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Intermediate Macroeconomics Week 3

by: Aaron Notetaker

Intermediate Macroeconomics Week 3 ECON 2202

Marketplace > University of Connecticut > Economics > ECON 2202 > Intermediate Macroeconomics Week 3
Aaron Notetaker

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About this Document

Discussing GDP in more depth, some discussion of Unemployment and introduction of Interest Rates
Intermediate Macroeconomic Theory
W. Pace
Class Notes
Intermediate, Economics, Macroeconomics, GDP, unemployment
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This 3 page Class Notes was uploaded by Aaron Notetaker on Thursday September 15, 2016. The Class Notes belongs to ECON 2202 at University of Connecticut taught by W. Pace in Fall 2016. Since its upload, it has received 12 views. For similar materials see Intermediate Macroeconomic Theory in Economics at University of Connecticut.


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Date Created: 09/15/16
Intermediate Macro Week 3 GDP Y = C + I + G + NX Y = GDP = total production (output) C = consumption spending (was 68.7% of GDP in 2012) (Consumers can spend or save) - Consumer durables - Nondurable goods - Services I = investment (was 15.2% of 2012 GDP) - Fixed investment (buildings, machinery) - Inventory investment (inventory) - Residential investment G = gov’t spending on goods and services (19.2% of 2012 GDP) - Short lived goods and services like health care, police - Capital goods, buildings and computers - Pure gov’t transfers (Social Security, Medicare) are excluded from G NX = net exports = trade balance = exports – imports (can be negative) - Why subtract imports? Imports are included in C, I and G, but is NOT produced in the country, therefore not in the definition of GDP - Measuring GDP – The Income Approach - Compensation of employers – wages, salaries, benefits of employees - Corporate profits - Other income – income of the self-employed, royalty income and net interest earned by individuals, etc - Depreciation – the loss of value of capital from wear and tear (net domestic product = GDP – depreciation) - Net factor income – wage, profits, rent paid the US residents by foreigners minus factor income paid by US residents to foreigners National income = compensation of employees + other income + corporate profits Gross National Product (GNP) = national income – depreciation GDP = GNP – income factor Private Disposable Income = GDP + net factor income + transfer payments received from gov’t + interest payments on gov’t debts – taxes Net Gov’t Income = taxes – transfers – interest payments on gov’t debt Nominal variable – measure at current market prices Real variable – measure in terms of quantities of actual goods and services (at some constant price/base year price) Real GDP = Nominal GDP/Price Level SAMPLE PROBLEM - If GDP = 500 - Inflation = 10% from year 1 to year 2 - Real GDP = 500/1.10 = $450 Nominal GDP = Price Level x Real GDP GDP tends to fall in cold and snowy months, therefore economic stats like GDP data are seasonally adjusted to account for regular seasonal fluctuations within a year Chain-weighted measures – of GDP allow the base year to change continuously (if prices of some important goods changed dramatically relative to other goods (if oil prices spike while other goods’ prices inflate normally), using a fixed base-year for prices when calculating real GDP can produce misleading results.) Price indexes – measures of the price level Personal consumption expenditure deflator (related to CPI) GDP deflator (implicit price deflator) - 100 x (nominal PCE in year y/ real PCE in year y) Consumer price index (CPI) - Measure of the average prices of consumer goods and services (i.e. cost of living index) - Calculated monthly by the Bureau of Labor Statistics using a ‘basket’ of thousands of consumer goods and services - If the ‘basket’ consists of 10 gallons of gas and 2 apples, the equation would be as follows - CPI = [100 x (10 x price of gas) + (2 x price of apples) / (10 x price of gas in base year) + (2 x price of apples in base year)] - Measurement errors in CPI could have important implications (adjustments to Social Security) Inflation Rate - % rate of change of the price level over a particular period (pi used for inflation rate, P subscript t = price level at time t) - Pi = Pt – Pt-1 / Pt-1 = Change in Pt / Pt-1 Percentage Change Method and Inflation Rate - % change in (x X y) = (% change in x) + (% change in y) Measuring Unemployment – percentage of people in the civilian population who want to work but do not have jobs. - Bureau of Labor Statistics classifies every adult over 16 (using the household survey and the survey of business establishments) 1. Employed 2. Unemployed 3. Not in the labor force a. Discouraged workers b. Retired c. Completely disabled - Labor Force = Employed + Unemployed - Unemployment Rate = Number of Unemployed / Labor Force - Labor-Force Participation Rate = Labor Force / Adult Population - Employment Ratio = Employed / Adult Population In 2013 – unemployment 7.8% (in 2016 around 4.8%), employed 58.9%, not in labor force 36% Interest Rate – the cost of borrowing (or the price paid for the rental of funds) Interest rates are returns for holding debt securities, such as bonds


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