Macro exam 1

GDP Components

Consumption + Investment + Government Spending + Net Exports

GDP deflator formula 

(Nominal GDP / Real GDP) x 100

Calculating inflation rate with GDP deflator

(GDP deflator in year 2 - GDP deflator in year 1) / (GDP deflator in year 1) x 100

Calculating economic growth

(Real GDP year 2 - Real GDP year 1) / (Real GDP year 1) x 100

Calculating inflation rate with CPI

 CPI in year 2 - CPI in year 1 / CPI in year 1 x 100

CPI (Consumer price index)

Price of the basket of goods and services in the current year / price of the basket in the base year x 100

Formula for turning dollar figures for Year X into todays dollars

(Amount in year X dollars x Price level today) / Price level in year X

Real interest rate

Nominal Interest rate - Inflation rate

Labor force

Number of Employed + Number of Unemployed

Unemployment rate

(Number of unemployed / Labor force) x 100

Labor Force participation rate

(Labor force / Total number of adults) x 100

U-6 Rate of unemployment formula

(Unemployed + MAW / Labor Force + MAW) x 100

Nominal GDP

Price x Quantity

Real GDP

 Price base year x quantity year 2

Natural rate of unemployment (Full employment)

Frictional unemployment + Structural unemployment

Actual rate of unemployment

Natural rate of unemployment + cyclical unemployment

GDP definiton 

The total market value of all goods and services produced within a country’s boarders within a given time period 

What is not included in GDP

1. Used goods

2. Indeterminate goods

3. Transfer Payments 

4. Financial assets: Stocks, bonds, etc

5. Household production 

Income and expenditure approach of calculating GDP

Aggregate income = Aggregate expenditure

What are the limitations of national income accounting?

1. Black Markets 

2. Environmental degradations

3. Does not measure quality of life

Why do we use Real GDP to calculate economic growth?

Removes the effects of inflation, allowing us to measure the change in quantity of goods produced

What is the limitation of Real GDP per capita?

Ignores income distribution

What is the Human Development Index (HDI)?

Measures quality of life in 3 ways

1. Health: Life expectancy at birth 

2. Education: Years of schooling of adults and expected years of schooling at birth 

3. Standard of Living: Measured by the Gross National Income (GNI) per capita

Why is PPI an early indicator of inflation?

If producers start to see increases in their costs of production, they will relay those costs onto their consumers

GDP deflator def

Measures the current prices in an economy

PPI Formula

(Price of a producers market basket in given year / Price of producers market basket in base year) x 100

2 sources of inflation

Demand pull inflation and cost push inflation

Demand pull inflation

Prices increase due to increase in demand

Cost push inflation

Prices increase due to costs of production increasing 

What are the effects of unanticipated inflation? Buyers vs Sellers: When inflation is higher than expected

Buyers win, sellers loose

What are the effects of unanticipated inflation? Menu costs:

Costs rising due to businesses taking on higher costs

What are the effects of unanticipated inflation? Relative Prices

Inflation obscures the relative change in price

What are the effects of unanticipated inflation? Fisher effect

Relationship between nominal interest rates, real interest rates, and expected inflation

What are the limitations of using CPI to measure inflation?

Substitution effect, Introduction of new goods, Changes in quality

Substitution effect

CPI does not account for consumers switching over to cheaper goods

Introduction of new goods

As new goods are introduced, consumers have more choices, and each dollar is worth more. 

Changes in quality

Quality improves over time, so naturally prices rise reflecting the quality improvement, not necessarily inflation.

Indexation

Adjusting wages, payments, or contracts automatically based on changes in the price index 

Sources of unemployment

Frictional and structural

Frictional unemployment

Short term, while employees look for jobs that align with their skills and interests

Frictional unemployment examples

Sectorial shift, unemployment benefits, comparative advantage

Structural unemployment

When demand for labor is lower than supply

Structural unemployment examples

Minimum wage, unions, worker efficiency, structural change

Natural rate of unemployment

Frictional unemployment + Structural unemployment

Actual Rate of unemployment

Natural rate of unemployment + Cyclical unemployment

Problems with the official unemployment rate: Understating

Does not account for MAW

2 types of MAW

Discouraged workers, side tracked workers

Problems with the official unemployment rate: Overstating

Unemployment benefits, Shadow economy

U6 vs U3 unemployment

U3: Official Unemployment Rate; U6: Official Unemployment Rate + MAW