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Summary for Chapters 8-9

by: Kayla Notetaker

Summary for Chapters 8-9 Econ 253-101

Marketplace > Marshall University > Economcs > Econ 253-101 > Summary for Chapters 8 9
Kayla Notetaker
GPA 4.0
Principles of Macroeconomics
Dr. Yuanyuan (Catherine) Chen

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About this Document

This is a combination of all notes I've uploaded so far. Contains all notes from GDP calculations and Unemployment and Inflation. A basic summary of both chapters
Principles of Macroeconomics
Dr. Yuanyuan (Catherine) Chen
Study Guide
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This 9 page Study Guide was uploaded by Kayla Notetaker on Saturday September 19, 2015. The Study Guide belongs to Econ 253-101 at Marshall University taught by Dr. Yuanyuan (Catherine) Chen in Fall 2015. Since its upload, it has received 74 views. For similar materials see Principles of Macroeconomics in Economcs at Marshall University.


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Date Created: 09/19/15
Macroeconomics 253 1 Chapter 9 Continued Explaining Unemployment 0 Individuals who are unemployed are eligible for unemployment insurance aid received while they search for a new job 0 This aid is usually equal to about half 12 of their previous wage and lasts for six months 0 This payment helps the unemployed maintain income and spending habits as well as reduces the harshness of recession 0 Also elevates the unemployment rate Minimum Wage Laws 0 Government enacted a Minimum Wage law in 1938 o 1938025 an hour 0 2013725 an hour 0 If minimum wage is set above the market wage wage determined by supply and demand of labor the quantity of labor supplied will be greater than the quantity of labor demanded This means there will be more people searching for fewer jobs 0 A study shows that teen employment drops as minimum wage increases employers hire less workers to compensate for the higher wages 200 mil Unemployed SL Workers Gov Minimum Wage 30hr quotquotquot 39 I I Market wage 20hr I l I I I I I I DL Jobs I I I I 400 mil 500 mil 600 mil 0 Labor Unions 0 Organizations of workers who bargain with their employers for better wages and better working conditions 0 Because their wage is usually above market wage there are fewer people hired 0 Most industries are not unionized so the effects on employment are minimal 0 Efficiency Wages 0 Above the market wage used to motivate employees hoping that motivated workers means higher productivity 0 Again is an above the market wage so it also has a hand in unemployment Measuring In ation o The continuous rise of the cost of living Price Level measure of the average prices of goods and services in the economy In ation Rate the percentage increase in the price level from one year to the next De ation Rate the percentage decrease in price level from one year to the next Consumer Price Index CPI Macroeconomics 253 2 0 The average prices of goods and services bought measured in terms of goods and services consumed by a typical urban HH of four 0 Calculating CPI 0 First calculate individual eXpenditures Base Year of 1995 2013 2014 Product Q P E P X Q P E P2013 X Q1995 P E P2014 X Q1995 Baseball Tickets 1 55 55 60 60 85 85 Hamburgers 25 3 75 5 125 450 11250 Notebooks 15 5 75 650 9750 6 90 TOTAL 205 28250 28750 V J Measured in Base Year Quantities 0 Second find the CPI Current Year CPI Formula CPI of the Current Year ECY divided by EBY X 100 So if we wanted to find the CPI for 2013 the formula would be 28250 X 100 205 Similarly if we wanted the CPI for 2014 28750 x 100 140 205 138 In ation Rate H 0 To Calculate in ation rate you use the CPIs you calculated above CPITz CPIT1 x 100 CPIT1 0 So to find the in ation rate from 2014 to 2015 140 138 1 3 8 Is CPI Accurate There are four biases that eXist and make the CPI overstate the in ation rate x 145 increase in the cost of living Macroeconomics 253 3 Substitution bias the BLS assumes that consumers purchase the same products and same amounts monthly but consumers actually buy fewer of the products as they increase the most in price and more of a product that increases the least in price Increase in Quality bias happens overtime as current products improve in quality Products may rise in price as a result of their raised quality BLS attempts to make adjustments so only the pure in ation part of the raised prices is included in the CPI It is hard to know exactly the price of true in ation so this usually gets overstated New Product bias BLS updates the market basket of good every ten years new products introduced between those years do not get included For instance technology comes out and its prices decline rapidly after their release These decreases in prices usually are not included in the CPI because they happen before the next update Outlet bias the BLS collects price statistics from fullpriced retail stores and does not take into account discount stores and online shopping These biases can lead the in ation rate astray from 05 to 1 Steps have been taken to reduce the size of the bias For example the BLS has started updating the market basket every two years rather than ten reducing the New Product Bias Producer Price Index PPI 0 Tracks the prices received by firms as they sell goods and services 0 This includes the prices of raw material and intermediate goods 0 PPI also can show any signs of potential changes in the CPI Using Price Indexes to Adjust for In ation 0 Sometimes we are interested in tracking changes in economic variables overtime rather than in dollar amounts 0 To correct for the effects of in ation we can divide nominal variable by price index and multiply by 100 to obtain the real variable Example Value in 2009 Value in 1985 x CPI 2009CPI 1985 Year Price Value CPI 1985 V2 50 2009 V1 30 100 So if VT2 VT1x CPI 2009CPI 1985 then P1985 30 x 501985 1002009 Interest Rate P1985 V2 15 0 The cost of borrowing moneyfunds expressed as a percentage of the amount that was borrowed O 0 Nominal Interest Rate stated rate on a loan Bank loan etc Real Interest Rate Nominal interest rate minus In ation rate I This is an approximation for real interest rate provides a better measure of cost of borrowing In ation De ation Real Nominal Interest Rate gt 0 Real Nominal Interest Rate lt 0 Real lt Nominal Real gt Nominal Macroeconomics 253 Chapter 8 Lecture GDP GDP Gross Domestic Product the market value of all final goods and services produced during a period of time typically one year 0 GDP is measured using market values NOT quantities Measuring Total Production 0 GDP includes only market value of final goods 0 Final goodservice good or service purchased by the final user Ex truck a sandwich iPod 0 Intermediate goodservice good or service that serves as an input into another good or service Ex tire for a truck bread for a sandwich headphones for iPod GDP Expenditure Approach 0 Step 1 count individual expenditures 0 Follow this formulaExpenditureProduct x Quantity or E P x Q Product Quantity Price per Unit Expenditure Eye Exams Eee 100 Qee 50 Pee 5000 PeeXQee Pizza Epz 80 sz 10 sz 800 szprz Textbooks Ex 20 th 100 Ptx 2000 PtxXth Paper Epa 2000 Qpa 010 Ppa 200 PanQpa Assume all good are final unless told otherwise 0 Step 2 Add to get a total 0 GDPZE E66 Epz Etx Epa 5000 800 2000 200 8000 Gross Domestic Product Measures Total Production 0 Consumption c spending of Households HHs on goods and services excluding spending on new houses don t confuse Capital C with consumption c I Durable Goods goods that last long periods of time Ex cars computers etc I NonDurable Goods goods that do not last long Fireworks food clothing etc I Services no tangible itema task done for you electricians painters etc 0 Investment I spending by firms on new factories offices machinery and adds to inventories includes spending by HHs on new houses I Business Fixed investment spending on new factories offices etc to produce I Residential Investment HHS spending on houses I Change in Business Inventories goods that have been produced but not sold 0 Ex In the first quarter say a business has 80 units not yet sold In the second quarter they have 100 units none yet sold The change in inventory would be Q2 Q1 or 100 80 which would equal 20 Macroeconomics 253 0 Government Purchases G spending by federal state and local governments on goods and services Ex Teacher salaries highways bridges etc I Transfer Payments by governments to HHs for which the government does NOT receive a good or service transfer payments are NOT included in the GDP I Social Security SS payments to retired andor disabled unemployment insurance payments to unemployed workers 0 Net Exports NX exports minus imports I Exports EX goods and services produced in the domestic country in our case the US and shipped to foreign firms HHs and governments I Imports IM goods and services produced in foreign countries sold to the domestic country s US rms HHS and governments Business Fixed Residential Change in inventory T Equation for GDP C I NX Y Accepted Exports Imports symbol for GDP Durables Federal Nondurables State Serv1ces Local Does GDP Measure Everything Does it measure what we want it to 0 Shortcomings in GDP When the BEA calculates GDP it does NOT include production in the home and production of underground economies 0 HH production goods and services people produce for themselvesnot bought and sold in markets Ex mechanic fixing hisher own car 0 Underground economy buying and selling goods and services that is concealed from the government I Conceals buying and selling for three main reasons 0 Avoid taxes 0 Avoid government regulations 0 Illegal goodsservices I It is estimated that if they were measured in the GDP HH products would be 10 of the GDP and underground economy productions would be at 8 0 Shortcomings in GDP as a measure of WellBeing 0 While GDP is meant to measure a country s population it is also used to measure a country s wellbeing Increases in GDP lead to increases in wellbeing but it s not a perfect indicator Leisure is not included in the GDP Also GDP is not adjusted for pollution or other negative effects of production I Ex Cigarette production is included in the GDP but the cost of lung cancer from smoking is not Macroeconomics 253 0 Crime and other social change also have no effect on GDP 0 Overall one way to think about it is this GDP measures the size of the pie but not how the pie is divided Real GDP vs Nominal GDP 0 Nominal GDP value of final goods and services evaluated at the current yearcalculated by adding the current values of final goods and services 0 Real GDP value of final goods and services evaluated at base year pricescalculated by determining a base year and using prices from that year to find the value of goods and services in other years 0 If total spending rises from one year to the next one of two of the following statements M be true 0 The economy is producing a larger output of goods and services OR o Goods and services are being sold at a higher price Calculating Real GDP 0 As stated above you calculate Real GDP by adding the current year s values of nal goods and services 0 Step l Add individual expenditures Assume the base year is 2009 Ex 83 in the textbook 2009 2015 Product Quantity PriceU nit Quantity PriceUnit Eye Exams Eee 80 Qee 40 Pee 100 Qee 50 Pee Pizza Epz 90 sz 11 sz 80 sz 10 sz Shoes Esh 15 Qsh 90 Psh 20 Qsh 100 Psh 0 Step 2 Find the value of the goods and services listed using Quantities from 2015 and Prices from 2009 Product Quantity 2015 PriceUnit 2009 Value Eye Exams Eee 100 Qee 40 Pee 4000 Pizza Epz 80 sz 11 sz 880 Shoes Esh 20 Qsh 90 Psh 1800 YR 4000 880 1800 6680 If the base year is the current year then YRYN GDP De ator measure of price level calculated by dividing nominal GDP by real GDP then multiplying by 100 GDP Deflator Yn Yr x 100 If Nominal GDP Real GDP in base year than the value of the GDP De ator will always be 100 0 Price Level measure of the average prices of goods and services in economy 0 Is NOT the price of goods is an index of total prices Macroeconomics 253 If 0 GDP In ator m 100 then YN YR 0 GDP In ator is less than 100 then YN is less than YR 0 GDP In ator is greater than 100 then YN is greater than YR 0 GDP In ator is stays the same then YN and YR have the same growth rate 0 GDP In ator is declines then YN growth rate is slower than YR prices are decreasing 0 GDP In ator is increases then YN growth rate is m than YR prices are increasing GDP vs GNP Gross National Product GNP o The value of final goods and services produced by residents of US even if production is overseas EX If Ford builds a factory in the UK production goes to the USGNP and the UK GDP EX If Toyota builds a factory in the US production goes to Japan s GNP and the US GDP 0 National Income the value of womout equipment buildings etc known as depreciation or fixed capital When you subtract this value from GDP you re left with National Income 0 Personal Income received by HHs calculated by subtracting earnings of corporations and add in payments received by HHs from the government transfer payments 0 Disposable income personal tax payments personal income disposable income 0 PI is always greater than DPI Macroeconomics 253 1 Chapter 9 Unemployment and In ation The state of the economy can be described by two factors unemployment rate and in ation rate 0 Misery indeX adds in ation rate and the unemployment rate to calculate an estimate of the overall economy Different types of People without jobs include 0 Those who prefer not to work at all 0 Those who are retired cannot work due to age 0 Full time college students Does joblessness Equal Unemployment amp 0 The major difference is that jobless people have no employer and are not looking those who are unemployed are physically able and are actively looking for work 0 There are two costs associated with unemployment 0 Social cost 0 Economic cost I Cost to individual loss of income decrease in consumer spending and saving I Cost to economy loss of production economy is production inside their production possibilities frontier less than they should Labor Force the sum of all the employed and unemployed people 0 People who have a job people who are actively looking for a job 0 People NOT counted in the labor force include o Retirees Homemakers Full time college students Active military service members Patients admitted to mental hospitals unable to work due to mental illness People serving in prison OOOOOO Discouraged Workers available for work but have stopped looking because they believe there are no jobs left for them Unemployment Rate the percentage of those in the labor force that are unemployed 0 Calculated by dividing the number of unemployed by the total labor force and multiplying by 100 of Unemployed x Entire Labor Force Labor Force Participation Rate LFP rate calculates the percentage of the working age population Labor Force x 1 00 Working age Population Unemployment Population Ratio the percentage of working age population that are employed Employment x 1 00 Working age Population Macroeconomics 253 2 Different Types of Unemployment 0 There are three types of unemployment o Frictional shortterm unemployment arises from trying to match workers with jobs 39 Occurs even when wages for exible and there are enough jobs to go around 39 Occurs when 0 Workers have different skills than what is required 0 Geographic mobility is not instant 0 Information about new jobs is not reaching those who are looking I Seasonal unemployment is included under the Frictional category It is the unemployment that depends on the season or weather 0 Ex Beach resorts are in higher demand and require more employees in summer months those employees will likely be laid off during winter months 0 This is why there are two unemployment rates to be calculated here one that is seasonally adjusted and one that is not 0 Structural longterm unemployment arises from constant mismatch between a worker s skills and the requirements I Unemployment is long term mainly due to current workers needing to be retrained 0 Ex Many older generation workers became unemployed as technology drastically changed many work environments 0 Cyclical arises when businesses enter recession they lay off workers and rehire when business start to work their way out of recessions Full Employment 0 When an economy is experiencing expansion rather than recession cyclical unemployment equals 0 This is considered full employment 0 Frictional and Structural unemployment are considered the natural rate of unemployment If cyclical unemployment does NOT equal zero than the rate of unemployment is not natural Frictional Structural NR 0 Ex Cyclical Unemployment 0 Structural Unemployment 17 Frictional Rate 23 17 23 4 natural unemployment rate


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