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Unit-2 Macro Review
GDP, Unemployment, Inflation
Circular Flow of a closed Economy
Spending
Goods andservicesbought
Goods andservicesbought
Revenue
Goodsand servicessold
Goodsand servicessold
Labor, land,capital & entrepreneurshipLabor, land,capital & entrepreneurship
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproductionFactors ofproduction
Wages, rent,and profitWages, rent,and profit
FIRMSFIRMS HOUSEHOLDSHOUSEHOLDS
FACTOR Market FACTOR FACTOR MARKET
PRODUCT MARKET PRODUCT MARKET
BUSINESS CYCLE: rate of GDP Growth
GDP growth by quarter1st quarter 2012
+2.2%
All 2011
+1.7%
GDP = C + I + G + (X-M)
Calculating GDP:
What Counts?
Only NEW & FINAL goodsDomestic Products
What does not Count?
Used goodsInternational productsFinancial transactionsNon-market transactionsGov’t Transfers (i.e. welfare, social security)
GDP does not measure: mix of goods, quality of products, quality of life, leisure time
Business Investment, Consumer/Business Construction,& Change in Inventories. (new houses count as investment!)
GDP = C + I + G + NX
GDP = Aggregate Demand (AD) (all spending or all income)
Spending
Goods andservicesbought
Goods andservicesbought
Revenue
Goodsand servicessold
Goodsand servicessold
Labor, land,capital & entrepreneurshipLabor, land,capital & entrepreneurship
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproductionFactors ofproduction
Wages, rent,and profitWages, rent,and profit
FIRMSFIRMS HOUSEHOLDSHOUSEHOLDS
FACTOR MarketFACTOR MarketFACTOR Market
PRODUCT MARKETPRODUCT MARKET
All Spending = All Income:
Y = C + I + G + (X-M)
2 Ways to measure GDP
or
Labor WagesLand RentCapital InterestEntrep. ProfitTalent
4-Types of Unemployment
• Structural– Skills do not match demand for labor
• Cyclical– too low a level of GDP (recession)
• Frictional– Temporarily between Jobs
• Seasonal– Based on time of year
Natural Rate ofEmployment
(or full employment)
Allows for someFrictional & Structural
Where:Cyclical = zeroSeasonal “factored out”
• In theory, if actual inflation = expected inflation, people have time to adjust for it. (less harmful)
ExpectedInflation
Actual Inflation
Nominal Interest Rate = Real Interest Rate + Expected Inflation
versus
COLA = cost of living adjustment
GDP Deflator vs CPI
• GDP deflator – prices of all goods/services produced domestically
• CPI index – prices of a market basket of goods & services
– (including international goods)
Substitution BiasNew goodsQuality changes
What shouldbe in basket?
(115 – 100)100
X 100 = +15.0%(115 – 100)100
X 100 = +15.0%
CPI Index: 1990 100 2000 115
Called Base year
Practice Test #2
• Questions #1 - #20
Multiple Choice Answers1 D
2 C
3 C
4 D
5 B
6 A
7 E
8 B
9 A
10 C
11 B
12 D
13 C
14 A
15 B
16 D
17 A
18 A
19 A
20 A
2-Types of Inflation
• Demand-Pull Inflation:– Too many dollars chasing too few goods– Example: printing money
• Cost-Push Inflation– ↑ cost of factors of production
– example: price of oil or labor rises rapidly