PRINCIPLES OF MACRO
PRINCIPLES OF MACRO ECON 212
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This 4 page Class Notes was uploaded by Noah Pouros on Saturday September 26, 2015. The Class Notes belongs to ECON 212 at Clemson University taught by Miren Ivankovic in Fall. Since its upload, it has received 19 views. For similar materials see /class/214222/econ-212-clemson-university in Economcs at Clemson University.
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Date Created: 09/26/15
Chapter 11 Measuring Cost of Living I Intro CPI is used to monitor change in cost of living over time If CPI increases family spends more to maintain living standard In ation economy s overall price level is rising In ation Rate percent change in price level from previous period 11 Consumer Price Index measure of overall cost of goods and services bought by a typical consumer reported monthly by Bureau of Labor Statistics a How to Calculate CPI 1 Survey Consumers to determine a xed basket of goods ie which prices are more important to the typical consumer 2 Find the prices of each good in a year 3 Compute the basket cost for each year 4 Choose base year and calculate index 5 Use Index to compute in ation rate Index total cost of goods in current year Total cost of goods in base year X 100 IR yr 2 CPI yr 2 7 CPI yr 1 CPI yr 1 X 100 In ation Rate percent change in price index from the previous period Producer Price Index measures cost of basket of goodsservices bought by rms useful in predicting change in CPI b Problems in Measuring CPI Three problems 1 Substitution Bias Not all prices change propionate thus consumers substitute expensive goods If basket is xed it doesn t account for change thus overstating cost of living 2 Introduction of New Goods adds more choices to consumer thus lowering cost of living 3 Unmeasured Quality Changes if quality of an item decrease while price is constant value of dollar falls getting the less amount of good for same price c GDP De ator vs Consumer Price Index GDP De ator re ects prices produced domestically CPI re ects prices bought by consumers Oil Prices much larger share of CPI then GDP CPI has xed prices while GDP De ator has currently produced products III Correcting Economic Variables For The Effects of In ation a Dollar Figures From Different Times Amount in today s Amount in year T X Price Level Today Price Level in Year T b Indexation Indexation the automatic correction by law or contract of a dollar amount for the affects of in ations cost of living allowances social security c Real and Nominal Interest Rates increase in rate if in ation decreases purchasing power Nominal Interest Rate interest rate as usually reported without a correction for the effects of in ation Real Interest Rate Interest rate corrected for the effects of in ation Real IR Nominal IR 7 In ation Rate Nominal IR tells how fast of in bank account rises over time Real IR tells how fast purchasing power of bank account rises over time Chapter 12 Production and Growth 1 Intro GDP per person grows N 2 per year average income doubles every 35 years focus on longrun determinants of the level and growth of real GDP lSt examine international data on GDP 2quotd examine role of productivity amount produced per each hour of worker 3rd link between productivity and economics polices 11 Economic Growth Around The World growth rate of 183 per year ignores short run changes represents an average rate of growth for real GDP per a person over many years Advanced Economy high GDP lower extreme poverty high education rate MiddleIncome Country 18 of population in extreme poverty Poor Country extreme poverty in norm III Productivity Its Role and Determinants Explains the large variation in living standards across the globe a Why Productivity is So Important Productivity the quantity of goods and services produced from each unit of labor input living standard is tied to productivity GDP measures total income amp total expenditures on output of gs Economy s income Economy s output High standard of living by producing a large quantity of goods and services A countries Standard of Living depends on its ability to produce goods and services b How Productivity is Determined 4 factors physical capital human capital technology knowledge natural resources Physical Capital stock of equipment and structures that are used to produced goods and services Allow for quicker amp more accurate production Produced factor of production Capital is a factor of production used to produce all kinds of goods and services including more capital Factors of Production inputs used to produce goods and services Human Capital the knowledge and skills that workers acquire through education training and experience Produced factor of production Raises nation s ability to produce goods amp services Natural Resources the inputs into production of goods and services that are provided by nature such as land rivers and mineral deposits Renewable amp Nonrenewable Not necessary ie Japan Technology Knowledge society s understanding of the best ways to produce goods and services Common Knowledge amp Proprietary Knowledge Tech knowledge refers to society s understanding how world works Human Capital refers to the resources expended transmitting this understanding to labor force Example tech knowledge quality of societies text books while human capital amount of time population can devote to reading them V Economic Growth and Public Policy a Savings and Returns society can change the amount of capital increase productivity by investing more current resources in the production of capital do so by consume less and save more of current income b Diminishing Returns and the CatchUp Effect Diminishing Returns the property whereby the benefit of an extra unit of an input declines as the quantity of the input increase In long run higher savings rate leads to higher level of productivity and income but not to higher growth in variables Catchup Effect country that starts off poor tends to grow more rapidly than countries that start off rich c Investment from Abroad Foreign Direct Investment capital investment that is owned amp operated by foreign entity Foreign Portfolio Investment investment that is financed w foreign money but operated by domestic residents d Education Investment in human capital Each yr of schooling raises wage by 10 US Enhance standard of living by providing good schools Opportunity cost however Human capital conveys positive externalities Extemalities effect of one person s actions on wellbeing of bystander Brain Drain emigration of countries highly educated workers to rich countries e Health and Nutrition Expenditures that lead to a healthier population Healthier workers are more productive and increase living standards Height is an indicator or productivity Taller workers tend to earn more and be more productive f Property Rights and Political Stability Market Prices coordinate transaction Respect Property Rights ability of people to exercise authority over recourses they own Economic prosperity depends in part on political prosperity g Free Trade