Macroeconomics Modules 4-5

microeconomics

study of how households and firms make decisions and interact in markets

macroeconomics

study of economy-wide phenomena including inflation, unemployment, and economic growth

gross domestic product

market value of all final goods and services within a country in a given period of time

income equals expenditure

for the economy as a whole because every dollar a buyer spends is a dollar of income for the seller

the circular flow diagram

simple depiction of the microeconomy that illustrates GDP as spending, revenue, factor payments, and income

factors of production

inputs like labor, land, capital, natural resources

factor payments

payments to the factors of production (wages, rent)

households

own the factors of production, sell or rent them to firms for income, and buy and consume goods and services

firms

buy or hire factors of production, use them to produce goods and services, and sell goods and services

the government

circular flow diagram omits…

market prices

goods are values at their…

excluded

things that don’t have a market value (housework for yourself)

final goods

intended for the end user, included in GDP because they embody the value of their intermediate goods

intermediate goods

used as components in the production of other goods

consumption

spending by households on goods and services, excludes purchases of new housing

investment

spending on goods that will be used in the future to produce more goods

business capital

business structures, equipment, and intellectual property products

residential capital

landlord’s apartment building (homeowner’s personal residence)

inventory accumulations

goods produced but not yet sold

government purchases

spending on the goods and services purchases by the government (at the federal, state, and local levels)

net exports

exports-imports

exports

foreign spending on the economy’s goods and services

imports

portions of C, I, and G that are spent on goods and services produced abroad

y=c+i+g+nx

equation of GDP

nominal GDP

the production of goods and services valued at current prices, NOT corrected for inflation

real GDP

the production of goods and services valued at constant prices (base year), IS corrected for inflation

GDP deflator

measures current level of prices relative to level of prices in base year:

\frac{no\min alGDP}{realGDP}\left(100\right)

economy’s inflation rate

compute the percentage increase in GDP deflator from one year to the next:

\frac{new-old}{old}\left(100\right)

consumer price index

measure of the overall cost of goods and services bought by a typical consumer, monitors changes in the cost of living over time:

\frac{currentbasket\cos t}{basebasket\cos t}\left(100\right)

core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

producer price index

a measure of the cost of a basket of goods and services sold by domestic firms

substitution bias

over time, some prices rise faster than others, so consumers substitute toward goods that become relatively cheaper, mitigating the effects of price increases, missed by CPI

introduction of new goods

increases variety and allows consumers to find products that more closely meet their needs, making dollars become more valuable, CPI misses this

unmeasured quality change

improvements in quality of goods in the basket increase the value of each dollar, BLS tries to account, but is hard to measure so misses some

overstates increases in cost of living

due to CPI missing problems because it uses a fixed basket of goods

nominal interest rate

not corrected for inflation; rate of growth in the dollar value of a deposit or debt

real interest rate

corrected for inflation; rate of growth in the purchasing power of a deposit or debt: nominal interest rate-inflation rate

dollar figures from different times

inflation makes it harder to compare…

dollars today

\frac{\$old}{P\left(CPI\right)old}\left(P\left(CPI\right)today\right)