EC202Z - Macroeconomics Final Study Guide

Session 1A - Why Economics?

    Economics is the study of how individuals choose to use scarce resources that nature/previous generations have provided.

  • key concepts: scarcity & choice

  • we study economics to figure out how the world works, to create better policies, and figure out how to change the world for the better

    • market structures, competition, pricing

    • public finance

    • recessions, fiscal and monetary policy

    • healthcare and public health

Positive: statements on how the world does work

  • true/false statements

  • factual

  • descriptive, scientific

Normative: statements on how the world should work

  • opinion based statements

  • realm of values and judgements

  • no objective way to determine if it is true or false

examples:

  • the university of oregon has the best mascot (normative)

  • the sky is blue (positive)

  • UNO is a top-tier game (normative)

  • the CO2 concentration in the room right now is above 1000 ppm (parts per million) (positive)

Session 1B - Living Standards Across Place & Time

Gross Domestic Product (GDP): is a measure of the total market value of the output of new final goods/services produced in an economy in a given period of time.

GDP per Capita: is a measure of average income

  • does not equal disposable income (which is the amount left over after deducting taxes and mandatory contributions)

  • disposable income = total income - taxes + gov transfers

  • how to calculate:

    • GDP / population (and then times 1000 or whatever units it is in)

  • GDP per capita is a rough measure of how a country is improving over time

Real GDP: adjusted for inflation, using GDP deflator

  • real = nominal / GDP deflator x 100

  • stays the same when prices rise and there is no problem

Nominal GDP: current price in dollars, rises if prices also rise

  • nominal = (price x quantity)

  • also: nominal = GDP deflator x real GDP

Growth Rate: tells us how quickly a variable is growing

  • GR = new - old / old x 100

  • a growth rate can be negative!

Session 2A - The Capitalist Revolution

Logarithmic Scales: gives more details on variations at smaller values

  • slope of the curve tells us the growth rate

Economic Growth:

  • Technology!

    • process using a set of materials and other inputs to produce an output

  • Institutions:

    • business practices

    • laws & regulations

    • government

    • work habits & culture

    • expectations about the future

  • Institutions Promoting Economic Growth

    • Political Stability

    • Rule of law

    • private property rights

    • stable money and prices

    • competitive markets

    • efficient taxes

    • international trade

    • free flow of funds across borders

Capitalism: an economic system where private owners of capital goods hire labor produce goods/services in hope of making a profit

  • private property

  • markets

  • firms

Firm vs. Not a Firm:

Firm: organizations where private owners of capital goods hire & direct labor to produce goods/services for sale on markets to make a profit.

  • apple, nike, walmart

  • 7/11 & panda express

Not a Firm: not a business or organization producing and selling goods/services

  • family/individual production

  • nonprofit organizations

  • government agencies (colleges)

Mixed Economies: where both the government and private businesses make economic decisions. overall, it is mostly the businesses making decisions, but the government steps in to ensure rules are in place and things run smoothly

  • most economies are considered mixed

  • think of it like this:

    • market economy → consumers and businesses decide what to produce & buy

    • command economy → government controls major decisions (the big boss)

  • U.S, Canada, United Kingdom, Germany, Japan

    • are some of the countries with mixed economies

Model: formal statement of a theory

  • makes assumptions

  • describes relationships between variables of interest

  • ceteris paribus

    • all else being equal (holding other things constant)

  • a good model includes:

    • clarity

    • accurate prediction

    • improved communication

    • useful

Session 2B - Malthusian Economics

Equilibrium: situation where is there is no tendency for change absent of an external force

Malthusian Model:

  • population expands if living standards increase

  • the law of diminishing average product of labor implies that as more people work on the land, their income will inevitably fall

  • diminishing average product of labor: the more workers do to produce more output, the average output per worker decreases

Thomas Malthus’s Main Idea:

  • when people have more food and higher incomes, they tend have more children

  • more children mean the population grows

  • as the population grows, more people are sharing the same amount of land & resources

  • eventually, income per person falls back down

*in the long run, improvements in living standards don’t last long due to population growth “using up” the gains

Malthusian Trap: is the outcome predicted by the model

  • example: imagine filling a bucket with water, but the bucket has a hole

    • more technology = pouring in more water

    • population growth = water leaking out

    • the water level never rises because the gains always disappear

Why was Malthus wrong?

  • he neglected the power of technology to increase productivity

  • his demographic assumptions were incorrect

    • eventually richer countries had lower fertility rates, population grew slower (demographic transition)

Session 3A - Employment & Unemployment

Unemployment: when people who want to work, but cannot seem to find work

  • has made specific efforts during the previous 4 weeks of looking

  • not working

  • available to work

Unemployment rate: percentage of the labor force that is unemployed

  • key indicator of an economy’s health

In the markets for labor:

  • firms are on the demand side

  • workers are on the supply side

Employment: any person 16 years or older

  • works for pay

  • works w/o pay for 15 hours per week for a family enterprise

  • has a job and is on temporary leave/absense; with or without pay

*if a person is in the working age population, who is not looking or does not desire for a job, they are not a part of the labor force

Equations:

  • WA = LF + NLF

  • LF = E + U

  • UR = unemployed / LF

  • ER = employed / LF

Session 3B - Model & Types of Unemployment

Shifting the Price-Setting Curve:

  • Competition: less competition = higher markup (and vice versa)

  • Labor Productivity: greater the labor productivity = the higher the wage will be (vice versa)

  • in a situation with less competition → the equilibrium real wage would fall

Types of Unemployment:

  • Frictional

    • portion of unemployment due to time delays; firms don’t typically hire the first applicant

      • ex: recent college grads, parents re-entering LF, moving to new city

  • Structural

    • portion of unemployment due to changes in structures of the employment that result in permanent job loss

      • caused by changes in technology, changes in trade flow, or changes in consumer tastes

      • ex: steel industry, U.S textile industry, blockbuster

  • Cyclical

    • portion of unemployment that is caused by a decrease in the aggregate demand during recessions

Session 4A - Underemployment, Inequality, and Labor Unions

Natural Unemployment: the sum of frictional & structural unemployment

  • the natural rate of unemployment can be affected by:

    • real wage rates

    • population demographics

    • unemployment benefits

Discouraged Workers: people who want to work, but don’t have jobs

  • they grow discouraged and stop looking

  • discouraged worker effect → lowers unemployment rate mathematically

Underemployed workers: those who are significantly overqualified for a position/job, who could be more productive in other positions.

Measuring Inequality: Lorenz Curve

  • plots the percentage of the total income earned by all of the people up to that given percentage of population

Gini Coefficient: ratio of the area between the Lorenz curve and the 45 degree line to the entire area under 45 line.

  • A / (A + B) (equation)

    • A / (A + B) = 0 ; there is no perfect income equality

    • A / (A + B) = 1 ; there is no perfect income inequality

Labor Union: organization of workers that acts collectively to negotiate pay and working conditions for its members

  • unions are looking to raise their wages for their worker members

  • higher wage = higher effort

  • cost per unit of effort increases for the firm

Session 5A - Recessions & Intro to GDP

Business Cycle: short run fluctuations in economic activity that cause output to be above or below the long-run trend

  • expansion (boom): period in the cycle from the trough to the peak; output & employment rise

  • recession (contraction/slump): period in the cycle from the peak to the trough; output & employment decrease

    • a recession is a period where the GDP is declining

  • the “official” dates of peaks and troughs of the business cycle are determined and tracked by a committee of the National Bureau of Economic Research

Sahm Rule: when the three-month moving average of the national unemployment rate (U-3) rises by 0.50 percentage points or more relative to its low during the previous 12 months it’s likely that we are in a recession.

  • a way economists look at the economy to see if we are entering a recession, and if so they put up automatic stabilizers to lessen the severity.

Intermediate vs Final Goods;

  • Intermediate: goods that firms repackage or bundle with other goods to be sold at a later stage

    • milk sold for a coffee shop

    • tires sold to a car manufacturer

    • drywall sold to a home builder

      • intermediate goods are not counted towards GDP; due to it not being the final product

  • Final Goods: goods sold to the final users, consumers

Session 5B - Components and Limitations of GDP

The Expenditure Approach: Categories

  • The Bureau of Economics Analysis (BEA) is the U.S government agency that tallies GDP data

    • GDP = C + I + G + (X - M)

      • C: consumption

        • durable & nondurable goods, services

      • I: investment

        • business spending on tools, factories, and equipment to produce a future output

        • purchases by businesses that add to their inventories

        • investment in GDP is NOT financial investing (such as stocks and bonds)

      • G: government purchases

        • government employee salaries, new government buildings built, public work projects

        • does NOT count transfer payments such as welfare or social security

      • Mexico is the largest trading partner of the US

      • X: exports

        • sales to foreigners of U.S produced goods/services

      • M: imports

        • U.S purchases of goods/services from abroad

    • any import ALWAYS shows up as C,I,G

    • examples:

      • UO, a public university, remodels and renovates one of its older science buildings (government)

      • amazon builds a warehouse and distribution center in eastern Oregon (investment)

      • apples buys microprocessors from fellow SIlicon Valley firm nVidia to use their laptops (not recorded)

      • The federal government sends a college student money in the form of a Pell grant (not recorded)

      • Laci Brock (in Tucson Arizona) buys a new astronomy painting from artist Cathrin Machin (in austrailia) (consumption, imports)

      • Farmers in Iowa sell soybeans to buyers in Mexico (exports)

      • Mike buys a used Lego set from Bulgaria (set 880, og manufactured and sold in 1995) (not recorded)

  • Nonmarkets goods are NOT included in GDP

    • not being sold, which creates profit, but does create some sort of value for society

  • Underground Economy

    • hidden, uncounted transactions

    • sometimes legal (waitress tips, babysitting for cash)

    • sometimes illegal (exchanges of illicit substances)

Session 6A - Intro to Inflation

real GDP = nominal / deflator x 100

  • nominal GDP: value of goods/services using to current year prices

  • real GDP: value of goods/services using prices from a base year (inflation removed)

  • inflation: the rate in which prices increase over time

  • disinflation: decrease in the rate of inflation over time

  • deflation: decrease in the overall price level

  • hyperinflation: period of a rapid increase in overall price level

rate of inflation: CPI new - CPI old / CPI old x 100

Session 6B - Inflation, Continued

Problems with the CPI:

  • CPI (consumer price index): measure of inflation

1) substitution bias

  • CPI assumes individuals keep buying the same basket of goods, even when prices change

    • beef becomes expensive, many people buy chicken instead

2) New goods bias

  • new goods being added to the basket, but it takes time for them to be added to CPI basket

    • smartphones provide many services that previously required separate devices

    • when new goods appear, consumers often gain more choice and value

3) Quality change bias

  • products improve over time

    • a laptop worth $1000 today is much faster and capable than a $1000 laptop from 10 years ago

    • part of a higher price, reflects on higher quality

CPI is used to:

  • measure inflation

  • adjust wages and pensions

  • calculate real income and GDP

*overstate: to make something seem higher, larger than it actually is

  • the CPI may overstate inflation because of substitution bias, the introduction of new goods, and difficulties accounting for improvements in product quality

  • inflation that is higher than expected is better for borrowers

  • inflation that is lower than expected is better for banks and savers

Session 7A - Inflation, Concluded; Review

Public Policy: Preventing High Inflation

  • reversing periods of high inflation can be very difficult and costly

  • low & predictable rates of inflation can:

    • help labor markets function more smoothly

    • help an economy avoid a deflationary trap

Session 8A - Aggregate Demand and the Multiplier Model

Aggregate Demand: total amount of goods/services that everyone is willing to buy at different price levels

  • can fluctuate due to consumption and investment decisions

MPC (marginal propensity to consume): fraction of extra income that is consumed

  • change in consumption / change in income

MPS (marginal propensity to save): fraction of extra income that is saved

  • change in saving / change in income

Y = c0 + c1Y + I (finding the equilibrium of the value of Y)

Multiplier Effect:

  • total change in equilibrium output can be greater than an initial

  • multiplier = 1 / 1 - MPC = 1 / MPS

  • Multiplier Model

    • AD = c0 + c1(1 - t)Y + I + G + X - M(Y)

Session 8B - Fiscal Policy, Deficits, and Debt

  • if t and m are held constant, does the value of the multiplier increase or decrease when c1 increases?

  • if c1 and m are held constant, does the value of the multiplier increase or decrease when t increases?

  • if c1 and t are held constant, does the value of the multiplier increase or decrease when m increases?

  • deltaY = multiplier x deltaG

  • Ynew = Yold + deltaY

    • multiplier = 1 / 1 - c1 (1 - t) + m

Stabilizing the Economy:

  • government spending

  • unemployment insurance

  • unemployment benefits and proportional tax rates are automatic stabilizers

Federal Budget

  • annual statement of the federal government’s reveanues and expenditures

    • two purposes: finance the activities of fed & achieve macro objectives

  • Fiscal Policy: when the government changes its spending or taxes to influence the economy