econ unit 2 brainrot

foci of macro

1. LR econ growth

2. business cycle (short run fluctuations in output and employment)

why is LR growth important

long ah speech on how humanity for all of time was poor and then we locked in and now gdp/capita or output/person is rising so we got bands

role of businesses and HH in LR growth

people borrow large amounts of money, savers set aside small amounts, pool together small amounts for loans to give to businesses to invest in capital

excluded transactions from GDP

1. financial transactions

2. second hand sales

expenditures approach

C + Ig + G + Xn

what is included in gross investment

machinery + tools, construction, research and development, changes in inventory

how to get net investment

gross investment - depreciation

what is considered government expenditures

public services, social capital, research and development (healthcare and benefits not included)

G/S gov uses, G/S public uses, R + D (this includes purchases of resources)

national incomes approach

wages + rent + interest + corp profits + prop income + taxes on prod

what is corp profits made of

dividends + undistributed corp profits + corp income tax

GDP in terms of NI

GDP = NI + depreciation + statistical discrepancy - NFFI

NFFI

value of Americans abroad - abroad stuff in America

NDP equation

NDP = GDP - depreciation

GNP

GDP + NFFI

personal income equation

PI = NI - taxes on prod - social security - corp income tax - undistrib corp profits + transfer payments

disposable income

PI - personal income taxes

what else is DI

consumption and savings

RGDP equation

nom GDP over (price index/100)

how to calculate price index

(mkt basket of a specific year over mkt basket of base year) times 100

limitations of GDP (what it doesn’t take into account)

1. nonmarket transactions like stay at home parents

2. value of leisure

3. improved product quality

4. underground economy

5. pos and neg externalities

6. composition and distribution of output (ARs vs toys, and who gets them?)

7. per-capita output

8. non econ measures of well eing

9. intermediate output

what is used to compare living standards

RGDP/capita

econ growth formula

new RGDP - old RGDP over old RGDP

goal of econ growth

lessen the burden of scarcity

determinants of growth

supply

• quantity and quality of nat’l resources

• quantity and quality of human capital

• quantity of capital

• technology

• (public policy: positive + stable business environments)

efficiency

• allocative efficiency and full employment

demand

• demand for final G/S also has to increase

RGDP in terms of labor

worker hours times labor productivity

what are worker hours

size of labor force times avg hours worked

what is labor productivity comprised of

technological advancement (40%), quality of capital (30%), quality of human capital (15%), economies of scale and resource allocation (15%)

sources of increasing returns and economies of scale

1. more specialized inputs

2. development costs spread

3. simultaneous consumption

4. network effects

5. learning by doing

case against growth

• hurts environment

• more growth won’t help poverty + discrimination

• more productive makes us slaves + worker burnout + stress

• unsustainable since Earth has finite resources

case for growth

• will lead to greater material abundance and higher living standards

• only practical solution to poverty

• improves nation’s infrastructure

• no growth would limit growth in poor nations

• better working environments

• pollution is more a problem of the commons than an effect of growth

• growth deals w human knowledge, not extractable limited resources

• even so, the price of limited resources have not risen, so we are not depleting them faster than they are being discovered

last word

our population is aging and the work force is declining. if the elderly demand new products for them, productivity can still grow.

parts of business cycle

1. peak

   1. at or near full employment and on PPC

   2. inflation

2. recession

   1. avg price level not decr (sticky)

   2. lower output, employment, and income

3. trough

   1. total output is lowest

   2. avg price may start decreasing

4. expansion

   1. demand for output incr

   2. incr output, employment, and income

   3. avg price may or may not increase

causes of shocks

• irregularity of innovation

• changes in productivity

• changes in amount of money

• financial instability

durable/nondurable

durable goods are affected by shocks

seasonal, frictional, structural, cyclical

seasonal - due to weather

frictional - moving between jobs

structural - wrong skills or education

cyclical - insufficient demand in recession

what is labor force

population - those under 16 - institutionalized - discouraged workers - others

LFPR

labor force over population times 100

unemployment formula

unemployed over labor force times 100

criticisms to unemployment rate

• part time treated same as full time

• ignores the discouraged worker

what happens to NRU over time + why

decreases bc LF decreases due to aging population

gdp gap

actual - potential

okun’s law

for every 1% increase in unemployment rate above NRU, the actual GDP drops 2% below potential GDP

inflation rate equation

new CPI index - old CPI index over old CPI index times 100

CPI equation

price of mkt basket in year over price of mkt basket in 1982-1984 times 100

what is only subtract from NI to GDP

NFFI, GDP doesn’t like it because of the word foreign

gdp and depreciation

subtract depreciation when going from GDP to something else cuz it always contains it

why add GDP and NFFI to get GNP

GDP doesn’t like foreign so once you add it, GDP changes and deals with national things because NFFI has Americans minus foreigners

only thing added to go from NI to PI

tr

real income eq

nom income over (CPI/100)

estimate real income

percent change nom minus percent change price level

nom interest rate formula

i = r + pi^e

what happens when negative real interest rate

savers lose purchasing power over time

institutional structures that promote growth

• strong property rights

• patents and copyrights

• efficient financial institutions

• literacy and widespread education

• free trade

• competitive market system

what does a change in inventory indicate

either output was made and not sold (counted) or sold but made in a different year (not counted)

hurt + helped by inflation

hurt: fixed income ppl

savers

lenders

helped: flexible income

borrowers

actual return on a loan where inflation is anticipated

i minus pi

deflation good or bad and why

bad because if spirals and causes bankruptcies mixe

economists feelings about strong demand

mixed feelings about strong demand

cost push causes less what

output and employment

shifting to be on PPC vs shifting of the PPC itself

shifting to be on PPC is efficiency, supply is shifting of the PPC itself

economists consider what an immediate determinate of employment and output

total spending

p index

current year cost over base year cost times 100

purchasing power of the dollar

1 over CPI over 100