macro quiz 1

Chapter 6:

Gdp measures wealth of nation, though gdp measures a country's STANDARD OF LIVING, for living standards to rise, OUTPUT must grow faster than population

Developed countries must grow at a rate of 2%, 

Developing countries need to grow at 10% to steadily increase living standards

Salary directly correlates to living standards, more salary, more ability to buy G+S

to find economic growth (new-old/old)*100 = USE REAL GDP. 

Gdp per capita = gdp divided by population

Gdp deflator = nominal/real(measures price levels)*100

Nominal gdp = no adjustment for inflation(quantity produced times price), real gdp = adjusted for inflation(base year price)/production of G+S valued at constant prices

GNP = measures what is produced by labor, ONLY PERMANENT RESIDENTS, take out all international out because they are not citizens

• For example: US citizen working in france IS counted but mexico citizen working in usa is taken OUT

GDP = Market of all finished goods/services produced within a country in a given year, REGARDLESS of nationality

• People who live in economy with high GDP tend to have access to better health care and education, leads to better economic well being

• Anything “used” isn't counted in gdp, ex: car

• For example: a citizen of mexico working for a FORD dealership in the usa adds to USA gdp, but also mexico GNP

• Example: Sale of a 1988 house in 2024 is not added in gdp because the house was not produced during the year it was sold(2024)

• Criteria for GDP: market value, produced within a certain time frame, final good and service, produced within a countries boundary

  • Market value - a feeling , because the value has to be equal to the price, some goods are more valuable than others so we cannot just add the quantities. Must be finished goods because calculating the intermediate process of materials and parts would be very complicated

Social security checks are not included in gdp because they are not “produced”

Expansion = economy is improving, firms selling more, hiring more, better pay, better living standards

Recession(downward fluctuation in economy) = less production, no demand for goods/services, fall in income, unemployment RISES, living standards go down

How to solve recession: The Federal Reserve

To calculate GDP(Expenditure Approach):

Y = C +  I + G(govt purchases) + Net Exports/trade values (Exports - Imports)

C (consumption) = money spent on private consumption(80% of gdp in USA)(greatest expenditure = health)

I (Investment) = private investment(ex:houses)(greatest expenditure: equipment and software)

G (govt purchases) = all of the money govt is spending in the economy(greatest expenditure = national defense)

(E - I) net exports = (greatest expenditure = importing), need to reduce trade deficit, import less & try to export MORE

Problems with GDP:

• underground/illegal transactions are not counted(babysitting)

• Gdp does not count for volunteering or housework

• Does not count for stock market/mutual funds

• Does not count for pollution and crime

Chapter 7:

Wealth of a nation : (RGDPyr2-RGDPyr1/RGDPyr1)*100

Rule of 70 = 70/growth rate in %

Growth miracles: south korea, japan after WW2, germany after WW2

Disaster: north korea/argentina

Productivity = how much(+), and quality of work -> gives salary

Causes of growth in gdp per capita:

Intermediate Causes(affected directly by institutions and incentives):

1. Physical capital = tools we use to produce something

• Ex: Pencils, computers, phones

• Farming good illustration of the role of capital, farmers use a lot more capital including tractors, trucks, harvesters

2. Human Capital = productive knowledge and skills workers acquire

• Ex: going to school to learn computer programming, one is trained to operate machinery, learning to use keyboard

 *need to invest in education for this to get better!

3. Tech. Knowledge = knowledge used to produce goods and services, primary factor is increasing input, knowledge about different capitals

*we increase tech knowledge with research and development

Ultimate Causes:

1. Institutions of economic growth include(promote economic growth):

1. Property rights: Encourage investment in physical and human capital, incentive to “free ride”: Free Rider = someone who consumes a resource without working or contributing to the resources keep up

2. Honest govt: Corruption = is like a tax that bleeds resources away from predictive entrepreneurs, resources “invested” in bribing cannot be invested in machinery and equipment’

3. Political stability: Anarchy has destroyed many institutions necessary for economic growth

4. Dependable legal system

5. Competitive open markets: FAIR, some of the best ways to encourage the efficient organization of resources

Inhibits economic growth: increasing taxes, creating price ceilings, government corruption, civil conflict, command economy

Some of the reasons for inefficient organizations:

• Inefficient and unnecessary regulations

• Red tap or the time and cost to do tasks such as starting a business or enforcing a contract in a court of law

• Barriers to free trade

2. Incentives = attendance counts as a 5% boost for your final grade 

*the organization of factors of production depends on incentives and institutions 

Economies of scale = the advantages of large scale production that reduce average cost as quantity increases, ex: car manufacturer can lower average costs by changing operation by also producing trucks

• By doing something else av cost goes down

Chapter 9:

Supply of $(savings)  

• Why are they saving?: impatience, smooth consumption, marketing+psychological factors(motivating to buy now), INTEREST RATE: set by the FED

• FED were created to make sure banks follow rules and regulations

• Smooth consumption(making 5k now when i retire i make less so organize so that can be ok after retirement), impatience(really want to buy something), psychological factors, interest rates(people save more with higher interest rate -> give up consumption)

• Interest rate(example) - 10%, if you save, give up consumption to put money into a bank account for 6 months to receive interest back. Movement along the supply curve. Changes in expectation for savings, even though the same interest rate, drop consumption which moves the supply curve to the right, not saving because of more interest rate saving because of personal scarcity. 

• Impatience - want to travel now, even though you want to buy things, you must save to go on this trip later in time

• If savers do not put their money in banks, supply of savings will fall and interest rates will rise

Goes through -> financial intermediary(banks,stock markets, bond markets, etc.)

Demand$(borrowing)

• Why do we borrow?: Smooth consumption, finance large investments, INTEREST RATE: lower interest rate, greater quantity of funds demanded from the borrowers

• Interest rate is high for borrowing, less people will borrow because they will have to pay so much money back because of the change in interest rate, so shaft in demand when IR stays the same but you need to borrow, demand curve moves to the right

• Cost of borrowing: Principle, add int rate%, and date you return the money

Economic growth = demand of good/services that are NEW(first hand)

If financial intermediary is not trusted = credit dries up, economy STOPS

Marketing and psychological factors are biggest enemy for SAVING

Federal Reserve decides BENCHMARK, for demand interest rate

Equilibrium in the market of loanable funds = demand of funds= supply of savings

• Entrepreneurs demand and savers supply loanable funds

• Higher interest rate = (+) more savings

• Lower interest rate = (-) less savings, won't make as much money when you take money back out of the bank

Saving money -> people give up consumption / Less borrowing when interest rates are high

IR goes up = supply goes UP, borrowing goes down / IR goes down = supply goes down, borrowing goes UP

REAL INTEREST RATE balances out loanable funds. To get rid of shortage increase interest rate/to get rid of surplus decrease interest rates

• Any changes in household saving patterns shift loanable funds supply curve

• Increase in taxes will reduce profitability for new investments meaning demand for loanable funds decreases

• Improvement in economic conditions causes increase in G + S cause demand of loanable funds to go up

• Advancements in technology increase demand for loanable funds

• Increase in household income and life expectancy = increase in supply of loanable funds

• Decrease in productivity of capital and decease of number of people in prime earning years is decrease in supply of loanable funds

• Increase in investor confidence increases demand for loanable funds

• Increase in interest rate causes increase in quantity supplied, if interest rates decrease quantity demanded will increase

Shifts in supply and demand

• Changes in economic conditions will SHIFT the demand or/and the supply curve

Demand of borrowing:

• The lower the interest rate, the greater the quantity of funds demanded.

Role of intermediaries

1. Banks: banks earn profit by charging more for their loan than they pay for the savings

The bond market: NO BANK/intermediary

Corporations borrow directly from the public(households/businesses/ etc.)

Ex: I.O.U, must pay back at a certain time

There is a default risk -> possibility company could go bankrupt and you lose all of the money

• Higher default risk, higher money you ask for in return

Budget deficit = income govt receives via taxes is less than the govt spending

• Once there is a deficit, NEED to borrow

Private investment goes down because there is an increase in government borrowing

Private consumptions and savings increase due to higher interest rate

Crowding out: decrease in private consumption & investment occurs when govt borrows more

The stock market

Suppliers: public = households, entrepreneurs, businesses

transfers directly -> the only demander is businesses

Stocks traded on stock market, called IPO(new /shares for the public)

• If you consume you CANNOT save, when savings give up consumption(need reward, which is the interest rate bank pays you for saving money) -> bank can only give out money that people have saved and put in the bank. 

Bridge between savers and borrowers can be broken in many ways including:

• Insecure property rights, Inflation and controls of interest rates, Politicized lending, Massive banks failures and panic

Problems can break bridge by:

• Reducing supply of savings

• Raising cost of intermediation

• Reducing effectiveness of lending

Only developed nations have established financial institutions(banks/stock&bond market)

Savings vs consumption gives you living standard

Chapter 11:

Total population (subtract those):

• Under 16 and working

• In hospitals and prisons

• In the military

• Retired

Potential workers(2 types)

Not in labor force = able to work, but not willing to work

Discouraged workers: GAVE UP looking for jobs, those who have looked for a long period of time but after denial believe they cannot find job

Labor force = willing and able to work (employed and unemployed!)

Unemployment: willing and able to work but cannot find a job, single best indicator of how well the labor market is working

Unemployment(looking) 3 types:

Natural rate of unemployment (Frictional and structural):

Frictional: always going to be there, when workers are between jobs or those who are unemployed but looking for new job(significant portion of unemployment)

• Those in job search, new people entering workforce, also reject other offers

Structural: skills of workers don’t meet skills demanded by employers, more difficult to get rid of 

• Can be caused by minimum wage, affected by technological process, can be caused by efficiency wages, can arise from labor surplus in market and actions in labor unions

• Reasons some people might not go back to work: Unemployment benefits, minimum wages, unions, and employment protection laws to benefit workers 

• Hiring and firing costs increase long-term employment

• Covid was structural unemployment, long term unemployment

• Gdp goes down, no production company are firing, people collecting money from govt, less purchasing power, living standard goes down

Cyclical: result of recession in business cycle, shrink when economy gets better(bus cycle improves)

NATURAL AND CYCLICAL GIVE YOU UNEMPLOYMENT

POTENTIAL WORKERS = Total population over age 16(working age) 

Underemployed is still employed, marginally attached are not in labor force

Formulas:

Not in labor force participation rate

(NILF/potential workers(working age)) *100

Labor force participation rate

(LF/potential workers) *100

Employment rate

(employed/people in labor force) *100

Unemployment rate

(unemployed/labor force)*100 OR unemployed/(unemployed+employed)

• You can find employment rate by (underemployed plus those part time/full time workers) divided by total labor force, then do 1-(that percent) which is unemployment rate

Frictional unemployment rate

(frictional/labor force) *100

natural rate of unemployment

(frictional +structural/labor force) *100

• If you find the employment rate do (1- emp rate) to find unemployment rate

unemployment rate rises = Workers laid off and start looking for work, and people without jobs and not looking for work become encouraged and decide to start looking 

unemployment falls = People without jobs looking for work, people without jobs and not looking take a job when offered, and people without jobs who and looking for work give up and stop looking for work 

Lowering unemployment benefits causes people to have to go back to work, causing long term unemployment to reduce