macroeconomy
gdp: a measure of total income and production
==gross domestic production/ gdp==
the market value of all final goods & services produced within a country in a given time period. include only products that are traded on the market.
value produced: use market prices to value production
what produced:
final good or service that is produced for its final user and not as a component of another g/s.
intermediate g/s that is produced by one firm bought by the other firm and used as a component of final g/s.
where produced: within a country
when: within a given time period.
==circular flow==
consumption expenditure: by householders on g&s.
investment: purchase of new capital goods & additions to inventories.
gov. expenditure on g/s: by all levels on g&s.
net exports of g & s: values of exports - values of imports of g&s.
exports of g&s: items that the firm in a state produce & sell to the others states.
import of g&s: items that households, firms & gov buy from another states.
Total expenditure is the total amount received by producers of final goods and services.
Consumption expenditure: C
Investment: I
Government expenditure on goods and services: G
Net exports: NX
Total expenditure = C + I + G + NX
Income
- Labor earns wages.
- Capital earns interest.
- Land earns rent.
- Entrepreneurship earns profits.
- Households receive these incomes.
Expenditure Equals Income
firms pay out everything they receive as incomes to the factors of production (Y), total expenditure equals total income. Y = C + I + G + NX
The value of production equals income equals expenditure.
expenditure not in gdp: used goods & financial assets (stocks & bonds).
the income approach:
wage income: compensation of employees, payment for labor services. includes net wages, insurance & pension fund.
interest, rent & profit income = net operating surplus.
interest: income of households receive on loans - interest they pay.
rent: payment of land usage & other inputs.
profit: profit of corporations & small businesses.
from factor to market price:
The expenditure approach values goods at market prices; the income approach values them at factor cost. Indirect taxes (such as sales taxes) make market prices exceed factor cost. Subsidies (payments by government to firms) make factor cost exceed market prices. To convert the value at factor cost to the value at market prices:
Add indirect taxes and subtract subsidies.
from net to gross product
The income approach measures net product. The expenditure approach measures gross product. Gross profit is a firm’s profit before subtracting the depreciation of capital. Net profit is a firm’s profit after subtracting the depreciation of capital. Depreciation is the decrease in the value of capital that results from its use and from obsolescence.
Statistical discrepancy is between the expenditure approach and income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total.
Gross national product or GNP is the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by residents of the country. gnp= gdp + net factor income from abroad
Disposable personal income: received by households - personal income taxes paid.
Real GDP is the value of the final goods and services produced in a given year expressed in the prices of the base year.
Nominal GDP is the value of the final goods and services produced in a given year expressed in the prices of that same year.
We use estimates of real GDP for three main purposes:
- To compare the standard of living over time
- To track the course of the business cycle
- To compare the standard of living among countries
Potential GDP is the value of real GDP when all the economy’s factors of production —labor, capital, land, and entrepreneurial ability—are fully employed.
The business cycle is a periodic, but irregular, up- and down-movement of total production and other measures of economic activity.
The four stages of a business cycle are: expansion, peak, trough and expansion.
A recession is a period in which the growth rate of real GDP is negative for at least six months.
jobs& unemployment
labor market indicators
- ==current population survey==
2)==working-age population:== is the total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care or in the U.S. Armed Forces. divided into those in the labor force and those not in the labor force.
3)==labor force==: number of people employed plus the number unemployed. People in the working-age population who by the above criteria are neither employed nor unemployed are classified as not in the labor force.
employed person: worked at least 1hr paid, 15hr unpaid, jobs & business that are absent.
unemployed person: specific efforts to find a job, or to be recalled
==Three Main Labor Market Indicators:==
1)Unemployment rate is the percentage of people in the labor force who are unemployed.
Unemployment rate = (Number of people unemployed/Labor force)x100
2)Employment−population ratio is the percentage of the working-age population
who are employed.
Employment−population ratio =(Number of people employed/Working-age population)x100
3)Labor force participation rate is the percentage of the working-age population who are members of the labor force.
Labor force participation rate =(Labor force/Working-age population)x100
==alternative measures of employment:==
1)A ==marginally attached worker== is a person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past.
2)==Discouraged worker== is a marginally attached worker who has not made specific efforts to find a job within the previous four weeks because previous unsuccessful attempts were discouraging.
==Part-Time Workers Who Want Full-Time Work==.
Full-time workers are people who usually work 35 hours or more a week.
Part-time workers are people who usually work less than 35 hours a week.
Part-time for economic reasons are people who work 1 to 34 hours per week but are looking for full-time work
The key reason why there is always some unemployment is because the labor market is constantly churning. three types of unemployment:
1)==Frictional unemploymen==t is the unemployment that arises from normal labor turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs.
2)==Structural unemployment== is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs.
3)==Cyclical unemployment== is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion.
==“Natural” unemployment== is the unemployment that arises from frictions andstructural change when there is no cyclical unemployment—when all the unemployment is frictional and structural.Natural unemployment rate is the natural unemployment as a percentage of
the labor force.
Full employment occurs when the unemployment rate equals the natural unemployment rate. all the unemployment is cyclical. The major influences on natural unemployment are: Age distribution of the population,The pace of structural change,The real wage rate,Unemployment benefits.
==Unemployment and Real GDP==
Cyclical unemployment is the fluctuating unemployment over the business cycle—unemployment increases during recessions and decreases during expansions.
At full employment, there is no cyclical unemployment.
At the business cycle trough, cyclical unemployment is positive.
At the business cycle peak, cyclical unemployment is negative.
==Potential GDP== is the value of real GDP when the economy is at full employment.
1)When the unemployment rate is above the natural rate, real GDP is below potential GDP.
2)When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP.
3)When the economy is at full employment, real GDP equals potential GDP and there is no output gap.
Output gap equals real GDP minus potential GDP, expressed as a percentage of potential GDP.
1)When the unemployment rate is above the natural rate, real GDP is below potential GDP and the output gap is negative.
2)When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP and the output gap is positive.
the cpi & cost of living
==Consumer Price Index (==CPI) is a measure of the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services.
Constructing the CPI:
1)The CPI Market Basket.The relative importance of the items in the CPI basket is the same as in the budget of an average urban household..The CPI is calculated each month, but the CPI basket is not updated each month.The CPI basket is based on information obtained from the Consumer Expenditure Survey, which is conducted frequently.
2)The Monthly Price Survey. CPI measures price changes, it is important that the prices
recorded refer to exactly the same items.
3)Calculating the CPI. Find the cost of the CPI basket at base period prices. Find the cost of the CPI basket at current period prices. Calculate the CPI for the base period and the current period.
==cpi= (Cost of CPI basket at current period prices/Cost of CPI basket at base period prices)×100==
==Inflation rate== is the percentage change in the price level from one year to the next.
==inflation rate=(CPI in current year − CPI in previous year/CPI in previous year)× 100==
==Deflation== is a situation in which the inflation rate is negative.
==Cost of living index== is a measure of changes in the amount of money that people would need to spend to achieve a given standard of living.
The CPI does not measure the cost of living because:
1)It does not measure all the components of the cost of living.
2)Some components are not measured exactly.
The potential sources of bias in the CPI are:
1)New Goods Bias.New goods do a better job than the old goods that they replace, but cost more.The arrival of new goods puts an upward bias into the CPI and its measure of
the inflation rate.
2)Quality Change Bias. Better cars and televisions cost more than the versions they replace.A price rise that is a payment for improved quality is not inflation but might
get measured as inflation.
3)Commodity Substitution Bias.If the price of beef rises faster than the price of chicken, people buy more chicken and less beef.The CPI basket doesn’t change to allow for the effects of substitution
between goods.
4)Outlet Substitution Bias.If prices rise more rapidly, people use discount stores more frequently. The CPI basket doesn’t change to allow for the effects of outlet substitution.
==The Magnitude of the Bias.== To reduce the bias, has increased the frequency of its Consumer Expenditure Survey and revises the CPI basket as new data is available.
T==wo main consequences of the bias in the CPI are:==Distortion of private contracts,increases in government outlays and decreases in taxes
==Distortion of Private Contracts==. Many wage contracts are linked to the CPI.If the CPI is biased, these contracts might deliver an outcome different from that intended by the parties.
==Increases in Government Outlays and Decreases in Taxes.== The CPI is used to adjust the income levels at which higher tax rates apply.Tax rates on large incomes are higher than those on small incomes, so as incomes rise the burden of taxes would rise relentlessly if these adjustments were not made.To the extent that the CPI is biased upward, the tax adjustments overcompensate for rising prices and decrease the amount paid in taxes.
==Alternative Consumer Price Indexes==
==1)The chained-consumer price index== is a is measure of the price level calculated using current month and previous month prices and expenditures. C-CPI is called a "chained" CPI because the inflation rate calculated for the current month is linked back, like the links in a chain, to a reference base month. Because it uses current period expenditures that are updated every month, the C-CPI avoids the bias in the CPI. The C-CPI takes account of new goods, quality change, and substitution effects. The only weakness of the C-CPI is that it gets revised several times as the data on recent expenditures get revised.
==2)Personal Consumption Expenditures Price Index (PCEPI)== is an average of current prices of all the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices. The PCEPI, like the C-CPI, uses current information on quantities and prices, so it avoids the sources of bias in the CPI. PCEPI Excluding Food and Energy. Food and energy prices fluctuate much more than other prices, so their changes can obscure the underlying trends in prices.By excluding these highly variable items, the underlying price level and inflation trends can be seen more clearly.The annual percentage change in the PCEPI excluding food and energy is called the core inflation rate.
==nominal & real values==
==That price index is called the GDP price Index==. The GDP price index is an average of the current prices of all the goods and services included in GDP expressed as a percentage of the base-year prices.
==GDP price index = (Nominal GDP ÷ Real GDP) × 100.==
==Nominal Wage Rate and Real Wage Rate .== Nominal wage rate is the average hourly wage rate measured in current dollars. Real wage rate is the average hourly wage rate measured in the dollars of a given reference base year.
==Nominal interest rate== is the dollar amount of interest expressed as a percentage of the amount loaned. ==Real interest rate== is the goods and services forgone in interest expressed as a percentage of the amount loaned.
==Real interest rate = Nominal interest rate − Inflation rate.==
Potential GDP
classical macroeconomics, the market economy works well and delivers the best available macroeconomic performance. Aggregate fluctuations are a natural consequence of an expanding economy with rising living standards.Government intervention can only hinder the ability of the market to allocate resources efficiently.
Keynesian macroeconomics, the market economy is inherently unstable and it requires active government intervention to achieve full employment and sustained economic growth.
monetarist macroeconomics, the classical view of the world is broadly correct, but in addition to fluctuations that arise from the normal functioning of an expanding economy, fluctuations in the quantity of money also generate the business cycle.
Potential GDP is the value of real GDP when all the economy’s factors of production are fully employed. We produce the goods and services that make up real GDP by using factors of production: labor and human capital, physical capital, land, and entrepreneurship. At any given time, the quantities of human capital, physical capital, land, entrepreneurship, and the state of technology are fixed. But the quantity of labor is not fixed.The quantity of labor employed depends on the choices of people and businesses. So real GDP produced depends on the quantity of labor employed.
Production function is a relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same. boundary between the attainable and the unattainable.
diminishing returns: The tendency for each additional hour of labor to produce successively smaller additional amo unts of real GDP.
Quantity of labor demanded is the total labor hours that all the firms in the economy plan to hire during a given time period at a given real wage rate.
Demand for labor is the relationship between the quantity of labor demanded and real wage rate when all other influences on firms’ hiring plans remain the same.The lower the real wage rate, the greater is the quantity of labor demanded.
Quantity of labor supplied is the number of labor hours that all the households in the economy plan to work during a given time period and at a given real wage rate.
Supply of labor is the relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same.
The quantity of labor supplied increases as the real wage rate increases for two
reasons:
Hours per person increase as the real wage rate increases.
The labor force participation rate increases as the real wage rate increases.
Full Employment and Potential GDP
When the labor market is in equilibrium, the economy is at full employment.
When the economy is at full employment, real GDP equals potential GDP.
The Natural Unemployment Rate
two fundamental causes of unemployment:
Job search is the activity of looking for an acceptable vacant job.
The amount of job search depends on:
Demographic change( increase in the proportion of the population increase in the entry rate into the labor)
Unemployment benefits(lower opportunity cost of job search)
Structural change(pace and direction of technological change.)
Job rationing occurs when the real wage rate is above the full-employment
equilibrium level.
The real wage rate might be set above the full-employment equilibrium level
for three reasons:
Efficiency wage( real wage rate that is set above the full-employment equilibrium wage rate to induce greater work effort.)
Minimum wage(If the government sets a minimum wage above the equilibrium wage rate)
Union wage( collective bargaining between a labor union and a firm.)
Job Rationing and Unemployment
The above-equilibrium real wage rate decreases the quantity of labor demanded and increases the quantity of labor supplied.
If the real wage rate is above the full-employment equilibrium level, the natural
unemployment rate increases.
An efficiency wage rate:
Decreases the quantity demanded—job rationing.
Increases the quantity of labor supplied.
Increases the natural unemployment rate.