Macro notes

Ch. 5

3/7/2012 10:08:00 AM

Economists and society at large o Agree on three important macroeconomic goals: Economic growth Full employment Stable prices Economic growth o The increase in our production of goods and services that occurs over long periods of time Business cycles o Fluctuations in real GDP around its long-term growth trend Expansion o A period of increasing real GDP Recession o A period of significant decline in real GDP Depression o An unusually severe recession Aggregation o The process of combining different things into a single category

Ch. 6 Gross domestic product (GDP) o The total value of all final goods and services produced for the marketplace during a given year, within the nations borders. Intermediate goods o Goods used up in producing final goods.

To avoid overcounting intermediate products when measuring GDP, we add up the value of the final goods and services only. The value of all intermediate products is already included in the value of the final products they are used to create.

Final good o A good sold to its final user. To avoid overcounting intermediate products when measuring GDP, we add up the value of the final goods and services only. The value of all intermediate products is already included in the value of the final products they are used to create.

Nominal variable o A variable measured without adjustment for the dollars changing value. When comparing variables measured in dollars over time, it is important to translate nominal values (which are measured in current dollars) to real values (which adjust for the dollars changing value as prices change).

Expenditure approach o Measuring GDP by adding the value of goods and services purchased by each type of final user. GDP = C (consumption) + I (private investment) + G (government purchases) + NX (net exports) Consumption (C) o The part of GDP purchased by households as final users Real variable o A variable adjusted for changes in the dollars value. Private investment (I)

o The sum of business plant, equipment, and software purchases, new-home construction, and inventory changes; often referred to as just investment. o Private investment has three components Business purchases of plant, equipment, and software New-home construction Changes in firms inventory stocks (changes in stocks of unsold goods) New investment o Investment minus depreciation Government purchases (G) o Spending by federal, state, and local governments on goods and services. Transfer payment o Any type of payment that is not compensation for supplying goods, services, or resources. Represents money redistributed from one group of citizens (taxpayers) to another (the poor, the unemployed, the elderly). While transfers are included in government budgets as outlays, they are not included in the government purchases component of GDP.

Net exports (NX) o Total exports minus total imports o To properly account for output sold to, and bought from, foreigners, we must include net exports, the difference between exports and imports, as part of expenditure in GDP

Value added o The revenue a firm receives minus the cost of the intermediate goods it buys.

Value-added approach o Measuring GDP by summing the values added by all firms in the economy o = sum of value added by all firms Factor payments o Payments to the owners of resources that are used in production. In any year, the value added by a firm is equal to the total factor payments made by that firm Factor payments approach o Measuring GDP by summing the factor payments earned by all households in the economy o = Wages and salaries + interest + rent + profit The total output of the economy (GDP) is equal to the total income earned in the country. Nonmarket production o Goods and services that are produced but not sold in a market Short-term changes in real GDP are fairly accurate reflections of the state of the economy. A significant quarter-to-quarter change in real GDP indicates a change in actual production, rather than a measurement problem Frictional unemployment o Joblessness experienced by people who are between jobs or who are just entering or reentering the labor market Seasonal unemployment o Joblessness related to changes in weather, tourist patterns, or other seasonal factors

Seasonal adjustment o Adjusting an economic variable to remove the effects of changes predicted to occur at that time of year. Structural unemployment o Joblessness arising from mismatches between workers skills and employers requirements or between workers locations and employers locations Cyclical unemployment o Joblessness arising from changes in production over the business cycle When there is cyclical unemployment, the nation produces less output, and therefore some group or groups within society must consume less output.

Full employment o A situation in which there is no cyclical unemployment In macroeconomics, full employment means zero cyclical unemployment. But the overall unemployment rate at full employment rate at full employment is greater than zero because there are still positive levels of frictional, seasonal, and structural unemployment.

Potential output o The level of output the economy could produce if operating at full employment. Labor force o Those people who have a job or who are looking for one. Unemployment rate o The fraction of the labor force that is without a job. o = (Unemployed/(Unemployed + Employed)) Involuntary part-time workers

o Individuals who would like a full-time job, but who are working only part time. Discouraged workers o Individuals who would like a job, but have given up searching for one.

3/7/2012 10:08:00 AM

3/7/2012 10:08:00 AM