Economics 111

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The study of the aggregate economy.

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Macroeconomics

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The act of combining many individual markets into one overall market.

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Aggregation

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Shows the quantity of the domestic product (Y) that is demanded at each given price level (P).

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Aggregate demand curve (AD)

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Shows the quantity of domestic product(Y) that is supplied at each given price level (P).

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Aggregate supply curve (AS)

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A price index that represents the average price of goods and services produced in an economy.

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Price level (P)

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The sum of money values of all final goods and services produced in the domestic economy and sold on organized markets in a year.

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Gross Domestic Product (GDP)

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Purchased by their ultimate users.

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Final goods and services

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Purchased for resale or for use in producing another good.

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Intermediate goods

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Only ____________________ is included in GDP.

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Market activity

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Calculated by valuing all outputs at current prices.

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Nominal GDP

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Calculated by valuing outputs of different years at a chosen base year's prices. Corrected for inflation.

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Real GDP

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Refers to a sustained increase in the general price level.

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Inflation

Front 13

Refers to the rate at which the prices increase.

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Inflation Rate

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Refers to a sustained decrease in the general price level.

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Deflation

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A period of time during which the total output of the economy declines.

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Recession

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A government policy designed to prevent or shorten recessions and to tame inflation (to stablize prices).

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Stabilization Policy

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To improve long-run economic growth, while keeping both unemployment and inflation low.

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Goal of macroeconomics

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the real GDP that the economy would produce if its resources were fully utilized (in normal times).

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Potential GDP (Y)

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The growth of the labor force, capital stock, and technical progress.

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Supply-side factors.

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Actual GDP tends to fluctuate around potential GDP.

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Short-Run

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Actual GDP tends to converge to potential GDP.

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Long-run

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Measures the size of the expansion of the economy over time

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Real GDP Growth

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considers the population effect on a coutry's GDP.

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Real GDP per capita

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Real GDP/Population =

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Real GDP per capita

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Real GDP per hour of work.

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Labor Productivity

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Real GDP/Hours of work =

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Labor Productivity

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(# of people employed) + (# of people unemployed but who actively seek work) =

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Labor force

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a person who gives up looking for work and is therefore no longer counted as unemployed and is not part of the labor force.

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Discouraged worker

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(# of unemployed/Labor force) x 100 =

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Unemployment Rate

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(Labor force/Working age population) x 100 =

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Labor Force participation rate

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Unemployed during a job change or of a new entrant into labor force

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Frictional unemployment

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Unemployed due to structural changes in an industry.

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Structural unemployment

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Unemployed due to the business cycle. Rises durinig recessions and falls as prosperity is restored. Due to bad economy

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Cyclical unemployment

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Real GDP tends to fluctuate around potential GDP over time.

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Business cycle

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a period of falling real GDP-- for at least two successive quarters.

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Recession

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a period of rising real GDP.

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Expansion (boom)

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The unemployment rate is never _______ since frictional and structural unemployment always exist in an economy.

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zero

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includes frictional and structual employment

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natural rate of unemployment

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Frictional + Structural =

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Natural rate of unemployment

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If the cyclical unemployment = 0 then

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The economy is at potential GDP (full-employment GDP)

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the portion of unemployment attributed to output being below potential. Due to recession and bad employment

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Cyclical unemployment

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production is not maximized with given resources (production is inside the PPF which is inefficient) when the labor is not fully employed.

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The economic costs of (cyclical) unemployment

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expresses the cost of a market basket of goods relative to its cost in some base period.

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Price Index

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{(Cost of Market basket in year t)/(Cost of market basket in base Year)} x 100=

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CPI in year t

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In the base year, CPI =

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100

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The process of finding the real value of some monetary magnitude by dividing by some appropriate price index.

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Deflating

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{(Nominal Monetary Magnitude in Year t)/(Price index in year t)} x 100=

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Real Value

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To compare the purchasing power of monetary magnitudes across different time periods, by converting current dollars to a common base year dollars.

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Purpose of Deflating

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The volume of goods and services that it will buy.

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Purchasing power

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{(Nominal Wage)/(CPI)} x 100=

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Real Wage

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The wage adjusted for inflation. It indicates the volume of goods and services that money wages will buy.

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Real Wage

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Another price index other than CPI. It is implicitly derived from the deflating procedure.

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GDP Deflator

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{(Nominal GDP)/(GDP Deflator)} x 100=

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Real GDP

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It is a broad measure of economy-wide inflation.

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GDP Deflator

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The inflation rate excluding food and energy prices

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The core inflation rate

Front 56

Inflation systematically reduces the real value of worker's wages. In reality, a rise in inflation is generally accomanied by an increase in nominal wage growth.

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Inflation Myth

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Causes a redistribution between borrowers and lenders.

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Unexpected Inflation

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(Real Rate of interest) + (Expected rate of inflation)=

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Nominal Rate of interest

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the percentage by which the money a borrower pays back exceeds the amount that she borrowed.

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The nominal rate of interest

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the percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing.

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Real rate of interest

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The difference between the price at which an asset is sold and the price at which it was bought

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Capital gain