Macroeconomics
Economics 100
Study Guide III
Definition of microeconomics: the study of how households and firms make
decisions and how they interact in markets.
Definition of macroeconomics: the study of economy-wide phenomena including
inflation, unemployment, and economic growth.
The Simple Circular Flow Model
Can you set up the more advanced circular flow?
Gross Domestic Product
GDP=output produced within the borders of a country
Or the Long Version
The market value if a final goods and services produced within a country in a given time period
The Components of GDP
GDP (Y) can be divided into four components: consumption (C), investment (I), government purchases (G), and net exports (NX).
Definition of Consumption: spending by households on goods and services, with the exception of purchases of new housing.
Definition of Investment: spending on capital equipment, inventories, and structures, including household purchases of new housing.
Definition of Government Purchases: spending on goods and services by local, state, and federal governments.
1. Salaries of government workers are counted as part of the government purchases component of GDP.
2. Transfer payments are not included as part of the government purchases component of GDP.
Definition of Net Exports: spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).
Real Versus Nominal GDP
A. There are two possible reasons for total spending to rise from one year to the next.
1. The economy may be producing a larger output of goods and services.
2. Goods and services could be selling at higher prices.
B. When studying GDP over time, economists would like to know if output has changed (not prices).
Thus, economists measure real GDP by valuing output using a fixed set of prices.
GDP and Economic Well-Being
A. GDP measures an economy’s total production.
C. GDP, however, may not be a very good measure of the economic well-being of an individual.
1. GDP omits important factors in the quality of life including leisure, the quality of the environment, and the value of goods produced but not sold in formal markets.
2. GDP also says nothing about the distribution of income.
3. However, GDP does help us achieve a good life. Nations with larger GDP generally have better education and better health care.
Business Cycles and Growth
Be able to define what is meant by a business cycle and express it graphically
Be able to describe the four phases of the business cycle
Understand that the long-term annual growth rate in real GDP in the U.S. is around 3%.
Economic Growth and Public Policy
A. The Importance of Saving and Investment (Remember the advanced circular flow?)
1. Because capital is a produced factor of production, a country can change the amount of capital that it has.
B. Education
C. Research and Development
The primary reason why living standards have improved over time has been due to large increases in technological knowledge.
Consumer Price Index
KEY POINT:
The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices in the economy. The percentage change in the price level measures the inflation rate.How to calculate the CPI
1. Fix the basket.
a. The Bureau of Labor Statistics uses surveys to determine a representative bundle of goods and services purchased by a typical consumer.
2. Find the prices.
a. Prices for each of the goods and services in the basket must be determined for each time period.
3. Compute the basket’s cost. (And some other stuff that we will not talk about in 100, but you will in 204)
a. By keeping the basket the same, only prices are being allowed change. This allows us to isolate the effects of price changes over time.
4. Compute the inflation rate.
a. Definition of Inflation Rate: the percentage change in the price index from the preceding period.
MORE TO COME
UNEMPLOYMENT
INFLATION