Macroeconomics

• Publisher: QuickStudy Reference Guides
• Year: 2009
• ISBN:
  9781423212188
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

A better understanding of how the economy works in general is crucial for established businesses, start-ups and students of economics. This 3-panel (6-page) guide, jam-packed with up-to-date information, examines macroeconomics in great detail.

NOMINAL GDP VS. REAL GDP

• REAL GDP = Nominal GDP deflated by the Price Index
• Assume only 2 goods are produced in an Economy (goods A and B):

  YR1
  	PRICE1	×	QTY1	=	GDP1
  GOOD A	$2	×	100	=	$200
  GOOD B	$3	×	90	=	$270
  NOMINAL GDP1				=	$470

  YR2
  	PRICE2	×	QTY2	=	GDP2
  GOOD A	$4	×	80	=	$320
  GOOD B	$3	×	70	=	$700
  NOMINAL GDP2				=	$1,020

• Using Nominal GDP, it shows an increase in year 2. To know if productivity really increased in year 2, Real GDP measures have to be used.
  1. Using YR 1 as the Base Year, NOMINAL GDP₁ = REAL GDP₁ = $470
  2. YR1 PRICES WILL BE APPLIED TO YR2 QTY to get real GDP₂

     YR2 Real GDP
     	PRICE1	×	QTY2	=	GDP2
     GOOD A	$2	×	80	=	$160
     GOOD B	$3	×	70	=	$210
     REAL GDP2				=	$370

     Because REAL GDP₁ > REAL GDP₂, productivity actually decreased.

MEASURING PRICE LEVEL

• Price Index: Average level of prices in a given year relative to the average level. Cost of a fixed basket of goods reported as a percentage of base period cost.
• GDP Price Index or GDP Deflator: A measure of the average price of all goods and services.
• Consumer Price Index (CPI): A measure of the BUSINESS CYCLES average price of urban consumer goods and services.
• Producer Price Index (PPI): A measure of the average price of goods bought by producers (includes crude materials; intermediate goods).
• Base Year: Standard year used to compute price indices. Base Year Index = 100.
• Cost of Living Adjustment (COLA): Automatic adjustments of income to the rate of inflation. This is also called indexing.

MEASURING INFLATION

• Inflation: Continuous increase in the average level of prices of goods and services over time.
• Inflation rate: The growth between price indices.

  CPI2 - CPI1	× 100
  CPI1

• Types of Inflation:
  1. Supply side inflation (Supply Decrease)
     1. Wage-push = wage increase leads to price increase
     2. Cost-push = increase in non-labor costs leads to price increase
  2. Demand-pull inflation: An increase in the price level initiated by excessive aggregate demand.
• Macro Consequences of (Unanticipated) Inflation:
  1. Uncertainty
  2. Speculation
  3. Non-productive investments
• Deflation: Continuous decrease in the average level of prices of goods and services (negative inflation rate) over time.
• Disinflation: Falling inflation rate. Note that prices are still increasing.
• Hyperinflation: Inflation of 100% or more per year (EX: Germany 1923, Yugoslavia 1993, Ecuador 2000).

MEASURING UNEMPLOYMENT

• Labor force: Employed + Unemployed
• Employed: Working and not looking for work
• Unemployed: 3 requirements to be categorized as unemployed:
  1. Not working
  2. Able to work
  3. Looking for work
• OUTSIDE THE LABOR FORCE = working age population, or working age but not looking for work.
• EMPLOYMENT rate =

  employed total	× 100
  labor force

• UNEMPLOYMENT rate =

  unemployed total	× 100
  labor force

• Types of Unemployment:
  1. Seasonal: Unemployed during periods between agricultural seasons, tourist seasons, school breaks, etc.
  2. Frictional: Unemployment as people move between jobs or into the labor market.
  3. Structural: Workers laid off by declining industries or in declining regions, or by job obsolescence.
  4. Cyclical: Unemployment due to general economic recession.
• Macro consequences ...