Principals of Macroeconomics with Dr. Lozano
Exam Two Study Guide
Ch. 7 The Basics of Macroeconomics
● Macroeconomics the part of economics concerned with largescale or general economic factors, such as interest rates and national productivity.
○ Main Factors The main three factors of Macroeconomic study are GDP (GrossDomestic Product), Inflation, and Unemployment.
● The GDP is a measure of total expenditure in an economy. Essentially it is how
much money people have spent on every product that an economy produces.
The GDP at its most basic is a multiplication problem: the amount of final goods
sold multiplied by their price. Their price is referred to as market value. GDP is
measured regularly, be it yearly or quarterly (3months) as it projects economic
growth and decline in a nation.
○ Final Goods The goods which are intended for the last user. Example:
A tire sold to a car manufacturer is a component of those cars, as such
it is not a final good, instead it is called an intermediate good. A tire
used to replace a busted one is a final good because the car owner is
the one actually using it.
■ Things without market value, such as doing your own
housekeeping, are excluded from measurement.
■ Illegal commodities are also excluded.
● Determining the Final Price of a Final Good
● The New Circular Flow of the GDP
○ When looking at the GDP, there is a new Circular Flow model that must If you want to learn more check out What are the major differences between how white and red wines are made?
be discussed. This model adds the Government, the Financial Market,
and all other Economies.
○ Using this model there is a way to calculate the GDP of an economy
using this equation: GDP = C + I + G + NX.Wherein:
■ C = the total spending by households on goods and services.
For renters this includes rent payments, for homeowners this
includes rent payments paid to the homeowner but not the
purchase price or the mortgage.
■ I = Machinery, Structures, Inventories. The total spending on
goods that make other goods.
■ G = Government Purchases and Sales excluding transfer
payments (such as Social Security).
■ NX = Exports
Two Approaches To GDP
Consumption by Households
Investment By Businesses
+ Don't forget about the age old question of Who is the Belgian chemist and alchemist that weighed a growing plant to determine where the growth was coming from?
Expenditures by Foreigners
● Nominal vs. Real GDP and the GDP Deflator
○ GDP is a dollar measurement, which presents some problems.
○ Nominal A GDP measurement based on the prices that prevailed
when output was produced
○ Real A GDP measurement based on a base year price and reflects We also discuss several other topics like What is carrying capacity and how is it related to popula2on growth?
changes in price level.
■ Nominal GDP is Price of that year times the Quantity of that
■ Real GDP is Price of the base year (2011) times the
Quantity of that year.
■ GDP Deflator ( Nominal GDP / Real GDP ) * 100. The GDP
Deflator show the average increase in price between two
times. The difference between two Deflator values is the value
○ Shortcomings of GDP
■ Nonmarket Activities and the Underground Economy are not
■ Improved Product Quality the increase in price may not be
due to inflation but product quality increased.
■ Composition and Distribution of the Output/Income
Distribution GDP does not reflect who gets most of the wealth
because it assumes equal distribution, which is impossible.
■ Noneconomic Sources of WellBeing Other things that don't If you want to learn more check out How does Baraka contrasts classic blues from country blues?
have to be paid for that offer payment in happiness.
○ Institutional Structures of GDP
■ Needed for a High GDP Strong property rights, Patents and
Copyrights, Efficient Financial Institutions, Free Trade,
Competitive Market System.
■ General Trends of High GDP Literacy and Widespread
Education, Life Expectancy.
○ Factors Affecting Productivity and GDP Growth with the percentage of times an increase has been because of them.
■ Technological Advancement (40%)
■ Quantity of Capital (30%)
■ Education and Training (15%)
■ Economies of Scale and Resource Allocation (15%)
○ Positive and Negative Views of Economic (GDP) Growth
● Greater Material Abundance, Increased Standards of
Living. Leisure Time, Expansion and Application of
● Larger economies use up more resources and
damage the environment more. This is due to the rule
that growth in Economies increases competition for
■ Inflation Rate The rate of Inflation is the average percentage price increase between two years. It has an equation in the form of [(CPI Year 2 CPI Year 1)/CPI Year 1] X 100 ● CPI Consumer Price Index
○ Measures the typical consumer’s cost of living. It is the basis of Cost of Living Adjustments (COLAs) in many contracts and Social Security We also discuss several other topics like What is Biological (physical)
■ Fix the “basket” The Bureau of Labor and Statistics uses
surveys to determine what the typical consumer buys and sets
up a “basket” of items and services that are bought.
■ Find the prices of the items in the “basket.”
■ Multiply the prices to the amounts to find the total cost of the
■ Choose base year and compute the index: (Cost in Current
Year/Cost in Base Year) X 100
■ This value, which is the CPI, can be used to find the Inflation
rate in a given year.
■ Assume the Typical Basket is 4 Pizzas and 10 Lattes.
100 x (60/60) We also discuss several other topics like In what ways did the 1920s represent both a loosening of social mores and a rise of social conservatism?
(100100) / 100 = 0
100 x (69/60)
(115100) / 100 = 15
100 x (78/60)
(130115) / 115 = 13
○ Problems with CPI It is not a perfect measurement.
■ Over time some prices increase faster than others.
■ Consumers substitute higher priced goods for ones that
become relatively cheaper, which mitigates the price increase
effect. CPI calculation misses this because the basket is fixed
for a number of years because it is difficult for the BLS to do its
■ Increases in the CPI tend to overstate increases in the cost of
○ Contrasts Between CPI and the GDP Deflator
■ Imported Goods CPI does use, GDP Deflator does not use.
■ Capital Goods CPI does not use, GDP Deflator does use.
■ The Basket CPI has a fixed basket, GDP Deflator uses
○ Correcting Variables for Inflation Comparing Money Figures for
■ Ex: Minimum Wage Did the minimum wage have more
purchasing power then or now?
● 1964 $1.15, 2010 $7.25
● To compare, use CPI to convert ‘64 $ to ‘10 $
○ $ in Today = $ in Year T x (CPI Today/CPI
○ $8.09 = $1.15 x (220.3/31.3) Where the CPI
in 2010 is 220.3 and the CPI in 1964 is 31.3
■ Purpose: Indexation a $ amount is indexed for inflation and is
auto corrected for inflation either by law or in a contract.
■ Inflation is a general increase in prices and fall in the
purchasing value of money.
● Income Distribution
● Administrative Inefficiencies
● Effects on Creditors and Debtors
○ Real vs. Nominal Interest Rates
■ Real Interest Rate: Nominal Rate
■ Ex: A $1000 loan with a 9% Interest
Rate and 3.5% Inflation Rate
■ Real Interest rate is 5.5%. The
higher the Rate of Inflation in
comparison to the Interest Rate, the
more the situation favors the debtor
instead of the creditor. If the
Interest Rate was 3.5% and the
Inflation Rate was 9% then the Real
Interest Rate would be 5.5%,
which means that in effect the
debtor will pay less than the loan
● Labor Force: The adult population excluding Elderly, Severely Disabled, Hospitalized, Jailed, Military, and FullTime Students. It includes both the Employed and Unemployed.
○ Labor Force Participation Rate: 100 x (labor force/adult population) ● Unemployed: The portion of the population that is searching for work but does not have it.
○ Unemployment Rate: 100 x (# of unemployed/labor force)
● Duration of Unemployment:
○ Typically ⅓ for under 5 weeks, the other ⅔ for under 14 weeks.
○ Usually only 20% of unemployed are so for over 6 months.
○ Most observed unemployment is longterm. The small group that is longterm has fairly little turnover.
● Natural Rate of Unemployment: The normal rate around which the actual fluctuates. Frictional + Structural. Cyclical Unemployment is the deviation from the Normal Rate and is parallel with business cycle.
○ Frictional Occurs when workers spend time searching for the job best suited to their skills.
○ Structural Occurs when there are fewer jobs than workers.
● Sectoral Shifts Changes in the composition of Labor Demand (what types of workers are more desirable/needed than others). This contributes to Frictional and is normal.
● Labor Force Statistics
○ Produced by the BLS, based on a regular survey of 60,000 households and an “adult population” that begins with age 16.
● Issues with Unemployment Rate
○ Doesn’t show the Discouraged Worker Stat or the Downgrading Stat (employees with higher education forced into lower level jobs by
● Government Assistance
○ Government Employment Agencies that provide information about jobs. ○ Public Training Programs to train workers for specific tradeskill jobs. ○ Unemployment Insurance that protects workers income for a set time period.