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Econ 102 Week 1 Notes

by: Andrea Lans

Econ 102 Week 1 Notes Econ 102

Andrea Lans
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About this Document

These notes cover chapters 1 and 2 of Macroeconomic Theory.
Macroeconomic Theory
Class Notes
Economics, Macroeconomics




Popular in Macroeconomic Theory

Popular in Economics

This 4 page Class Notes was uploaded by Andrea Lans on Sunday October 9, 2016. The Class Notes belongs to Econ 102 at University of California - Los Angeles taught by Keskinel in Fall 2016. Since its upload, it has received 73 views. For similar materials see Macroeconomic Theory in Economics at University of California - Los Angeles.


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Date Created: 10/09/16
Chapter 1: Science of Macro Issues in Macroeconomics - Recessions, housing market problems, cost of living ↑, countries in poverty, trade deficit, government budget deficit & its effects on workers, consumers, businesses, taxpayers - US Real GDP per capita- upward trend in living standards in long run; fluctuations in short run - US Inflation rate stable in long run; fluctuations in short run (↑ during WWI, oil price shock; ↓ during Depression, financial crisis) - US Unemployment Rate • Never 0 • 25% unemployment rate during Great Depression Huge drop during WWII • • Unemployment responds to shock w/a lag Economic Model - Ex- S & D for new cars: Qd = D(P, Y) • General Functional Notation • Quantity of cars demanded is related to price & aggregate income - Specific Functional Form: D(P,Y) = 60 - 10P + 2Y - Supply & Demand graph; equilibrium P & Q - Endogenous Variable: Values determined inside model - Exogenous Variable: determined outside of model (given); constant - Market clearing: prices flexible, adjust to equate S & D • Short run- prices sticky; explains unemployment, firm surpluses Chapter 2: Data of Macro Gross Domestic Product - GDP: Total expenditure on domestically-produced final goods & services regardless of nationality • - Y = C + I + G + NX - Consumption (70% GDP): durable goods, nondurable goods, services (least -> greatest %) - Investment (13%): business fixed, residential fixed, inventory (Δvalue of firm’s inventory) Spending on new capital; doesn’t include financial investment • - Stock: quantity measured at a point in time (person’s wealth, # people w/degrees, gov’t debt) - Flow: Quantity measured/unit of time; measures rate of change (person’s annual saving, # new college graduates this yr, gov’t budget deficit) - Government Spending (19%): excludes transfer payments (unemployment insurance) - Net Exports (-3%): Exports- Imports Output = expenditure - assume firms purchase their unsold output; unsold output • counts as “inventory investment” • Total income earned by domestically-located factors of production • Real GDP: measure values using prices of a base year (vs. nominal- current prices); changes can only be due to changes in quantity - Income Approach: rent + wages + profit + interest - Value Added Approac:h Value of output - intermediate goods to produce output - NGDP (Net GDP) = GDP - depreciation - Gross National Product (GNP): Total income earned by nation’s factors on production, regardless of where located - GNP - GDP = factor payments from abroad - factor payments to abroad • Factor payments: wages, profits, rent, interest/dividends on assets - GDP deflator: measure price level (inflation rate) • GDP Deflator = 100 x (Nominal GDP/ Real GDP) - Chain-Weighted real GDP: updates base year every year due to relative price changes; average of 2 growth rates based on prices of 2 years to calculate real GDP - Shortcomings of GDP: Non-market production —> imputed value • • Underground economy (7% in US) • Leisure • Environment (Green Domestic Product) • Income inequality, crime, etc. - Alternatives: • Human Development Index (HDI): health, wealth, education • Happiness Index —> Easterlin Paradox: $ = happiness until basic needs are met Consumer Price Index - CPI: measure of overall level of prices; published by Bureau of Labor Statistics • Tracks changes in cost of living • Inflation (π): %ΔCPI - Core π: CPI excluding food & gas (volatile goods) • Adjusts contracts for inflation (COLAs) • Allows comparisons of dollar amounts over time • CPI base year = 100 • CPI = 100 x (Cost of basket in month/ Cost of basket in base period) - CPI may overstate inflation (~ 1.1%/yr, based on 1995 panel) 1. Substitution Bias: CPI can’t reflect consumers’ ability to substitute with goods whose relative prices have fallen 2. Introduction of New Goods 3. Unmeasured Changes in Quality 4. Discount Stores - Laspeyres index: fixed basket of goods, overestimates π, BLS uses this - Paashe index: changing basket of goods, underestimates π - Fisher Index: geometric mean of CPIL & CPIP - CPI vs. GDP Deflator (2 measures of inflation) Urban Consumers All goods No Capital Goods Includes Capital Goods Imported Goods Domestic Goods Fixed Basket of Goods Basket of Goods Changes Every Year - Producer Price Index (PPI): indicator to see what may happen to CPI - Personal Consumption Deflator: PCE = [Nominal C / Real C] x 100 • CPI, PPI, PCE capture same info Unemployment - Household Survey: current population survey, 60,000 households; current unemployment rate 4.9% • US total population- 325 million • Adult, civilian, non-institutional population- 250 million - Labor force = 155 million, not in labor force = 95 million • Not in labor force: homemakers, retirees, full-time students, marginally attached workers (sub-set: discouraged workers) - Unemployment rate = unemployment / labor force = 7.5 / 155 = 4.9% - Labor Force Participation Rate = L.F. / Adult Population = 62% - Labor Underutilization Rate: • U6 = (U + Marginally Attached Workers + Involuntary Part-Time) / L.F. = 9.7%


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