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Macroeconomics Midterm 1 Study Guide

by: Mccaffev

Macroeconomics Midterm 1 Study Guide Econ 222- 004

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compiled from what was on the study guide slides
Principles of Macroeconomics
Pattama Shimpalee
Study Guide
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This 6 page Study Guide was uploaded by Mccaffev on Thursday September 22, 2016. The Study Guide belongs to Econ 222- 004 at University of South Carolina taught by Pattama Shimpalee in Fall 2016. Since its upload, it has received 5 views. For similar materials see Principles of Macroeconomics in Economics at University of South Carolina.

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Date Created: 09/22/16
Ch 5 GDP ­ national income and product accounts provide a set of numbers that indicate a  country’s state of economic performance circular flow diagram (review in book) ● product market: a mechanism that allows people to easily buy and sell  products ● factor market: refers to markets where services of the factors or  production are bought and sold, such as the labor markets, capital market, raw  material market, mgmt mark, and entree. mark ● financial market: a mechanism that allows people to trade securities,  commodities, at low transaction costs and at prices that reflect the efficient  market hypothesis ● Find value of GDP ○ expenditure approach ■ GDP = C + I + G + NX ■ C = consumer exp: spending by  households on consumption goods and services; includes  durable and nondurable goods; services include non tangible items ■ I = investment: purchase of new  capital goods and additions to inventories: machines, tools,  factories, office buildings; inventories = stocks of goods and  raw materials help to facilitate business operations ■ G = Gov exp: all spending on  goods and services bt government at the state, federal and  local levels ■ EXCLUDES:  transfer payments such as social security or  unemployment insurance benefits (these are not  purchases) ■ NX = net exports: exports minus  impots; equal to trade balance ■ exports: the goods  and services that are made in one country and  transmitted to foreigners  ■ imports: the goods  and services that are bought by residents,  governments and businesses but made outside of the country ■ X > IM = trade  surplus ■ X < IM = trade  deficit ○ income approach ■ GDP = wages + (Rent + Profit + Interest) +  (indirect taxes minus subsidies) + (depreciation) ○ statistical discrepancy: GDP expenditure minus the GDP  income total ● disposable personal income (DPI): the total amount of money available for an individual or population to spend or save after taxes have been paid ○ = (Wage + Profit + Interest + Rent) + Tr ­ T ● what is a budget balance? ○ government revenue ­ government spending ○ taxes ­ (gov. exp + transfer payments) ○ NT = net taxes = tax paid ­ cash benefits received ○ T ­ (G + Tr) ■ T > (G + Tr) = budget surplus ■ T < (G + Tr) = budget deficit ● GDP: the total market value of all final goods and services produced within a country in a given period of time ○ includes all items produced in the economy and sold legally  in markets ○ final goods: intended for the end user ■ intermediate goods: used as components or  ingredients in the production of other goods (some can be both) ■ GDP already embodies the value  of intermediate goods used in final good production ­ RGDP: values output using the prices of a base year; corrected for inflation ­ NGDP: values output using current market prices; not corrected for inflation ● how to calculate RGDP: use current prices for designated base year, then  use these same prices and adjust quantities as need be ● how to calculate NGDP: use current prices and quantities for each year ● how to calculate the growth rate of RGDP: ○ growth of RGDPt = ((RGDPt ­ RGDPt­1)?(RGDPt­1)) x 100 ● how to calculate the growth rate of NGDP:  ○ growth of NGDPt = ((NGDPt ­ NGDP t­1)?(NGDPt­1)) x 100 ■ percent = growth ● deflation: a decrease in the overall price level of goods and services ○ occurs when the inflation rate falls below 0% (GOOD) ● GDP deflator: measure of the level of prices of all new, domestically  produced, final goods and services in an economy ○ GDP deflator t = (nominal GDPt/real GDPt) x100 ● inflation rate: percentage change in price index from one period to the next ○ inflation rate t = (GDP deflator t ­ GDP deflator t ­1)/(GDP  deflator t­1) x 100 ● what is GDP for? ○ to track the course of the business cycle ○ to measure the size of an economy ○ to compute the standard of living over time (real GDP per  capita) ○ to compare the standard of living among countries (RGDP  per capita) ● shortcomings of GDP ○ quality of environment ○ quality of life ○ non market activity such as the child care a parent provides  at his or her home ○ equitable distribution of income ● business cycle: a periodic, but irregular, up and down movement of total  production and other measures of economic activity ○ recession: periods of economic downturns when output and  employment are falling ■ depression: a very deep and prolonged  downturn ○ expansion: sometimes called recoveries; periods of  economic upturns when output and employment are rising ○ peak: the point at which the economy turns from expansion  to recession ○ trough: the point at which the economy turns from  recessions to expansion ● potential GDP: the value of real GDP when all the economy’s factors of  production (labor, capital, land and entrepreneurial ability) are fully employed ● GNP = GDP + (net factor income from abroad) ○ adds income earned by residents’ investments abroad minus income generated by foreigners in the nation’s economy Ch 6 Jobs and Unemployment ● working age population: total # of people aged 16 and older who are not in jail, hospital, or some other form of institutional care or in the US Armed Forces ○ = # of employed + # of unemployed + # of  not in labor force ● labor force = # of employed + # of unemployed ● U­3 rate: the percentage of people in the labor force who are unemployed ○ unemployment rate (U­3) = # of unemployed workers/labor  force x 100 ○ OMITS marginally attached workers and involuntary part  time workers ● Labor Force Participation rate: percentage of the working age population  who are members of the labor force ○ LFP rate = labor force/working age population x 100 ● who is considered employed ○ worked at least 1 hour in a paid job or 15 hours unpaid in a  family business ○ were not working but who had jobs from which they were  temporarily absent ● who is not in the labor force ○ retired people and people who do not choose to work for  whatever reason and are not in the labor force ● who is unemployed ○ no employment ○ actively looking for work and available for work ○ had made efforts to find employment during the previous  four weeks or were waiting to be recalled to a job from which they were  laid off ● who is a marginally attached worker ○ not actively looking for work but who have indicated they  want a job and have looked for work without success in the past year;  includes discouraged workers who have given up on job search bc they  feel like they wont find one ● involuntary part time workers: people who are looking for full time work but cant find it ● full time = 35 hours or more; part is less than 35 hours ● frictional unemployment: the result of normal labor market turnover ● structural unemployment: result of technological advancement or foreign  competition ● cyclical unemployment: unemployment that occurs due to fluctuations in  real GDP ○ CU = Actual U rate ­ Natural U rate ● natural employment: unemployment that arises from friction and structural  change when there is no structural employment ○ FU + SU = NRU ● U­6 is considered to be a broader measure of the unemployment situation  in the US ● actual U rate = FU + SU + CU ● full employment ○ actual U rate = natural rate of unemployment ● what is the value of the average US unemployment rate from 1948: 5.82% ● why has the US LFP rate increased the past 50 years ○ more women are working outside of the home, instead of  having care taking be their only job ● output gap (GDP gap) = Y ­ Yp ○ Y = Real GDP ○ Yp = real potential GDP ○ recessionary gap (Y < Yp) negative gap ○ expansionary gap (Y > Yp) positive gap ○ during a recession, the U rate exceeds the natural U rate  and the output gap is negative ● full employment ○ U rate = NROU ○ Y = Yp ○ No output gap; no cyclical unemployment ● GDP is lost when a country’s U rate is above its natural rate Ch 7 CPI ● consumer price index (cost of living): a measure of the overall cost of the  goods and services bought by typical consumers ○ used to monitor changes in the cost of living over time ● steps to calculating CPI 1. fix the basket of goods a typical consumer buys 2. find the prices of all the goods in the basket 3. compute the basket’s cost at different times 4. choose a base year and compute the CPI CPI t = (total cost of basket in year t)/(total cost of basket in base year) x  100 5. compute the inflation rate inflation rate t = (CPIt ­ CPI t­1)/(CPI t­1) x 100 ● inflation rate: percentage change in the CPI from the preceding period ● what is the largest category of consumer spending? ○ housing ● what are the effects of changes in some prices on CPI and GDP deflator? ○ it can increase CPI ○ it can increase GDP deflator ● reference base period: a period for which the CPI is defined to equal 100;  currently the base period is 1982­1984


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