Macroeconomics

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National Accounts

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Households earn income via the factor markets from wages, interest on bonds, dividends on stocks, and rent on land.
 A stock is a share in the ownership of a company held by a shareholder.
 A bond is borrowing in the form of an IOU that pays interest.
 In addition, households receive government transfers from the government.
 Disposable income, total household income minus taxes, is available to spend on consumption or to save.
Private savings, equal to disposable income minus consumer spending, is disposable income that is not spent on consumption.
 The banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing, are known as the financial markets.

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Government purchases of goods and services

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is paid for by tax receipts as well as by government borrowing.

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Exports (X)

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generate an inflow of funds into the country from the rest of the world, while imports (IM) lead to an outflow of funds to the rest of the world.

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inventories

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stocks of goods and raw materials held to facilitate business operations.

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investment spending

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spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories of finished goods.

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Final goods and services

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goods and services sold to the final, or end, user.

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intermediate goods and services are goods and services

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bought from one firm by another firm—that are inputs for production of final goods and services.

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Gross domestic product or GDP

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measures the total value of all final goods and services produced in the economy during a given year. It does not include the value of intermediate goods.

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Aggregate spending

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the sum of consumer spending, investment spending, government purchases of goods an services, and exports minus imports (net exports): the total spending on domestically produce final goods and services in the economy. Involves the equation used to calculate GDP

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GDP can be calculated three ways:

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Add up the value added of all producers
 Add up all spending on domestically-produced final goods and services. This results in the equation: GDP=C+I+G+X-IM
 Add up all income paid to factors of production

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Included in GDP

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domestically produced final goods and services (including capital goods)
new construction of structures changes to inventories

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Not included in GDP

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 intermediate goods and services  inputs
 used goods  financial assets like stocks and bonds - foreign-produced goods and services

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Real GDP

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is the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.

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Nominal GDP

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is the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.

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Real GDP and Nominal GDP are not equal except...

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during the base year output valued at current prices

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Chained dollars

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is the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year.

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Chained dollars

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is the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year.

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GDP per capita

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is a measure of average GDP per person, but is not by itself an appropriate policy goal.

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GDP and the meaning of life

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Rich is better  Money matters less as you grow richer  Money isn’t everything

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aggregate price level

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measure of the overall level of prices in the economy.

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market basket.

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used to To measure the aggregate price level, economists calculate the cost of purchasing a market basket.

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Price index

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the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100.

cost of market basket in a given year divided by the cost of a market basket in base year times 100

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inflation rate

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is the yearly percentage change in a price index, typically based upon Consumer Price Index, or CPI, the most common measure of the aggregate price level.

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CPI

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consumer price index, or CPI, measures the cost of the market basket of a typical urban American family.

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inflation rate equation

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Price index year 2 - price index year 1/price index year 1 times 100

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CPI Biased?

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The U.S. government takes considerable care in measuring consumer prices. Nonetheless, many economists believe that the consumer price index systematically overstates the actual rate of inflation.
 One reason is the fact that the CPI measures the cost of buying a given market basket. Yet, consumers typically alter the mix of goods and services they buy, reducing purchases of products that have become relatively more expensive and increasing purchases of products that have become relatively cheaper.
 The second reason arises from innovation. By widening the range of consumer choice, innovation makes a given amount of money worth more.

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GDP deflator

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which measures the price level by calculating the ratio of nominal to real GDP.
 The GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in that year.