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Econ week 2 notes

by: Elisa Merten

Econ week 2 notes ECON1210

Marketplace > Brown University > Economcs > ECON1210 > Econ week 2 notes
Elisa Merten
Brown U

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About this Document

these notes cover the second week of classes, chapters 2-3
Intermediate Macroeconomics
Assaf Sarid
Class Notes
Economics, Macroeconomics, consumption
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This 5 page Class Notes was uploaded by Elisa Merten on Thursday February 4, 2016. The Class Notes belongs to ECON1210 at Brown University taught by Assaf Sarid in Winter 2016. Since its upload, it has received 41 views. For similar materials see Intermediate Macroeconomics in Economcs at Brown University.


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Date Created: 02/04/16
Feb 1 - 5 Output, unemployment, and Inflation at a Glance  National income and product account  used to measure aggregate economic activity o Aggregate output is GDP o Quantifies the total production in a country in a year o GDP(1) – the market value of the final goods and services produced in a certain country during a given period  Final good vs. intermediate good  Y = C + I + G + X - M o GDP(2) – sum of value added in the economy during a given period  Value added = value of a firms production – value of intermediate goods o GDP(3) – sum of incomes in the economy during a given period  Wages = P * MPL  Profits = wages o Nominal GDP – Q @ current price * P @ current price  Increases over time b/c prices increase over time  Dollar GDP  $Yt  nominal GDP in year t o Real GDP – Q * P @ constant price (using a base year)  Yt  real GDP in year t o GDP growth  (Yt – Y(t-1)) / Y(t-1)  expansions = + growth  recessions = - growth  growth fluctuates due to business cycle and gov’t policies o Problems  Dealing with changes in quality of existing goods(ie; computer)  Solution  adjust for improvements by looking hwo the market for goods values goods with different characteristics in a given year  Hedonic Pricing  treats goods as providing a collection of characteristics each with an implicit price o Not counted  Household production (shadow economy)  Leisure  does not include the well being of citizens  Non-market goods (democracy, freedom) ^^  Natural resources, environmental resources  Inequality  GDP vs. GNP  GNP includes  Well being may not be included in GDP, but is correlated  Transfer payments (social security, medicare, etc…)  Unemployment o Employment  the number of people who have a job o Unemployment  number of people who do not have a job and are looking for a job  Includes part-time o Labor force  L = E + U  Includes non-citizens o Unemployment rate (u)  = U/L (U/(E+U))  u (2010 America) = 9.6% o Okun’s Law  When output is low U is high  When Y increased U decreases  Inversely related to growth rate o Why do we care?  Direct effects on the welfare of the unemployed  Provides a signal that the economy may not be using some resources efficiently  GDP per capita or GDP per worker?  Inflation Rate o Inflation  sustainted rise in general price level  What happened to average price? o Inflation rate  rate at which the price level increases o GDP deflator  PL = Nominal GDP/Real GDP  Index number (set equal to 1 in the base year)  To get inflation get rate of change for deflator  Includes good from consumers and firms, produced only in that country o CPI (consumer price index)  Measures how many dollars a basket of goods costs  Basket includes typical urban consumer goods, including imported goods  Tells us the average cost of living year to year  Rural vs. urban  Different preferences and compositions of household  Basket changes o GDP deflator and CPI are not very different, usually only vary 1%  1980 CPI was higher than GDP deflator b/c oil was in the basket and cost went up o Why do we care?  Inflation causes distortions  Hurts different people due to relative income  Real vs nominal  Real = nom. – inf  Creates uncertainty in the future  causes output to fall  Philips Curve o Relationship between inflation rate and U o Not as statistically significant as Okun’s law  Short, Medium and Long Run o Short run ( a few years)  demand o Medium run (5-10 years)  Level of tech, capital stock. Labor force o Long run (50-100 years)  Factors in education, research, savings, quality of gov’t Capital Goods Market  Demand for goods(Z) = Y = C + I + G + Xn o Assume a closed economy o Z = C + I + G o Consumption is about 70% of GDP  Exogenous Variables o Not explained within the model o Taken as given o Independent variable o ie: prices (price takers), gov’t spending & taxes  Endogenous variables o Depend on other variables within the model o Dependent variable o ie: quantity (chosen by consumer), Consumption  Consumption o Disposable income(Yd)  C = C(Yd)  Yd = Income(Y) - tax  + b/c normal good o Consumption Function is a behavioral equation  Tries to see how people will behave in the economy  C = c0 + c1Yd  c0 + c1 are parameters of the consumption function  c0 is the Y-int, represents the amount of consumption you have to consume to survive  c1 is the slope = marginal propensity to consume (>1, +)  rich people have lower MPC than poor, they save more  Investment and Government Spending o I is exogenous  do not take into account how firms will grow  If C increases, firms will invest more  I also depends on the interest rate o G & T are tools for fiscal policy (exogenous)  Government does not behave the same as consumers of firms  They not need to maximize profits or surplus, they have other considerations (political, short term, long term)  What happens when G increases/decreases?  What happens when T increases/decreases?  Equilibrium o Y(production/supply of goods) = Z (demand of goods) o Z = c0 +c1(Y-T) + I + G  Only do not know Y o Y = (1/1-c1)(c0 + I + G – c1T) o The equilibrium determines the aggregate output o (1/1-c1) > 1  multiplier  Every increase in spending by $X, increases production by X * multiplier o (c0 + I + G – c1T)  autonomous spending  Does not depend on output o point of intersection is equilibrium o the slope of the production function is greater than the consumption function because people don’t spend everything they make o an increase in autonomous spending has a more than 1-1 effect on the equilibrium  consumers spend x * c1and then workers gain x*c1 meaning the production goes up more  x is increase  this goes on and on creating a series  x + c1 +(c1)^2 +(c1)^3 …  (1/1-c1) = the series = multiplier o Summary  Increase in demand  increase in Y  increase in income …  End result is an increase in output that is larger than the shift in demand by a factor of the multiplier  Dynamics of adjustment o Adjustment of output over time


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