Untitled Flashcards Set

Recap of Midterm Macroeconomic Goals, Framework, and Policies

Macroeconomics is fundamentally concerned with achieving certain goals, employing a framework for analysis, and utilizing various policy tools. Key macroeconomic goals include a consensus on essential targets for the economy, while the framework helps economists analyze changes such as inflation and recession. The federal government employs several policy tools to influence these macroeconomic factors.

GDP, Unemployment, and Inflation

Gross Domestic Product (GDP) measures the total value of all goods and services produced by a country within a year, serving as an indicator of a country’s economic activity and size. A common way to assess individual economic well-being is through GDP per capita, which indicates the average economic well-being of citizens. The unemployment rate reflects the percentage of the working population that is unemployed and seeking work, while the inflation rate conveys the annual increase of the consumer price index (CPI), which compares the costs of a set basket of goods over time.

Government Budget Balances

Governments finance their expenditures—such as public goods and transfers through tax revenue. A budget surplus results when tax revenue exceeds expenditures, while a budget deficit occurs when spending surpasses revenue, necessitating financing methods like issuing treasury bills, bonds, or printing money.

Measuring the Size of the Economy: Gross Domestic Product (GDP)

GDP can be measured through the total dollar value of what consumers purchase or what the country produces. Consumer demands can be categorized into four main parts: consumer spending, business investment, government spending, and net exports. The net export component—exports minus imports—determines trade balance. A trade surplus occurs when exports exceed imports, while a trade deficit happens when imports surpass exports. GDP can thus be represented by the equation: GDP = C + I + G + (X – M).

Production Components

Production comprises five key components: durable goods (long-lasting items), nondurable goods (short-lived products), services (intangible products), structures (various buildings), and changes in inventories (unsold goods). It is crucial to avoid double counting in GDP measurement, focusing only on final goods and services rather than intermediate goods.

Adjusted Values

Nominal value relates to the economic statistic announced at present without inflation adjustment, while real value has been inflation-adjusted. Real GDP is calculated using the formula: Real GDP = Nominal GDP × Price Index / 100. Tracking GDP growth occurs at a reported annualized rate, reflecting economic health over time.

Comparing GDP Internationally

When comparing GDP among nations, exchange rates must be considered to ensure accurate assessments. GDP per capita provides insights regarding economic performance on a per-person basis, yet it is crucial to differentiate between GDP and the standard of living as the latter includes factors such as leisure time, environmental quality, health, and inequality.

Growth Factors

Long-term economic growth is driven by labor productivity, influenced by human capital, technological advancements as a result of invention and innovation, and economies of scale. The aggregate production function explains how inputs like human and physical capital lead to outputs measured as GDP per capita.

Economic Convergence

Economic convergence refers to the phenomenon where lower per capita income economies grow faster than their higher-income counterparts, driven by capital deepening and technological adoption, which facilitates sustainable economic growth across nations.

Unemployment

The adult population comprises employed individuals, unemployed individuals actively seeking work, and those out of the labor force. The unemployment rate is calculated as a percentage of the labor force that is unemployed. Hidden unemployment includes underemployed individuals and discouraged workers. Conditions like hysteresis, where prolonged unemployment leads to skill deterioration, may cause structural unemployment.

Inflation

Inflation represents a general, ongoing rise in price levels, calculated through the CPI based on a fixed basket of goods. CPI's limitations include substitution bias, which may overstate the true cost of living changes due to a failure to adjust for consumer substitution between goods, and quality bias, which fails to account for improvements in product quality. Inflation impacts purchasing power and complicates long-term planning, necessitating indexing in various markets and programs to adjust for inflation.

Trade Balances

Trade balances indicate the difference between a country's exports and imports, with merchandise trade balance focusing solely on goods, while the current account balance includes services, income flows, and unilateral transfers. Economic conditions such as growth cycles can influence trade balances, and a country’s net international position reflects the total holdings of foreign assets by domestic residents versus domestic assets held by foreign residents. Understanding trade balances is crucial for evaluating a country's economic health and policy approaches.