Notesale: Turn your study into money

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Thursday, June 18, 2015

Final Review
Ch
...
As a result, we can compare
RGDP numbers from one year to the next and really know if there is a change in
output (rather than prices)
...


- But, because nominal GDP uses the prices in place in the year the output was
produced, it suffers from a major problem: it can increase from one year to the
next even if there is no increase in output

GDP per capita: RGDP / POPULATION

- per capita: per person
Modern Economic Growth
where output per person rises

Saving and Investment
Saving:
when current consumption is less than current output (or when current spending
is less than current income)
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Investment:
when resources are devoted to creating/increasing future output

The amount of investment is ultimately limited by the amount of saving

- increased saving can only come at the price of reduced current consumption
- society must decide how to balance the reductions in current consumption
required to fund current investment against the increase in future consumption
that the added current investment will make possible
Households are the principle source of saving, businesses are the main economic
investors
How does savings by households get transferred to businesses, so that
businesses can purchases newly created capital goods?
Banks and other financial institutions: they collect the savings of
households, and then lend the funds to businesses which invest in
equipment, factories, and other capital goods

Ch
...
Recipients contribute nothing to
current production, so including these would be overstating the GDP

- Private transfer payments: funds transfered form one private individual to another
- do not enter GDP, (parents giving children money)

- Stock market transactions: buying/selling of stocks/bonds - create nothing in the
way of current production, not included in GDP, swapping of paper

- but, payments for the stockholder are included because their services are
provided and thus a part of the economy’s current output of goods/services

Secondhand Sales
contribute nothing to current production

The Expenditure Approach ( 4 categories- GDP = C + I + G + Xn)
views GDP as the sum of all money spent in buying it
add up all the spending on final goods/services that has taken place throughout
the year
Personal Consumption Expenditures:
all expenditures by households on goods/services

- durable goods: products that have expected lives over three years
- nondurable goods: products with less than three year lifespan
- services: work done by people
what affects this:

- wealth (personal assets and paper wealth)
- debts
- changes in living style
Gross Private Domestic Investment:
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all final purchases on machinery, equipment, and tools by businesses
all constructions
changes in inventories - increase in inventories are considered investment
because they represent “unconsumed output”
Net Private Domestic Investment:
includes only investment in the form of added capital
depreciation: the amount of capital that is used up over the course of a year
Net investment = gross investment - depreciation
Government Purchases:
2 components:
1) expenditures for goods and services that government consumes in
providing public services
2) expenditures for publicly owned capital such as schools and highways
which have long lifetimes
Includes all government expenditures on final goods/services and all direct
purchases on resources, including labor
Does not include government transfer payments
Net Exports:
totals up only those expenditures that are used to purchase goods and services
within the borders of the US
exports: good and services produced within the borders of the US
to prevent over counting you must take exports and subtract imports to find net
exports : net exports = exports - imports

The Income Approach
views GDP in terms of the income derived or created from producing it
wages, rents, interest, and profits
wages + rents + profits + intrest
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Compensation for employees: wages
Rents: income received by households and businesses that supply property resources
net rents = gross rental income - depreciation of the rental property
Interest: the money paid by private businesses to the supplier of loans used to purchase
capital
Corporate profits: the earnings of corporations - 3 categories

- corporate income taxes
- dividends: after-tax profits that corporates choose to pay-out or distribute to their
stockholders- thus they flow to households (the owners of corporations)

- undistributed corporate profits: after-tax profits that are not distributed to
shareholders, are saved, retained and invested later in capital

Price Index:
measures the level of prices compared to some base year
CPI = consumer price index
Consumer Price Index:

- measures inflation
- reports the “market basket”
- the composition of the market basket for the CPI is based on the
spending patterns of urban consumers in a specific period

- the rate of inflation is equal to the percentage growth of CPI from one
year to the next

prices of the most recent market basket in particular year
CPI =

—————————————————————————————
price estimate of the market basket in a certain time period

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GDP is not:

- intermediate goods
- public transfers
- private transfers
- stock market transactions
- secondhand sales
Nominal GDP vs Real GDP
GDP is the measure of the market or money value of all final goods/services
produced by an economy in a given year
We determine the value of GDP by multiplying total output by market prices
How can we compare the market values of GDP from year to year if the value of
money itself changes in response to inflation (rising prices) or deflation (falling
prices)?
you have to deflate GDP when prices rise and inflate GDP when prices
fall
...
A GDP is based on the prices that prevailed when the
output was produced is called unadjusted GDP or nominal GDP
...
This system groups taught these elements into two main
categories:

- increases in hours of work
- increases in labor productivity
Labor inputs vs
...

discouraged workers: not in the labor force, not seeking work

Types of Unemployment (3)

Frictional

- workers “between jobs”
- search employment, or wait employment
- it takes time to find a job
Structural

- workers who find that their skills and experience have become obsolete
or unneeded thus find that they have no marketable talents
...


- creative destruction
Cyclical

- unemployment that is caused by a decline in total spending
- results from an insufficient demand for goods and services
- slow economy, downturn, recession

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frictional workers have marketable skills and either live in areas where jobs exists or are
able to move to areas where they do
...
(long term)

Full Employment
a fully employed economy does not mean zero unemployment
when unemployment rate is less than or equal to the natural rate of
unemployment
at NRU the economy is said to be producing its potential output

Costs of unemployment
the basis economic cost of unemployment is forgone output
GDP gap - the sacrifice of output, the difference between actual and potential
GDP
GDP gap = actual GDP - potential GDP
positive GDP gaps create inflationary pressures and cannot be sustained
indefinitely
Okun’s Law - for ever 1 percentage point by which the actual unemployment
rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs

Inflation Rate
the percent change in the price level - using price index
CPI2 - CPI1
inflation rate =

——————
CPI1

what does inflation do?
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reduce purchasing power

Real Interest Rate

real interest rate = nominal interest rate - inflation

Unequal Burdens

- occupation: workers in lower-skilled occupations have higher
unemployment rates than workers in higher-skilled occupations
...
They are
less likely to be self-employed
...
The causes of the higher rates
includes lower rates of educational attainment, greater concentration in
lower-skilled occupations, and discrimination in the labor market
...


- education: on average, less educated workers have higher unemployment
rates than workers with more education
...


Non-economic Costs

idleness means loss skills, loss of self-respect, plummeting morale, family
disintegration, and sociopolitical unrest

Inflation
inflation is the rise in the vernal level of prices

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reduces purchasing power

Types of inflation

Cost-push inflation: explains rising prices in terms of factors that raise per-unit
production costs at each level of spending
...


- savers: as prices rise, the real value, or purchasing power, of an
accumulation of savings deteriorates, paper assets decline in value during
inflation

- creditors: because of inflation each of those dollars lent out will buy only half
as much as it did when the loan was negotiated, the borrower pays back
less valuable dollars

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Who is unaffected of helped by inflation?

- flexible-income receivers:
- social security payments are unaffected
- cost-of-living adjustments (COLA’s) for union workers when CPI
rises

- unanticipated inflation can lead to a spurt in nominal incomes and
enhance real incomes

- business owners may benefit by rising products prices faster than
resource prices, thus business revenues will increase more rapidly
than costs

- debtors: pay back cheaper dollars
Cost push inflation and Real output

cost-push inflation is caused by abrupt unexpected rises in key resource prices
that drives up overall production costs
...


Demand pull inflation and Real output

one perspective is that low levels of inflation reduce real output because inflation
diverts time and effort toward activities designed to hedge against inflation
another perspective is that lower rates of inflation are associated with higher
rates of economic growth and mild inflation is detrimental to economic growth
other perspectives say that mild inflation is the by-product of strong spending is
a small price to pay for full employment and continued economic growth

Hyperinflation

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always bad, distorts economic relationships

Ch 12 / 29

Changes in aggregate supply:

- determinants of aggregate supply raise or lower per-unit production
costs at each price level

- DETERMINANTS:
- input prices/resource prices: increase prices = decrease AS,
decrease prices = increase AS

- productivity (technology): the measure of the relationship between
a nations level of real output and the amount of resources used to
produce that output
...
Increase productivity = increase in AS

- business taxes: increase in taxes = decrease in AS
- government regulation: increase in regulation = decrease in AS,
costly for businesses

Equilibrium

the intersection of the AD curve and the AS curve establishes the economy’s
equilibrium price level ad equilibrium real output

Increase in AD: Demand pull inflation

- increase spending = shifts AD curve to the right = rise in price levels = AD
increase beyond full employment = inflation = increase in demand expands
real output = actual GDP exceed potential GDP

Decrease in AD: Recession and cyclical unemployment

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- lower expectations = decline in AD
- deflation - a decline in the price level is not the norm - prices are sticky even
when AD declines

Decreases in AS: cost-push inflation

- higher energy prices = rise in production costs = AS curve shift leftward =
increase in price level = cost put inflation = decline in real output

Increases in AS: full employment with price-level stability

- rise in real output = increase in price level = rapid RGDP growth
Ch 14
Functions of money:

- medium of exchange: readily acceptable as payment
- unit of account: measures the value of goods in dollars
- store of value

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