Notesale: Turn your study into money

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ECO302 – Chapter 2
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Aggregate is the word macroeconomists use for total
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The measure of aggregate output in the national income accounts is called the gross domestic product
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Some goods can be both final goods and intermediate goods
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When calculating GDP count only the production of final goods, not intermediate goods
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GDP Is the Sum of Value Added in the Economy during a Given Period
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GDP Is the Sum of Incomes in the Economy during a Given Period
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Also from the production side: GDP is the sum of value added in the economy during a given period
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Aggregate production and aggregate income are always equal
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This definition
makes clear that nominal GDP increases over time for two reasons: (1) the production of most goods
increases over time
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Nominal GDP is also called dollar GDP or GDP in current dollars
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If our goal is to measure production and its change over time, we need to eliminate the effect of increasing
prices on our measure of GDP
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Real GDP is also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation

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Real GDP must be defined as a weighted average of the output of all final goods

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The problem in constructing real GDP in practice is that there is obviously more than one final good
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The
approach used by economists to adjust for these improvements is to look at the market for the product and
how it values the product with different characteristics in a given year
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A country with twice the GDP of another country is economically twice as big as the other country
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It gives us the average
standard of living of the country
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Periods of positive GDP growth are called expansions
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GDP growth in year t is constructed as (Yt - Yt-1)/Yt-1 and expressed as a percent
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An approach which treats goods as providing a
collection of characteristics, each with an implicit price
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There is no official definition of what constitutes a recession, but the convention is to refer to a “recession” if
the economy goes through at least two consecutive quarters of negative growth
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Unemployment is the number of people who do not have a job but are looking for one
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Earlier, the only available source of data on unemployment was the number of people registered at
unemployment offices, and so only those workers who were registered in unemployment offices were
counted as unemployed
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How many of those looking
for jobs actually registered at the unemployment office varied both across countries and across time
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Countries
with less generous benefit systems were likely to have fewer unemployed registering, and therefore smaller
measured unemployment rates
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In the
United States, this survey is called the Current Population Survey (CPS)
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The survey classifies a person as employed if he or she has a job at the time of the
interview; it classifies a person as unemployed if he or she does not have a job and has been looking for a job
in the last four weeks
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When unemployment is high, some of the unemployed give up looking for a job and therefore are no longer
counted as unemployed
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When the economy slows down, we typically observe both an increase in unemployment and an increase in
the number of people who drop out of the labor force
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Underground economy—the number of people working without declaring it to the social security
administration
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The suffering depends on the nature of the unemployment
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Many
workers who want to work do not find jobs; economy is not utilizing its human resources efficiently
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Inflation is a sustained rise in the general level of prices—the price level
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Deflation is a sustained decline in the price level
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Deflation is rare, but it happens
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If we see nominal GDP increase faster than real GDP, the difference must come from an increase in prices
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The GDP deflator is called an index number
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The rate of change of the GDP deflator, (Pt – Pt-1)/ Pt-1  gives the rate at which the general level of prices
increases over time—the rate of inflation
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$Yt = Pt Yt  Nominal GDP is equal to the GDP deflator times real GDP
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The GDP deflator gives the average price of output—the final goods produced in the economy
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(2) Some of the goods bought by consumers are not
produced domestically but are imported from abroad
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The CPI gives the cost in dollars of a specific list of goods and services over time
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Each month, Bureau of Labor Statistics (BLS)
employees visit stores to find out what has happened to the price of the goods on the list; prices are
collected in 87 cities, from about 23,000 retail stores, car dealerships, gas stations, hospitals, and so on
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CPI is an index
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CPI is published monthly but GDP and the GDP deflator are only constructed and published quarterly
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Pure inflation - a faster but proportional increase in all prices and wages
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Why do economists care about inflation? Precisely because there is no such thing as pure inflation:
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During periods of inflation, not all prices and wages rise proportionately
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For example, retirees in many countries receive payments that
do not keep up with the price level, so they lose in relation to other groups when inflation is high
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Variations in relative prices also lead to more uncertainty,
making it harder for firms to make decisions about the future, such as investment decisions
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Taxation interacts with inflation to create more distortions
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Is deflation good? No
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(2) Even a low rate of deflation limits
the ability of monetary policy to affect output
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If output growth is high, unemployment will decrease - Okun’s law

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Okun’s law - Output growth that is higher than usual is associated with a reduction in the unemployment
rate; output growth that is lower than usual is associated with an increase in the unemployment rate
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Phillips curve - a relation between the change in the rate of inflation and the unemployment rate
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A low unemployment rate leads to an increase in the inflation rate, a high
unemployment rate to a decrease in the inflation rate
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What determines the level of aggregate output in an economy?
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Movements in output come from movements in the demand for goods
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How much can be produced depends on how advanced the technology of the country is,
how much capital it is using, and the size and the skills of its labor force
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The technological sophistication of a country depends on its ability to innovate and introduce new
technologies
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The skills of workers
depend on the quality of the country’s education system
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The true determinants of output are factors like a
country’s education system, its saving rate, and the quality of its government
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Changes
in demand, perhaps due to changes in consumer confidence or other factors, can lead to a decrease in
output (a recession) or an increase in output (an expansion)
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In the long run, we must look at factors like the education system, the saving rate, and the role of the
government to determine the level of aggregate output in the economy

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