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CHAPTER 2: THE DATA OF MACROECONOMICS
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...
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GDP
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-The best measure of how the economy is performing.
-Nations total income and the total expenditure on its output of goods and services.
-Market value of all final goods and services produced within an economy in a given period of time
-Nations total income and the total expenditure on its output of goods and services.
-Market value of all final goods and services produced within an economy in a given period of time
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Where does data come from for GDP?
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(1) Administrative Data: Byproducts of government funciton
(2) Statistical Data: Surveys
(2) Statistical Data: Surveys
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Consumer Price Index (CPI)
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Measures the level of prices.
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Unemployment Rate
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Fraction of workforce that is unemployed
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Are used goods up for resale counted towards the GDP?
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NO! Only the value of CURRENTLY produced goods & services!
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What is and is not counted for inventory?
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Counted: Production for inventory increases GDP
Not Counted: A sale out of inventory
Not Counted: A sale out of inventory
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Does GDP count intermediate goods?
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NO! Only final goods (:
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If goods and services are not sold at their market price then you need to use an estimate called an ____________________________.
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IMPUTED VALUE!
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underground economy
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buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
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Is the underground economy counted for imputed values?
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NO
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Nominal GDP
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The value of goods and services measured at current prices.
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How can nominal GDP rise?
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price or quantity rise
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Real GDP
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Measures the value of goods and services using a constant set of prices.
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GDP Deflator
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Nominal GDP/Real GDP
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What is the chain-weighted measure of real GDP?
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Used to make sure the base year is not extremely outdated
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What are the components of GDP (expenditure)?
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Consumption (C)
Investment (I)
Government purchases (G)
Net exports (NX)
Investment (I)
Government purchases (G)
Net exports (NX)
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Consumption
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Consists of household expenditures on goods and services.
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Investment
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Consists of items bought for future use.
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Government Purchases
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Goods and services bought by federal, state and local government
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Net Exports
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Trade with other countries (exports-imports)
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Gross National Product
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GDP + Factor Payments FROM Abroad - Factor Payments TO Abroad
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Net National Product
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GNP - Depreciation
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National Income
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NNP - statistical discrepancy
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Consumer Price Index
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The most commonly used measure of level of prices
-Uses a current price and divides it by the base year
-BASKET OF GOODS!
-Uses a current price and divides it by the base year
-BASKET OF GOODS!
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Differences between CPI and GDP Deflator:
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(1) GDP measures ALL goods and services - CPI measures goods and services bought by consumers
(2) GDP only includes domestically produced goods and services
(3) CPI has fixed weights of prices and GDP has changing weights
(2) GDP only includes domestically produced goods and services
(3) CPI has fixed weights of prices and GDP has changing weights
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Price Index with FIXED basket of goods
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Laspeyres Index
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Price Index with CHANGING basket of goods
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Paasche Index
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Labor Force
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number of employed + number of unemployed
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Uneployment Rate
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(Number of unemployed/labor force) x 100
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Labor Foce Participation Rate
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labor force/working age population x 100
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CHAPTER 3: NATIONAL INCOME - WHERE IT COMES FROM AND WHERE IT GOES
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...
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Does a large GDP ensure that all of the nation's citizens are happy?
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NOPE! Although it may be the best recipe for happiness the macroeconomists has to offer!
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What does GDP depend on?
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(1) Factors of Production
(2) Production Function
(2) Production Function
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What are factors of production?
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The inputs used to produce goods and services.
(ex) capital and labor
(ex) capital and labor
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Capital
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Set of tools that workers use
(ex) construction crane, accountants calculator, etc.
(ex) construction crane, accountants calculator, etc.
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Labor
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Time people spend working.
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What does the over bar mean in terms of Capital (K) and Labor (L)?
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Each variable is fixed.
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What is the production function?
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How much output is produced for given amounts of capital and labor.
Y=F(K,L)
Y=F(K,L)
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What is also attached to the production function?
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Constant returns to scale!
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What is constant returns to scale?
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If an increase of an equal percentage in all factors of production causes an increase in output of the same percentage.
(ex) increasing capital and labor by 10%, increases output by 10%
zY = F(zK, zL)
(ex) increasing capital and labor by 10%, increases output by 10%
zY = F(zK, zL)
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What is the distribution of national income determined by?
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Factor Prices
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What are factor prices?
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The amount paid to each unit of the factors of production!!
(ex) rent the owners of capital collect and the wage workers earn
(ex) rent the owners of capital collect and the wage workers earn
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What is a competitive firm?
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Small relative to the markets in which it trades (little influence on market prices)
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To make a product, what does a firm need?
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capital and labor
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What is the goal of a competitive firm?
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Maximize profit!
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Profit =
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revenue - cost
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Revenue =
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selling price x quantity sold
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Labor Costs =
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wages x amount of labor
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Capital Costs =
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Rental price x amount of capital
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Marginal Product of labor
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The extra amount of output the firm gets from one extra unit of labor - holding capital fixed.
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diminishing marginal product of labor
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the property whereby the marginal product of an input declines as the quantity of the input increases
(ex) less loafs made because the kitchen is more crowded at a certain point in time.
(ex) less loafs made because the kitchen is more crowded at a certain point in time.
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In MPL = W/P...What does W/P stand for?
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REAL WAGE
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What is real wage?
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The payment to labor measured in uinits of output rather than in dollars.
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Marginal Product of Capital
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Amount of extra output the firm gets from an extra unit of capital
(ex) more ovens than employees
(ex) more ovens than employees
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In the equation MPK = R/P, what does R/P stand for?
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REAL RENTAL PRICE
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What is real rental price of capital?
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the rental price measured in units of goods rather than in dollars
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Economic Profit
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Income that remains after the firms have paid the factors of production
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How big is economic profit?
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MUST BE at least 0... if production function has constant returns to scale!
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Accounting profit =
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economic profit + (MPK x K)
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What production function shows how actual economies turn capital and labor into GDP?
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Cobb-Douglas Function!
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What is the function?
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A K^delta L^(1-delta)
-If capital and labor increase by some proportion, than output increases by that proportion as well.
-If capital and labor increase by some proportion, than output increases by that proportion as well.
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What is the GDP function for a closed economy?
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Y = C + I + G
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What is disposable income?
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Income after paying all taxes
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A higher level of disposable income leads to...
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a higher level of consumption
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What is the relationship between income and consumption called?
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Consumption function
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Marginal Propensity to Consume (MPC)
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the amount by which consumption changes when disposable income increases by one dollar
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The MPC is between what two numbers?
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Zero and one.
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Why is it between those two number?
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They choose to save a certain percentage
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What is the interest rate?
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Cost of funds used to finance investment
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Nominal interest rate
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Normal - interest rate that investors pay to borrow money
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real interest rate
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nominal interest rate corrected for effects of inflation
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Transfer payments are the opposite of __________.
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taxes
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Transfer payments
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increase household disposable income
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fiscal policy
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Government spending and taxation that influences the economy
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if government purchases equal taxes
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balanced budget
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If government purchases exceed taxes
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budget deficit
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if government purchases are less than taxes
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budget surplus
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If interest rate is too high...
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investment is too low, demand falls short of supply
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If interest rate is too low...
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investment is too high, demand exceeds supply
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Disposable income minus consumption
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private saving
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Government revenue minus government spending
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public saving
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crowding out
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a increase in real interest rate and a decrease in investment that results from government borrowing
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CHAPTER 4: THE MONETARY SYSTEM - WHAT IT IS AND HOW IT WORKS
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...
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Monetary Policy
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decisions about the nations system of coin, currency, and banking
-Governments control over the money supply
-Governments control over the money supply
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Who are the decisions made by for monetary policy?
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Central Banks
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Money
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Is the stock of assets that can be redily used to make transactions.
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What are the three functions of money?
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(1) Store of value
(2) Units of account
(3) Medium of exchange
(2) Units of account
(3) Medium of exchange
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Store of value
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transfers purchasing power from the present to the future
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Unit of account
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Money provides the metric people use to quote prices and record debts.
(ex) car costs $40,000 not 800 shirts!
(ex) car costs $40,000 not 800 shirts!
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Medium of exchange
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Money is what people use to buy goods and services.
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Liquidity
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the ease with which an asset can be converted into cash
(ex) loan
(ex) loan
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Is money a liquid asset?
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It is the most liquid asset
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Money without intrinsic value is called
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Fiat money
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Commodity money is....
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objects that have value in themselves and that are also used as money
(ex) GOLD!
(ex) GOLD!
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Why is gold commodity money?
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It can be used for various purposes
(ex) jewelry, dental fillings...
(ex) jewelry, dental fillings...
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What are some other examples of commodity money?
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Red Cross, Cigarettes, etc.
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Why would someone want to use fiat money?
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-Commodity money is costly (gold) because it takes time to verify the purity of gold and correct quantity.
-Bills are lighter than gold
-If everyone accepts the bills, then bills will have value and serve as money
-Bills are lighter than gold
-If everyone accepts the bills, then bills will have value and serve as money
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Money supply is...
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the quantity of money available in the economy
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What is the central bank of the US?
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THE FED!
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What two groups does the federal open market committee consist of?
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(1) Members of the federal reserve board - appointed by the president and confirmed by the senate
(2) Presidents of the regional federal reserve banks
(2) Presidents of the regional federal reserve banks
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How often does this group meet?
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Every 6 weeks to discuss monetary policy
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What is the main way that the fed controls the supply of money?
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Open-market opperations
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What are open market opperations
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purchase and sale of government bonds
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To increase money supply, government...
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buys bonds!
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To decrease money supply, government...
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sells bonds!
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Assets in quantity of money
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(1) Currency
(2) Demand deposits
(2) Demand deposits
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What is currency?
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the sum of outstanding paper money and coins
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What are demand deposits?
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The funds people hold in their checking accounts
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What is included in M1?
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currency, demand deposits, traveler's checks, and other checkable deposits
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What is included in M2?
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M1 plus retail money market mutual funds balances, savings deposits and small time deposits
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Money supply is not only determined by the fed but also...
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households and banks
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deposits that banks have received but have not loaned out are called
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Reserves
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Fractional reserve banking
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a system under which bankers keep only a fraction of deposits in their reserve
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Process of transferring funds from savers to buyers
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financial intermediation
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leverage is
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the use of borrowed money to supplement existing funds for purposes of investment
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What is the goal of capital requirement?
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to ensure that banks will be able to pay off their depositors
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money multiplier equation
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m=(cr+1)/(cr+rr)
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currency deposit ratio
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cr
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reserve deposit ratio
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rr
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CHAPTER 1: THE SCIENCE OF MACROECONOMICS
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...
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The money multiplier is multiplied by the monetary base to see
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the money supply
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Endogenous Variables
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those variables that the model explains
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Exogenous Variables
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those variables that a model takes as given
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In a simple supply and demand model of pizza what are the endo and exo variables?
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Exo: Aggregate income and price of pizza
Endo: Price and Quantity of Pizza
Endo: Price and Quantity of Pizza
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Macroeconomics
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The study of the economy as a whole
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CHAPTER 5: INFLATION - ITS CAUSES, EFFECTS AND SOCIAL COSTS
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...
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Inflation is
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the increases in prices
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hyperinflation
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A very rapid rise in the price level; an extremely high rate of inflation.
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What is the quantity equation?
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M x V = P x T
quantity of money x velocity = price x transactions
quantity of money x velocity = price x transactions
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What is the right hand side?
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transactions
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What is the left hand side/
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money use to make the transactions
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the velocity means
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the rate at which money circulates in the economy (number of times dollar changes hands)
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because transactions are hard to measure, what does the quantity equation become?
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M x V = P x Y
Money x Velocity = Price x Output
Money x Velocity = Price x Output
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What are real money balances (M/P)?
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Measure the purchasing power of the stock for money.
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What is a money demand function?
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The equation shows the determinants of the quantity of real money balances people wish to hold.
(M/P)^d = kY
(M/P)^d = kY
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k is
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a constant that shows how much money people want to hold for every dollar of income.
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Velocity of money is...
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fixed!
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Who has ultimate control over the rate of inflation?
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Central bank - they control the money supply!
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Revenue raised by creating money is called...
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seigniorage
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When government creates money to finance expenditure - what happens to money supply and in turn, inflation?
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Money supply increases and so does inflation!
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The interest rate that the bank pays you =
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nominal interest rate
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The interest rate that increases your purchasing power -
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real interest rate
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If i=nominal interest rate, r=real interest rate, and pi=inflation, what is the relationship (equation)?
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r=i-pi
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What is the fisher equation?
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i = r + π (rewritten form)
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The one-for-one relationship between the inflation rate and nominal interest rate is called...
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the fisher effect
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The real interest rate that the borrower and lender expect is called...
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ex ante real interest rate (i-Eπ)
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The real interest rate that the borrower and lender actually realized is...
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ex post real interest rate (i-π)
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nominal interest rate is the opportunity cost of...
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holding money
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What are the costs of inflation?
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(1) Shoeleather cost of inflation - walking to the bank more often causes ones shoes to wear out.
(2) High inflation induces firms to change their posted prices more often - menu costs are pricey.
(3) The higher the rate of inflation, the greater the variability in menu prices.
(4) Inflation can alter individuals' tax liabilities.
(5) inconvenience of living in a world with changing prices.
(2) High inflation induces firms to change their posted prices more often - menu costs are pricey.
(3) The higher the rate of inflation, the greater the variability in menu prices.
(4) Inflation can alter individuals' tax liabilities.
(5) inconvenience of living in a world with changing prices.
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What is the one benefit of inflation?
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Inflation allows the real wages to reach equilibrium levels without nominal wage cuts.
Basically improves the functioning of labor markets
Basically improves the functioning of labor markets
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Costs of Hyperinflation
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-Shoeleather and menu costs are more severe.
-relative prices do not do a good job of reflecting true scarcity
-tax systems are distroted
-inconvient
-relative prices do not do a good job of reflecting true scarcity
-tax systems are distroted
-inconvient
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The causes of hyperinflation
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Excessive growth in the money supply
-government has inadequate tax revenue
-turns to the printing press = rapid money growth
-fiscal probelms become more severe
=fiancial reforms.
-government has inadequate tax revenue
-turns to the printing press = rapid money growth
-fiscal probelms become more severe
=fiancial reforms.
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