflation rate

percent increase in overall price level

measured by cpi

cpi

(consumer price index) a measure of the overall cost of the goods and services bought by a typical consumer

spending multiplier

initial change in spending causes lager change in GDPo

stabilization policies

government actions to reduce economic fluctuations

FIGHTS recessions

fiscal policy

government use of spending to influence economy

expansionary fiscal policy

used during a recession

increase in govt. spending, decrease in taxation

Contractionary fiscal policy

used when inflation is high

vise versa of expansionary (govt. spending drops, taxes increase)

used to slow the economy

3 tools of fiscal policy

government spending

taxes

government transfers (money transferred to assistant programs)

discretionary fiscal policy vs automatic stabilizers

discretionary fiscal policy: intentional government changes (govt. spending, taxes, and govt. transfers)

VS

automatic stabilizer are already existing government programs to help stabilize economy

supply side economics

An economic philosophy that holds the decrease of taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government.

Lags in Fiscal Policy

+Recognition lag

+Action lag

+Impact lag

recognition lag

the time it takes to realize and economic problem

implementation lag

time it take to approve + put in a policy in action

impact lag

the time it takes for policy to affect economy

budget surplus

government collects more money in taxes

revenue is greater than spending

budget deficit

government spends more money than collected --> government now must borrow money

debt

the total amount of money the federal government owes from borrowing over time

difference between debt and deficit

debt = the amount owed OVER TIME

deficit = how much more the government spends than earns in 1 year

debt to GDP ratio

shows how large the debt is compared to the economy

four phases of a busisness cycle

Expansion: The economy grows; GDP, employment, and production increase.

Peak: The economy reaches its highest point before slowing down.

Contraction: The economy slows down; GDP and employment decrease.

Trough: The economy reaches its lowest point before beginning to recover.

economic indicators

Leading indicators: Predict future economic activity (stock market, building permits, consumer expectations).

Coincident indicators: Change at roughly the same time as the economy (real GDP, employment, personal income).

Lagging indicators: Change after the economy has already changed (unemployment duration, certain interest rates).

marginal propensity to consume (MPC)

percentage of additional income that a person spends rather than saves

higher MPC = lagrer spending multiplier

Marginal Propensity to Save

the percentage of additional income that a person saves rather than spends

MPC + MPS = 1

how does the spending multiplier affect fiscal policy

Expansionary fiscal policy increases government spending, which creates additional income and spending throughout the economy.

The multiplier effect makes the total increase in GDP larger than the original government spending.

The larger the MPC, the larger the multiplier.

crowding out

Occurs when increased government borrowing raises interest rates and reduces private investment.

This can partially offset the positive effects of expansionary fiscal policy.

federal budget

- A financial plan showing how much money the federal government expects to collect and spend during a fiscal year.

federal revenue

Money collected by the federal government, primarily through taxes.

Includes individual income taxes, payroll taxes, and corporate taxes.

Federal Expenditures

Money the federal government spends on programs, services, and obligations.

Examples include national defense, Social Security, Medicare, and education.

federal debt vs federal deficit

a deficit is an annual shortfall, while debt is the accumulated amount owed from previous borrowing.

Running repeated deficits generally increases national debt.

Economic Growth

An increase in the amount of goods and services an economy produces over time.

Usually measured by an increase in real GDP.

Productivity

The amount of output produced per unit of input, such as labor hours.

Higher productivity allows an economy to produce more goods and services using the same resources.

Human Capital

The knowledge, education, skills, and experience workers gain.

Investments in education and training can increase productivity and economic growth

physcial capital

Human-made resources used to produce goods and services.

Examples include machinery, factories, equipment, and technology.

technological advancement

Improvements in technology that make production more efficient.

Allows businesses to produce more output with fewer resources or less time.

natural resources

Resources found in nature that are used to produce goods and services.

Examples include water, oil, minerals, and land.

entrepreunurship

The ability to organize resources, take business risks, and create new products or services.

Encourages innovation, competition, and economic growth.

investment

Spending on resources that increase future production capacity.

Examples include businesses purchasing equipment, building factories, and improving technology.

positive externalities

Benefits received by people outside of the transaction.

Example: Education benefits society because educated individuals can contribute to a more productive workforce.

Negative Externalities

Costs experienced by people outside of the transaction.

Example: Factory pollution harms nearby residents even though they are not involved in producing or purchasing the goods.

Sustainable Economic Growth

Economic growth that meets current needs without preventing future generations from meeting their own needs.

Focuses on balancing economic development with environmental protection and responsible resource use.

how can economic growth be encouraged

Investing in education and worker training.

Improving technology and innovation.

Building infrastructure.

Encouraging entrepreneurship and business investment.

Improving productivity.

Using natural resources efficiently.

Formula for CPI

(current basket cost ÷ base year basket cost) × 100

formula of inflation rate

(new cpi - old cpi ÷ old cpi) × 100

spending multiplier

debt to GDP ratio formula

(national debt ÷ GDP ) × 100

GDP formula

consumer spending + government investments + government spending + (exports - exports)

unemployment rate formula