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economics
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the study of how DECISION MAKERS choose to use SCARCE RESOURCES
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decision makers in macroeconomics
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GOVT. decides how much to spend and tax
FIRMS are producer units
HOUSEHOLDS are consumer units
THE CENTRAL BANK + Federal Reserve System
FINANCIAL SECTORS
FIRMS are producer units
HOUSEHOLDS are consumer units
THE CENTRAL BANK + Federal Reserve System
FINANCIAL SECTORS
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scarce resources
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the inputs/factors of production used by FIRMS: land, capital, natural resources, labor
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the price of scarce resources
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land: rent
capital: interest rates
labor: wage
capital: interest rates
labor: wage
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investment
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when FIRMS buy capital
capital increases with investment
capital decreases with depreciation
capital increases with investment
capital decreases with depreciation
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capital
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non-human assets/resources used to produce FINAL goods (machinery, software, tools, equipment, etc.)
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final goods/services
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goods/services that households buy for FINAL use (i.e. not used in the production of other goods)
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GDP
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the dollar value of all FINAL GOODS/SERVICES produced DOMESTICALLY; a measure of production of a country
% change in GDP = GDP growth
GDP is NOT: illegal products, products not traded in markets (e.g. home-made cakes), externalities, inequalities, happiness
% change in GDP = GDP growth
GDP is NOT: illegal products, products not traded in markets (e.g. home-made cakes), externalities, inequalities, happiness
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unemployment rate
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percentage of the labor force that is unemployed
unemployed / labor force
an UNEMPLOYED person is 16-years-old or older and is not working, available for work, has made specific efforts to find work in the previous 4 weeks
an EMPLOYED person is 16-years-old or older and is working for pay for 1+ hours/week, working w/o pay for 15+ hours/week in a family business, has a job but is temporarily absent or w/o pay
unemployed / labor force
an UNEMPLOYED person is 16-years-old or older and is not working, available for work, has made specific efforts to find work in the previous 4 weeks
an EMPLOYED person is 16-years-old or older and is working for pay for 1+ hours/week, working w/o pay for 15+ hours/week in a family business, has a job but is temporarily absent or w/o pay
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labor force participation rate
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labor force / population
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labor force
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employed + unemployed
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population
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labor force + not in labor force
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inflation
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the change in price of a "basket" of goods/services
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the goal of the economy
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the ideal economy is one where there is high GDP growth, low unemployment, and low inflation
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target inflation rate (in the U.S.)
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~2%
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natural rate of unemployment (in the U.S.)
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~3.5%
when unemployment rate = natural unemployment rate, economy is at FULL EMPLOYMENT
when unemployment rate = natural unemployment rate, economy is at FULL EMPLOYMENT
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positive economics
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studying economic behavior w/o making judgments; describes what exists and how it works
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normative economics
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analyzing outcomes of economic behavior, evaluating economic outcomes as good or bad; prescribing a course of action
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Ceteris Paribus
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the "all else equal" assumption; i.e. ignore all other variables
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opportunity cost
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the cost of the best alternative we forego when we make a decision (includes implicit and explicit costs)
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scarcity
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there are limited amounts of goods/services, resources, time, money, etc.
there is a gap between limited resources and limitless wants
there is a gap between limited resources and limitless wants
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expenditure approach to calculating GDP (total spending / national income)
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Y = C + I + G +NX
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consumption (C) in relation to GDP
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total spending by households on consumption goods and services (e.g. haircuts, new cars, clothes)
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investment (I) in relation to GDP
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increase in capacity to produce (i.g. buying capital)
additions to inventories in THIS year are considered in THIS year's GDP (e.g. a car built in 2022 and traded in 2023 is considered in 2022 GDP
additions to inventories in THIS year are considered in THIS year's GDP (e.g. a car built in 2022 and traded in 2023 is considered in 2022 GDP
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government spending (G) in relation to GDP
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total spending on goods and services from FIRMS by all levels of government
does NOT include transfer payments (e.g. social security, unemployment compensation, welfare payments, etc.)
does NOT include transfer payments (e.g. social security, unemployment compensation, welfare payments, etc.)
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exports (Ex) and imports (IM) in relation to GDP
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EXPORTS are added to GDP b/c produced domestically
IMPORTS are subtracted from GDP b/c produced internationally
IMPORTS are subtracted from GDP b/c produced internationally
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trade deficit (U.S.)
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U.S. imports are greater than exports (not necessarily negative)
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GDP, price, and quantity
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quantity = GDP / price
price = GDP / quantity
price = GDP / quantity
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Nominal GDP
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the production of goods and services (GDP) valued at CURRENT PRICES; reflects change in PRICE and QUANTITY
GDP Nominal = GDP Real x ( GDP Deflator / 100 )
% change in GDP Nominal = % change GDP Real + % change in prices
GDP Nominal = GDP Real x ( GDP Deflator / 100 )
% change in GDP Nominal = % change GDP Real + % change in prices
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Real GDP
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the production of goods and services (GDP) values at some base year
reflects QUANTITY only, therefore GDP growth = % change in GDP Real
GDP Real = GDP Nominal / ( GDP Deflator / 100 )
% change in GDP Real = % change GDP Nominal - % change in prices
reflects QUANTITY only, therefore GDP growth = % change in GDP Real
GDP Real = GDP Nominal / ( GDP Deflator / 100 )
% change in GDP Real = % change GDP Nominal - % change in prices
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GDP per capita
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GDP / population
reflects the well-being of citizens
% change in GDP per capita = % change in GDP - % change in population
reflects the well-being of citizens
% change in GDP per capita = % change in GDP - % change in population
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calculating inflation
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price index = ( cost of a basket in a current year / cost of a basket in a base year ) x 100
inflation rate = % change in price index
inflation rate = ( price index NEW - price index OLD / price index OLD ) x 100
inflation rate = % change in price index
inflation rate = ( price index NEW - price index OLD / price index OLD ) x 100
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inflation measures (price indexes)
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CPI (Consumer Price Index) = items in basket are weighted, reflects the change in prices of consumption; used by govt. to adjust for social security payments
PCE (Personal Consumption Expenditure PI) = the basket, scope, and weight metric are different from CPI; used by FED for policy-making
PPI (Producer PI) = wholesale prices; used as a leading indicator of inflation
GDP Deflator = related to prices of ALL goods/services domestically produced
PCE (Personal Consumption Expenditure PI) = the basket, scope, and weight metric are different from CPI; used by FED for policy-making
PPI (Producer PI) = wholesale prices; used as a leading indicator of inflation
GDP Deflator = related to prices of ALL goods/services domestically produced
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types of unemployment
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frictional unemployment = the normal movement of workers from one job to another
structural unemployment = when workers' characteristics do not fit employers' requirements
cyclical unemployment = when level of economic activity declines (post-recession unemployment rates)
structural unemployment = when workers' characteristics do not fit employers' requirements
cyclical unemployment = when level of economic activity declines (post-recession unemployment rates)
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GDP Deflator
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a price index used to adjust Nominal GDP to find Real GDP
GDP Deflator = ( GDP Nominal / GDP Real ) x 100
i.e. GDP Deflator = % change in PRICES
GDP Deflator = ( GDP Nominal / GDP Real ) x 100
i.e. GDP Deflator = % change in PRICES
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revenue and costs (microeconomics)
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revenue (R) = payments paid TO firms for sale of goods and service
R = P x Q
costs (C) = payments paid BY firms for the purchase of inputs/factors of production (labor, capital, other costs)
cost of labor = wage (w) x number of hired units (L)
cost of capital = cost of capital (r) x number of units of capital K)
C = wL + rK
R = P x Q
costs (C) = payments paid BY firms for the purchase of inputs/factors of production (labor, capital, other costs)
cost of labor = wage (w) x number of hired units (L)
cost of capital = cost of capital (r) x number of units of capital K)
C = wL + rK
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competitive market structure
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1) the same product is being sold/bought
2) each buyer/seller = PRICE TAKERS = don't change prices by buying/selling
3) all buyers/sellers have full information
4) an output market (firms are selling final goods/services, households are buying final goods/services)
2) each buyer/seller = PRICE TAKERS = don't change prices by buying/selling
3) all buyers/sellers have full information
4) an output market (firms are selling final goods/services, households are buying final goods/services)
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demand + the determinants of demand
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demand regards HOUSEHOLDS
demand depends on...
1) the price of the good
2) the income of the household
3) the prices of related products
4) the tastes of the household
5) expectations about future prices, incomes, etc.
demand depends on...
1) the price of the good
2) the income of the household
3) the prices of related products
4) the tastes of the household
5) expectations about future prices, incomes, etc.
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Law of Demand
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there is a negative relationship between the price of a good and the quantity demanded for that good
the demand curve follows the Law of Demand (drawn as INVERSE demand)
the demand curve follows the Law of Demand (drawn as INVERSE demand)
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normal goods vs. superior goods vs. inferior goods
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NORMAL goods = the quantity demanded for the good INCREASES as income INCREASES
LUXURY goods = the quantity demanded INCREASES by a greater factor as income INCREASES (leading indicator of recession)
INFERIOR goods = the quantity demanded for the good DECREASES as income INCREASES
LUXURY goods = the quantity demanded INCREASES by a greater factor as income INCREASES (leading indicator of recession)
INFERIOR goods = the quantity demanded for the good DECREASES as income INCREASES
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related products (substitutes vs. compliments)
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substitutes = when the PRICE of one INCREASES, the DEMAND for the other INCREASES
compliments = when the PRICE of one INCREASES, the DEMAND for the other DECREASES
compliments = when the PRICE of one INCREASES, the DEMAND for the other DECREASES
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the determinants of supply
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1) the price of the product (if the price of the product
increases, incentive to supply that product increases)
2) the cost of producing the good (if cost increases, supply of the good will decrease)
3) prices of related goods
4) luck
increases, incentive to supply that product increases)
2) the cost of producing the good (if cost increases, supply of the good will decrease)
3) prices of related goods
4) luck
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Law of Supply
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there is a positive relationship between price and quantity of goods supplied
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market equilibrium
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a situation in which quantity demanded equals quantity supplied (i.e. Qs = Qd)
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shortage vs. surplus (supply and demand curves)
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shortage: quantity demanded > quantity supplied; suppliers will increase prices until equilibrium
surplus: quantity demanded < quantity supplied; suppliers will decrease prices until equilibrium
surplus: quantity demanded < quantity supplied; suppliers will decrease prices until equilibrium
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shifts in supply and demand curves
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if demand has decreased and supply has increased: PRICE decreases, but whether QUANTITY decreases is indeterminable (b/c we don't know which impact is stronger)
if demand has increased and supply has decreased: PRICE increases, but whether QUANTITY decreases is indeterminable (b/c we don't know which impact is stronger)
if demand has increased and supply has decreased: PRICE increases, but whether QUANTITY decreases is indeterminable (b/c we don't know which impact is stronger)
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tax in supply and demand curves
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tax rate shifts the SUPPLY curve UP
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government revenue in supply and demand curves
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government revenue = quantity x tax rate
government revenue doesn't necessary increase w/ increased tax rates
government revenue doesn't necessary increase w/ increased tax rates
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consumer price and producer price
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consumer price = the post-tax price of a good
producer price = consumer price - tax-rate
producer price = consumer price - tax-rate
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Laffer Curve
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the relationship between tax RATES and tax REVENUES that shows that high tax rates could lead to lower tax revenues b/c decreased economic activity
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price ceiling
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legal maximum price that may be charged for a particular good/service
consequences of price ceilings:
1) creates shortage (less incentive to produce goods, Qs decreases)
2) creates illegal markets
3) places limitations on trade (b/c Qs decreases)
consequences of price ceilings:
1) creates shortage (less incentive to produce goods, Qs decreases)
2) creates illegal markets
3) places limitations on trade (b/c Qs decreases)
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price floor
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legal minimum price that may be charged for a particular good/service
consequences of a price floor:
1) creates surplus
2) leads to over-investment
3) leads to disposal issues
consequences of a price floor:
1) creates surplus
2) leads to over-investment
3) leads to disposal issues
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minimum wage
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minimum wage = price floor
if the price floor is less than the equilibrium, it affects nothing
if the price floor is much greater than the equilibrium, it increases unemployment rates
if the price floor is less than the equilibrium, it affects nothing
if the price floor is much greater than the equilibrium, it increases unemployment rates
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PPF
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Production Possibilities Frontier; plots the maximum output a country can produce with its resources
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technical efficiency
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the economy is using all of its available resources in producing a good
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allocative efficiency
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the economy is producing the optimal mix of goods and services (i.e. producing what the people want/need)
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opportunity costs in relation to PPF
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opportunity cost = slope (i.e. one more unit of one good = however many less units of another good)
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absolute advantage
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a country has an absolute advantage in the production of a good over another country if it can produce more of that good using the same or fewer resources
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comparative advantage
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a country has a comparative advantage in the production of a good over another country if it can produce a good at a lower OPPORTUNITY COST
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theory of comparative advantage
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countries benefit from SPECIALIZING in the production of goods for which they have a comparative advantage, and IMPORTING goods for which they don't have a comparative advantage
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Rule of 72
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time (years) it takes for GDP to double = 72 / % growth rate
e.g. if the growth rate is 3% it takes 24 years for the GDP to double
if growth rate is > ~8% the rule is ineffective
e.g. if the growth rate is 3% it takes 24 years for the GDP to double
if growth rate is > ~8% the rule is ineffective
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potential GDP (full employment GDP)
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the GDP level when the labor force is fully employed (i.e. when unemployment rate = natural rate of unemployment)
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growth theory
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the long-term growth in potential GDP/economy; disregards short-term fluctuations in the economy
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determinants of long-term growth
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1) growth rate of labor force
2) growth rate of capital stock
3) rate of technical progress
2) growth rate of capital stock
3) rate of technical progress
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labor productivity
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the output per worker per hour
higher labor productivity leads to higher wages and higher GDP per capita
higher labor productivity leads to higher wages and higher GDP per capita
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Pillars of Productivity Growth
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how do we grow productivity?
1) capital (increased investment leads to higher productivity)
2) labor quality (e.g. education, training, etc.)
3) technology
1) capital (increased investment leads to higher productivity)
2) labor quality (e.g. education, training, etc.)
3) technology
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convergence hypothesis
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productivity growth rates of poorer countries tend to be higher than those of richer countries
assumes that poorer countries can observe/copy richer countries (this is NOT true for all countries)
assumes that poorer countries can observe/copy richer countries (this is NOT true for all countries)
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