0% found this document useful (0 votes)
15 views40 pages

EconUnited - Unit 2 of Macroeconomics Slides

This document covers key concepts in macroeconomics, including GDP, unemployment, business cycles, and inflation. It explains various methods to measure GDP, the limitations of GDP, types of unemployment, and the effects of inflation on the economy. Additionally, it discusses important economic indicators and terms related to these topics.

Uploaded by

abhibhar08
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
15 views40 pages

EconUnited - Unit 2 of Macroeconomics Slides

This document covers key concepts in macroeconomics, including GDP, unemployment, business cycles, and inflation. It explains various methods to measure GDP, the limitations of GDP, types of unemployment, and the effects of inflation on the economy. Additionally, it discusses important economic indicators and terms related to these topics.

Uploaded by

abhibhar08
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 40

Unit 2 :

Macroeconomics
Contents of this slideshow

- GDP
- Limitations of GDP
- Real and Nominal GDP
- Unemployment
- Business Cycles
- Inflation
- Costs of Inflation
GDP
Gross Domestic Product
- GDP is a measure of the final output of a nation’s economy
- Total value of all new goods and services produced in an economy in a
given year

- 3 ways to measure GDP


- Value added approach
- Income approach: How much is earned as income on resources used to
make things
- Expenditures approach: How much is spent on things
-
- Circular flow diagram illustrates how the expenditures approach and income
approach must equal each other
Key Terms
- Expenditures approach: Y = C + I + G + (X - M)
- Consumption: Spending by households on final goods
- Investment: Spending businesses do in order to produce goods and services
- Government spending: Spending by government entities
- Exports: Goods that are produced in a country and sold to another country
- Imports: Goods that are produced in another country and then are purchased
- Net Exports: Exports - Imports(X - M)

- Income approach: Adds up wages, rents, interest, and profits

- Value added approach: Adding up all of the value added at various stages of production

- Final Goods: The goods and services that are purchased by consumers, businesses, the
government, or other countries in their final form for their intended final use

- Intermediate Goods: Goods that are used in the production of a final product

- Transfer payment: Any payment by a government to a household that is not in exchange


for a good or service
Limitations of GDP
- The exclusion of non-market transactions
- The failure to account for or represent the degree of income inequality in
society
- The failure to indicate whether the nation’s rate of growth is sustainable or
not
- The failure to account for the costs imposed on human health and the
environment of negative externalities arising from the production or
consumption of the nation’s output
- Treating the replacement of depreciated capital the same as the creation of
new capital
Key Terms
- Quality of Life: the standard of health, happiness, security, and material
comfort of an individual, a group of people, or a nation

- Non-market transactions: economic activity that takes place in the informal


sector

- Income inequality: When a disproportionate share of a nation’s income is


earned by a small minority of households

- Sustainability: The ability of a system to endure indefinitely into the future

- Economic bads: Any outcome from economic activity that creates negative
value for society
Key Terms
- Real GDP per capita: The real gross domestic product of a nation, divided by
the nation’s population

- Depreciation of capital: The decrease in the value of a nation’s capital stock


over time

- Human Development Index(HDI): A composite measure of nation’s social


and economic development developed by the United Nations that includes
measures of health, wealth, and education

- Genuine Progress Indicator(GPI): A measure of a nation’s quality of life that


includes the income and output measured by gross domestic product

- Happy Planet Index(HPI): A measure of a nation’s quality of life that


includes survey results on happiness, life expectancy at birth, the degree of
inequality across society, and the ecological footprint
Real GDP
- A measure of GDP that has been adjusted for the price level
- A measure of how much is actually produced
- Real GDP weighs output using prices from a base year
Nominal GDP
- Calculate GDP using today’s prices
- A measure of how much is spent on output
- 2 approaches to adjust Nominal GDP to get Real GDP
- Using the same prices every year
- Using the GDP Deflator
Key Terms
- Nominal GDP: The market value of the final production of goods and
services within a country in a given period using that year’s prices (also
called “current prices”)
- Real GDP: Nominal GDP adjusted for changes in the price level, using prices
from a base year (constant prices) instead of “current prices” used in
nominal GDP
- GDP deflator: Measures the average prices of all finished goods and services
produced within a nation’s borders over time
- Base year: The year used for comparison in the determination of price
changes using the GDP deflator price index
- Current prices: The prices at which goods are sold in a nation in a particular
year
- Constant prices: The prices from a base year that are used to calculate real
GDP in other years
Practice problems
Practice problems
Practice problems
Answers
Answers
Answers
Unemployment
3 types of unemployment
- Frictional
- The component of the natural rate of unemployment that occurs because the
job search process is not instantaneous
- Structural
- Unemployment that occurs as a result of a structural change in the economy,
such as the development of a new technology or industry
- Cyclical
- The unemployment associated with the recessions and expansions
Equations
- Labor force

- Labor force participation rate

- Unemployment rate
Key Terms
- Unemployment: When people are not working, but they are actively looking for
work
- Unemployed: A term that describes a person who could be working, and wants to
work, but is not working
- Unemployment rate: The percentage of the labor force that is unemployed
- Labor force: The number of people in a population who are either employed or
unemployed
- Eligible population: The eligible population in the US is anyone 16 years of age or
older who is not institutionalized (i.e., not in prison) and not in the military
- Labor force participation rate: The percentage of the eligible population that is in the
labor force
Key Terms
- Discouraged workers: People who do not have a job, but they will take a job if offered
one. However, they have given up looking for work, so they are not counted in the
labor force
- Underemployed: People who work part-time, but they really want to work full time if
they could find a full-time job
- Full employment output: The amount of output that is produced in an economy
when that economy is using all of its resources efficiently
- Natural rate of unemployment: The unemployment rate that exists when an economy
is producing the full employment output
Practice Problems
Answers
Business Cycles
The business cycle

- Shows how a nation’s Real GDP fluctuates over time

- Output gaps
- Difference between actual output and potential
output in the business cycle
- Potential output is also called
full-employment output
Key terms
- Business cycle model: This model typically demonstrates an increase
in real GDP over the long run, combined with short-run fluctuations
in output
- Aggregate demand: The total demand for a nation’s output, including
household consumption, government spending, business
investment, and net exports
- Aggregate supply: The total supply of goods and services produced
by a nation’s businesses
- Recovery: When GDP begins to increase following a contraction and
a trough in the business cycle
- Growth trend: the straight line in the business cycle model, which is
usually upward sloping and shows the long-run pattern of change in
real GDP over time
- Positive output gap: The difference between actual output and
potential output when an economy is producing more than full
employment output
- Negative output gap: The difference between actual output and
potential output when an economy is producing less than full
employment output
Phases and turning points of the business cycle
Practice Problem
Answers
Inflation
Inflation
- Inflation is the general and ongoing rise in the level of prices in an economy
- Index number: A unit-free number derived from the price level over a
number of years that makes computing inflation rates easier
- Rate of inflation: Measured as the percentage change between price level
over time
- Price level: Measured by constructing a hypothetical basket of goods and
services
- Represents a typical set of consumer purchases
Changes in the cost of living
- Consumer Price Index(CPI): A measure of inflation calculated by US
govt statisticans based on price level from a fixed basket of goods
and services that represents the purchase of the average consumer

- Core inflation index: A measure of inflation typically calculated by


taking CPI and excluding volatile economic variables to better
measure the underlying and persistent trend in long-term prices

- Quality/New goods bias: Causes inflation calculated using a fixed


basket of goods over time to overstate the true rise in cost of living
because improvements in the quality of existing goods and the
invention of new goods are not taken into account

- Substitution bias: Causes an inflation rate calculated using a fixed


basket of goods over time to overstate the true rise in the cost of
living because it does not take into account that people can
substitute away from goods whose prices rise disproportionately.
Key Terms
- Deflation: Negative inflation; Prices in the economy are falling
- Hyperinflation: Outburst of high inflation; When economies shift from a
controlled economy to a market-oriented economy
- Disinflation: A slowing of the rate of inflation
- Purchasing power: What can actually be bought with money
- Real variables: Variables that are adjusted for the rate of inflation
- Nominal variables: Variables that have not been adjusted for the rate of
inflation
- Real interest rate: The interest rate earned that reflects the actual
purchasing power of that interest
The costs of inflation
- Inflation isn’t bad for everyone
- There are winners and losers of inflation
- Winners: Borrowers that owe money that pays it back with a fixed
amount of interest
- Losers: Lenders
Key Terms
- Unanticipated inflation: When the price level increases at a faster pace than expected
- Unanticipated disinflation: When the price level increases at a slower pace than
anticipated
- Unanticipated deflation: When the price level decreases when it was expected to
increase
- Wealth redistribution: When the real value of wealth is transferred from one agent to
another
- Lender: An agent (usually a bank) or a person (for example, a holder of a bond) who
makes money available to another agent, with the agreement that the money will be
repaid (usually with interest)
- Borrower: An agent that has received money from another agent with the agreement
that the money will be repaid (usually with interest)
- Saver:An agent that is not spending some of their income
- Bond: An asset that is a promise to pay a fixed amount at some point in the future
Practice Problem
Practice Problem
Answer
Answer

You might also like