chapter 4 short edition Macroeconomic Overview
Key Macroeconomic Concepts
Key Variables: National income, unemployment, productivity, inflation, interest rates, exchange rates, net exports.
GDP: Major measure of national income; can be nominal or real (adjusted for inflation).
Long-term economic growth: Increase in real GDP over decades.
Short-term fluctuations: Business cycles including peaks, troughs, and recessions.
Business Cycles
Business Cycle Definitions:
Trough: Low point with high unemployment.
Recession: Negative growth in real GDP for two consecutive quarters.
Recovery & Peak: Economic expansion following troughs.
Potential Output: Full-employment output, gap measured by (actual - potential).
Recessionary gap when Y < Y^; inflationary gap when Y > Y^.
Unemployment
Definitions:
Frictional: Normal job turnover.
Structural: Mismatch in skills or locations due to tech changes.
Cyclical: Related to economic cycles, higher during downturns.
Natural Rate of Unemployment: Sum of frictional and structural unemployment when economy is at full employment.
Inflation and Price Levels
Inflation Rate: Changes in the average price level; calculated using Consumer Price Index (CPI).
CPI Calculation: Cost of basket at current prices / base period prices * 100.
Purchasing Power: Affected negatively by inflation; real value adjusted by inflation rate.
Interest Rates and Exchange Rates
Interest Rates: Price for borrowed money; nominal vs. real rates; affects saving and borrowing.
Exchange Rates: Value of currency against foreign currencies; appreciation vs. depreciation of currency.
Trade and Economic Growth
Net Exports: Difference between exports and imports; fluctuates but is generally small relative to GDP.
Long-Term Growth: Essential for improving living standards; more impactful than short-term fluctuations.
Government Policy: Effectiveness debated regarding influencing long-run growth and managing business cycles.