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EC 202 Week 2 Notes

by: Kelsey Fagan

EC 202 Week 2 Notes EC 202

Marketplace > University of Oregon > Economcs > EC 202 > EC 202 Week 2 Notes
Kelsey Fagan
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These are the notes for the second week of class.
Intro Econ Analy Macro
Chad Fulton
Class Notes
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This 7 page Class Notes was uploaded by Kelsey Fagan on Wednesday April 6, 2016. The Class Notes belongs to EC 202 at University of Oregon taught by Chad Fulton in Spring 2016. Since its upload, it has received 59 views. For similar materials see Intro Econ Analy Macro in Economcs at University of Oregon.


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Date Created: 04/06/16
Day 3 (4/4):  Measuring Economic Performance  ● Measuring Welfare (or standard of living):  ○ Total aggregate income (GDP)  ■ Might not use because there is possibility of one person having most of the  wealth in a region  ○ Average aggregate income (GDP per person)  ○ The ​ distributio of aggregate income (considers rich vs. poor disparities)  ○ Life expectancy (years)  ○ Measuring Happiness  ■ Culture matters: what country you grow up in influences how “happy” you  are  ■ Demographics: women are “happier” than men, conservatives are  “happier” than liberals  ■ Genetics matter: sometimes genetic makeup plays a factor in “happiness”  ○ Recall two ways to measure GDP:  ■ Expenditure approach:  ● GDP = C + I + G + X ­ M  ○ C=consumption  ○ I=investment  ○ G=government expenditure  ○ X­M=net exports of goods and services  ○ Y= gross domestic product  ■ Income approach  ● GDP=Y  ○ Y=income  ■ Add up all types of income: compensation of  employees, net interest rental income, depreciation  etc.   ○ Growth Rate:  ■ GDP Growth Rate: (GDP in the current year ­ GDP in the previous  year)/GDP in the previous year *100%  ● Recession vs. Expansion:  ○ Recession: a recession is a period in which real GDP decreases.  ■ The ​ growth rate is negative for at least two successive periods  ■ Recession lasts from the peak to the trough   ○ Expansion: an expansion is a period during in which real GDP increases.  ■ This is the entire time from atrough​ (lowest point) to peak (highest  point)  ○ Turning point: when an economy hits the trough or peak, we say that it has  reached a turning point.  ● Prices:  ○ The price level is the average level of prices and the value of money  ○ A persistently rising level is calleinflation (positive growth).  ○ A persistently falling price level is calledeflation(negative growth).  ● Consumer Price Index (CPI):  ○ The CPI measures the average of the prices paid by urban consumers for a “fixed”  basket of consumer goods and services  ■ They are used for the purposes of comparison across time  ■ The values of two different indexes cannot be compared  ■ The values of a price index are not in terms of dollar(there are NO units)  ■ An index is ​defined to equal 100 in thereference base period  ■ The reference base period could in theory be any period  ○ Base period (example):  ■ Currently the reference base period is 1982­1984  ■ That is, for the average of the 36 months from January 1982 through  December 1984, the CPI equals 100  ○ Constructing the CPI:  ■ 1) Selecting the CPI basket (which goods/services to look at)  ■ 2) Conducting a monthly price survey   ■ 3) Calculating the CPI   ● Take all the items and determine the quantity and price of specific  items and total them  ● Example:  ○ Base­period (2012)  ■ Oranges­ 10 bought @ $1.00 a piece = $10  ■ Haircuts­ 5 bought @ $8.00 a piece = $40  ■ Total CPI basket base­period = $50  ○ Current­period (2013)  ■ Oranges ­ 10 bought @ $2.00 a piece= $20  ■ Haircuts­ 5 bought @ $10.00 a piece = $50  ■ Total CPI basket current­period = $70  ○ Biases in the CPI: the CPI might ​overstate the true inflation rate for four reasons:  ■ New goods: new types of goods are often more expensive than  comparable goods (i.e. computers vs. typewriters)  ■ Quality change: some goods improve their quality over time and should be  more expensive (2016 TV vs. 1950 TV)  ■ Commodity substitution: people substitute away from more expensive  goods, keeping the price of the bundle low  ■ Outlet substitution: people substitute away from more expensive stores,  keeping the price of their bundle low  ● Alternative indexes:  ○ Personal consumption expenditure deflator  ○ GDP deflator  ○ Big Mac index: literally the price of a Big Mac from McDonalds (invented in  1986 by The Economist)  ● Nominal VS. Real      Nominal  Real  Variable  is a variable in terms of the  is a variable in terms of the  prices in thecurrent year  prices in a​ommon base  year (we will be focusing  on “real” because it is  more accurate to view  inflation and such)  GDP  is the value of goods and  is the value of final goods  services produced during a  and services produced in a  given year valued at the  given year when valued at  the prices of a reference  prices that prevailed in that base year  same year  Wages  Wages valued at the prices  Wages valued at the prices  that prevailed in that same  of a reference base year  year    ○ It is important to distinguish between the two because nominal values are  influenced by inflation and real values aren’t.   ○ Real value = Nominal value * (prices in base period/prices in the current period)  ● The inflation rate: is the percentage change in the price level from one year to the next  ○ Formula: inflation rate = ((CPI this year ­ CPI last year)/ CPI last year)*100%  ● Core inflation: is the CPI inflation rate excluding the volatile elements (of food and fuel)  ● Example:    Item  Q (2014)  P (2014)  Q (2015)  P (2015)  apples  1  $5  2  $10  oranges  3  $5  0  $10  pears  5  $5  2  $10  Totals:  9 * $5  =$45  4 * $10   =$40    ● Market basket: 1 apple, 3 oranges  ○ (2014) Market basket: 1* $5 + 3* $5= $20  ○ (2015) Market basket 1* $10 + 3* $10= $40  ● CPI  ○ (2014) CPI: $20/$20 *100 = 100  ○ (2015) CPI: $40/$20 *100= 200  ■ Inflation: 200­100/100 *100% = 100  ● NGDP  ○ NGDP (2014) total amount: $45  ○ NGDP (2015) total amount: $40  ● RGDP  ○ RGDP (2014) using the values for that year: $45  ○ RGDP (2015) using the values of the base year (2014):  ■ 2 apples @$5 = $10  ■ 0 oranges @$5 = $0  ■ 2 pears @$5 = $10  ● Total= $20  Day 4 (4/6):  GDP Cont./Unemployment  ● Inflation Rate Example (something that might appear on a test)  ○ Recall: Inflation rate = ((CPI this year­CPI last year)/CPI last year)*100%  Year  CPI  1998  95  1999  96  2000  99  2001  100  2002  104  ○ What is the inflation rate in the year 2002?  ■ Hint: this is easy because 2001 was the base year  ○ Answer: 4 is the Inflation Rate for 2002  ● Review Question: What item(s) are excluded when core inflation is calculated?  ○ Food  ● Review Question: Suppose that the CPI this year is 2 points higher than last year. What  do you know about the inflation?  ○ There is not enough information  ○ Explanation/Example:   ■ CPI2014=100, CPI2015=102; inflation=2% (the difference in CPI is two,  and the percentage happens to be 2%)  ■ CPI2014=1, CPI2015=3; inflation =200% (the difference in CPI is two,  but the percentage happens to be 200%)  ● Unemployment:  ○ Definitions:  ■ Employed: those who have a job  ■ Unemployed: those who do not have a job, ​ but would like to have one  ■ Labor force: those who want to work, ​ whether or not they have a job  (employed + unemployed)  ■ Out of labor force: those who do not have a job, and do not want one, but  could have one  ■ Young and institutionalized: those who cannot work (the young and the  elderly)  ○ Measuring unemployment:  ■ Recall that in this section the focus is measuring macroeconomic  conditions  ■ 3 labor market indicators:  ● The unemployment rate: the percentage of the labor force that is  unemployed  ○ =(#of people unemployed/labor force)*100  ○ Note that the number of unemployed and the  unemployment rate are measuring two different things  ● The employment­to­population ratio: the percentage of the  working­age population who have jobs  ○ = (employment/working­age population)*100  ● The labor force participation rate: the percentage of the  working­age population who are members of the labor force  ○ = (labor force/working­age population)*100  ■ Other definitions (complications in unemployment):  ● Marginally attached workers: people who want a job but anot  currently working  ● Discouraged workers: people who have ​left the labor fo during  long­term unemployment  ● Underemployed: people who are ​working less that they would like  ○ Types of unemployment:  ■ Frictional: unemployment that arises from normal labor market turnover  ■ Structural: is unemployment created by changes in technology and foreign  competition that change the skills needed to perform jobs or the location  of jobs (there’s no way to avoid this)  ● Example: buggy whip makers were unemployed when cars were  invented and got more popular, because buggies weren’t being  made any more so neither were buggy whips.  ■ Cyclical: is the higher than normal unemployment at a business cycle  trough and lower than normal unemployment at a business cycle peak.   ○ Full employment: (important!)  ■ Natural unemployment= frictional + structural  ● The natural unemployment rate is natural unemployment as a  percentage of the labor force  ● Full employment is defined as the situation in which the  unemployment rate equals the natural unemployment rate (when  cyclical is at 0) *this is great!  ● Unemployment is ​ below the natural rate in expansions, above  the natural rate in recessions  ○ Unemployment and output  ■ Potential GDP is the quantity of real GDP produced at full employment  ■ Real GDP minus potential GDP is the output​gap  ● Output gap= ​ Real GDP­Potential GDP  ■ The output gap is positiv during expansions, annegative during  recessions.  ○ Example:  ■ Given:  ● Labor Force=100  ● # Employed=90  ■ Calculate the unemployment rate.  ■ Formula: = #​unemployed/labor force  ■ Find:  ● #​unemployed:  ○ Labor force (100) ­ #employed (90)= 10  ● Unemployment rate:  ○ #​ unemployed (10)/ labor force (100)= .10*100= 10%  Economic Growth  ● Economic growth: the sustained expansion of production possibilities measured as the  increase in real GDP over a given period  ○ Business cycles: fluctuation​round potential GDP  ○ Economic growth: an ​increase in potential GDP itself (increasing the  sustainability)   ● GDP per Capita:  ○ When we want to exclude the effects of increased population  ■ GDP per capita= GDP/population (dollars per person)  ■ Note: this could either be nominal GDP or real GDP per capita  ○ Question: Suppose that I told you that real GDP increased from 200 in 2014 to  400 in 2015. Would you say that the average standard of living increased?  ■ Answer: It’s hard to say if you only know the GDP change and not the  population change.  ● Rule of 70:  ○ The rule of 70 states that the number of years it takes for the level of a variable to  double approximately 70 divided by the annual percentage growth rate of the  variable:  ■ Examples:  ● If the real GDP growth rate is 5%, then it would take approx.  70/5=14 years for real GDP to double  ● If the real GDP growth rate is 1%, then it would take approx.  70/1=70 years for real GDP to double 


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