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ECON1010: MACRO W1-4 (when judging whether the economy is doing well or…
ECON1010: MACRO W1-4
- when judging whether the economy is doing well or poorly, it is natural to look at the total income of the economy
- income must equal expenditure
GDP: is a measure of the total income or total expenditure of an economy Consumption (C)+Investment (I)+government purchases (G)+net exports (NX) (exports-imports)
- cannot reflect value of leisure. value of clean environment etc
- best single measure of the economic wellbeing
- higher the GDP higher the standard of living
Consumption: spending by households on goods and services - personal needs excluding housing
Investment: spending on capital equipment, etc. Things that help produce goods and services
Government purchases: spending on goods and services by local, state and federal governments - does not include transfer payments due to no means of exchange
Net exports: exports- imports
Nominal GDP: values the production of goods and services at CURRENT prices // DO NOT NEED BASE YEAR
- inflation grows faster in nominal GDP than real GDP
=price of that year X amount produced the same year
Real GDP: Values the production of goods and services at constant prices // USES base year prices to value the economy
=base year price X amount of production for the other year
GDP deflator: a measure of the price level calculated as the ratio of nominal GDP to read GDP times 100
- tells the rise in nominal GDP that is attributed to a rise in prices rather than a rise in the quantities produced
= (nominal GDP / real GDP) X 100
Inflation: a situation in which the economy's overall price level is risingInflation rate: the percentage change in the price level from the previous periodCPI: measure of the overall cost of the goods and services bought by a typical consumers (fixed basket) while GDP deflator reflects the price of all goods and services produced domestically
- stable inflation = stable economic growth
- when CPI rises, the typical family has to spend more dollars to maintain the same standard of living
- Inflation rate= (CPI year 2 - CPI year 1) / CPI year 1 X 100
- CPI= price of basket/base year X 100
- does not take into account the differences in spending patters between individual households
- Higher inflation = higher CPI = higher prices in baskets
PROBLEMS:
- CPI is an accurate measure of the selcted goods that make up a typical bundle but is not a perfect measure of the cost of living
- Substitution bias: the basket does not change to refelct customer reaction to changes in relative prices
- introduction of new goods: the basket does not reflect the change in purchasing power brought on by the introduction of new products
- unmeasured quality changes: if the quality of the goods rise (falls) from one year to the next, the value of a dollar rises (falls), even if the price od the good stays the same
- these problems cause the CPI to overstate the true cost of living
Scarcity: limited nature of society's resources such as natural resources, capital and labour
Economics: the study of how society manages scarce resources
Opportunity Cost: the best alternative that must be given up to obtain some items
opp cost= what you give up / what you gain
Microeconomics: study of how households and firms make decisions and how they interact in markets
Macroeconomics: study of economy wide phenomena, including inflations, unemployment and econmic growth
Positive statements: are claims that attempt to describe the world as it is (can be tested) e.g. minimum wage laws create unemployment
Normative statements: claims to attempt to prescribe how the world should be (future tense) e.g. minimum wage should be raised (can't be tested
Interest rates:
- Real interest rates: nominal interest rate - (minus) inflation
Nominal: interest rate usually reported and not corrected for inflation. It is interested in what the bank pays. Usually corrected for inflation
Unemployment:
- long run problem: focuses on reducing the natural rate of unemployment
- short run problem: focuses of reducing the cyclical rate of unemployment
- unemployment rate= (number of unemployed / labour force) X100
- labour force: the total number of workers ie the sum of the unemployed and the employed
- discouraged workers, retired indivs and disabled people DO NOT show up in the UER
- people actively looking for a job ARE included in the UER
- an ideal labour marker, wages would adjust to balance the supply and demand for labour; ensuring that all workers are fully employed
- Frictional unemployment: refers to unemployment that results from the time that it takes to match all workers with a job
- Structural employment: the unemployment that results because the number of jobs avaliable in some labour markets is insufficient to provide a job for everyone who wants one
Minimum wage laws: when the minimum wage is set above the level that balances supply and demand, it create unemployment
Theory of Efficiency wages: efficiency wages are willingly able equilibrium wages paid by forms in order to increase worker productivity
- this may be referred because improvements are made in worker health, worker turnover, worker effort and worker quality
Production & Goods: a country's standard of living depends on its ability ti produce goods and services
- annual growth rates that seem small become large when compounded over many years (compounding refers to the accumulations of a growth rate over a period of time)
Productivity: about how much labor can produce in one hour (think about how much you get paid) = Natural Resources (N), Physical Capital (K), Human Capital (H).
Diminishing returns: as stock of capital rises the extra output produced from an additional unit of capital falls
Rule of 70: 70/interest rate: find out when the principal will double e.g. if you put 8000 into a 5% interest rate investment, it will take 14 years to double
Catch up effect: it is easier for a country to grow fast if it starts out relatively poor
externality: the effect of one person's actions on the wellbeing of a bystander
Short term (unsustainable) growth: - occurs when growth rate of GDP per capita cannot be sustained. Applies to N & K due to diminishing returns to capital
Long term (sustainable) growth: associated with H & A improvements. GDP per capita can be maintained. IS NOT sussceptible to diminishing returns