Unit 2: economic indicators and the business cycle

why do we study macro?

-measure the health of the whole economy

-guide policies to fix problems

economic freedom

are individuals free to buy, sell, and produce what they want?

Economic growth and innovations

Constant development of new goods, services, and techniques improves the standard of living

economic efficancy

stems from innovations, maximes production with available resources

economic security/predictablity

does government attempt to impose more equal standard of living for all

economic equality

does government attempt to impose more equal standard of living for all?

private sector

part of the economy that is run by individuals and bussiness

public sector

part of the economy that is controlled by the government

factor payments

payments for the factors of production, namley rent, wages, interest, and profit

transfer payments

when government redisturbutes income

national income accounting

economist collect statistics on production, income, investment, and savings

Gross Domestic Product (GDP)

the dollar value of all final goods and services produced within a country in one year

dollar value

GDP is measured in dollars

Final Goods

GDP only counts new goods and services

within a country

GDP measures production within the country boarders

one year

GDP measures annual economic performance

GDP per Capatia

GDP divided by the production. It identifies on average how many products each person makes

economic system 

capitalism promotes innovations and provides incentives to improve productivity 

rule of law 

countries with solid institutions and political stability have historically had more economic growth 

capital stock

countries that have more machines and tools are more productve

human capital

countries that have better education and training are more productive

natural resources

in general, countries that have access to more natural resources are more productive

intermediate goods

goods inside the final goods don't count

nonproduction transaction

finanical transaction and used goods

nonmarket and illegal 

things made at home (black market)

expenditures approach

add up all the spending an final goods and services produced in a given year

income approach

add up all the income earned from selling final goods and services produced in a given year 

value-added approach

add up all the dollar value at each stage of the production process

consumer spending

70% of U.S. GDP, purchased of final goods and services by individuals

business investment

16% of U.S. GDP, business spending on tools and equipment

Government spending

17% of U.S. GDP, (non transfer payments)

Net Exports 

exports(x)-imports(m) 3%

durable goods

washing machines, refrigador

non-durable goods

food, cloths, toliet paper

services

dental work, repairs, tutoring

Investments (I) explained

never when individuals buy assets like stocks and bonds, always when businesses buy capital like machines, resources, and tools

government (G) explained

payments made by the government for goods and services, non including money spent on transfer payments and interest payments

unemployment

workers that are activitly looking for a job but aren't working 

unemployment rate 

the percent of people on the labor force who want a job but are not working

labor force

-at least 16

-able & willing to work

-not inn jail or hospital

-not in military, school full time, or retired 

frictional unemployment

temporary umemployment or being between jobs

seasonal unemployment

is a specific type of frictional umemployment, which is due to time of year and nature of the job

strutural unemployment

changes in labor force make some skills absolete

creative destruction

permement loss of jobs

technological unemployment

type of structural unemployment where automation and machinary replace workers

cyclical umemployment

unemployment caused by recession

demand deficient unemployment

as demand for goods and services falls, demand for labor falls and workers are laid off

natural rate of unemployment

frictional and structural unemployment are present at all times because some people will always be between two jobs or replaced by technology

natural rate of umemployment (NRU)

frictional plus structural umemployment. the amount of unemployment that exist when the economy is healthy and growing

full employment output (y)

the real GDP created when there is no cyclical unemployment

inflation

the rising general level of prices and reduces the “purchasing power” of money

Is inflation good or bad?

in general, high inflation is bad because banks don't lend and people dont save

deflation

decrease in general prices or a negative inflation rate

inflation rate

the percent change in prices from year to year

price indices

index number assigned to each year that show how prices have changed relative to a specific base year 

consumer price index (CPI)

CPI=price of market basket/price of market basket in base yearX100

nominal values

-measured in current prices

-not adjusted for inflation

real values

-adjusted for inflation to reflect the purchasing power

-expressed in constant price

inflation rate equation

new#-old#/old#x100

substitution bias

as prices increase for the fixed market basket, consumer buy less of these products and more substitutes that may not be part of the market basket

new products

the CPI makert basket may not included the newest consumer products

product quality

the CPI ignores both improvements and declines in produce quality

lenders

people who lend money (at fixed interest rates)

borrowers

people who borrow money

nominal wage

wage measured by dollars rather than purchasing power

real wage

wage adjusted for inflation 

menu costs

costs money to change listed prices 

shoe leather cost

the cost of transactions increase

unit if account costs

money doesn't reliably measures the value of goods/services

nominal GDP

gdp measured in current prices. it does not account for inflation from year to year

real GDP

GDP expressed in constant, or unchanging, dollars. Real GDP adjust for inflation