macro unit 2

### BUSINESS CYCLE  

- Shape: Wavy curve (expansion → peak → contraction → trough).  

- Phases:  

  - Expansion: GDP ⬆, Unemployment ⬇, Inflation ⬆.  

  - Peak: GDP highest, Unemployment lowest, Inflation high.  

  - Contraction: GDP ⬇, Unemployment ⬆, Inflation slows.  

  - Trough: GDP lowest, Unemployment highest, Inflation low.  

### GDP (Gross Domestic Product)  

- Definition: Total value of all final goods/services produced in a country within a given time.  

- Measurement:  

  - Expenditure Approach: GDP = C + I + G + Xn (Consumption, Investment, Government Spending, Net Exports).  

  - Income Approach: Sum of all incomes (wages, rent, interest, profit).  

- Real vs. Nominal:  

  - Nominal GDP: Measured in current prices.  

  - Real GDP: Adjusted for inflation (Real = Nominal / GDP Deflator  100).  

- GDP Growth Rate: % change in Real GDP.  

- Left Out: Non-market activities, illegal transactions, household work, environmental costs.  

### UNEMPLOYMENT  

- Types:  

  - Structural: Skills outdated (e.g., factory worker replaced by AI).  

  - Cyclical: Due to economic downturns (e.g., layoffs in recession).  

  - Frictional: Between jobs (e.g., college grad job hunting).  

  - Seasonal: Job depends on season (e.g., ski instructor).  

- Calculations:  

  - Labor Force: Employed + Unemployed (actively seeking work).  

  - Labor Force Participation Rate = (Labor Force / Working-Age Population) × 100.  

  - Unemployment Rate = (Unemployed / Labor Force) × 100.  

- Not Counted: Discouraged workers, retired, under 16, stay-at-home parents, institutionalized.  

- Natural Rate of Unemployment (NRU): Sum of structural + frictional unemployment (~4-5%). Means full employment with no cyclical unemployment.  

### INFLATION  

- Definition: General rise in price levels, reducing purchasing power.  

- Causes:  

  - Demand-Pull: Excess demand raises prices (e.g., stimulus checks increase spending).  

  - Cost-Push: Higher production costs push prices up (e.g., oil price hikes).  

- Calculations:  

  - CPI (Consumer Price Index) = (Current Basket Cost / Base Year Basket Cost) × 100.  

  - Inflation Rate = ((CPI this year - CPI last year) / CPI last year) × 100.  

  - Real vs. Nominal:  

    - Real Income = Nominal Income - Inflation Rate.  

    - Real Interest Rate = Nominal Interest Rate - Inflation Rate.  

- Phillips Curve: Shows inverse relationship between inflation & unemployment (short-run).  

- Helped: Borrowers, asset owners, government with debt.  

- Hurt: Fixed-income earners, savers, lenders.  

### CONSUMPTION/SAVINGS  

- MPC (Marginal Propensity to Consume): % of extra income spent.  

- MPS (Marginal Propensity to Save): % of extra income saved (MPC + MPS = 1).  

- APC (Average Propensity to Consume) = Consumption / Income.  

- APS (Average Propensity to Save) = Savings / Income.  

- Factors: Income, interest rates, future expectations, wealth.  

- Multiplier: 1 / (1 - MPC) → Higher MPC = Larger GDP impact.  

### OTHER REVIEW TOPICS  

- PPF (Production Possibilities Frontier): Shows max output combos.  

  - Concave shape (increasing opportunity cost).  

  - Efficient (on curve), inefficient (inside), unattainable (outside).  

- Economic Systems:  

  - Market (Capitalism, supply & demand), Command (Govt. controlled), Mixed (Blend of both).  

- Supply & Demand:  

  - Demand ⬆ → Price ⬆, Quantity ⬆.  

  - Supply ⬆ → Price ⬇, Quantity ⬆.  

  - Shifts caused by: income, tastes, expectations, substitutes, input costs.  

- Comparative vs. Absolute Advantage:  

  - Absolute: Who produces more.  

  - Comparative: Who has lower opportunity cost.