Econ 352xMichaux, Michael2012 FallWeeks: 1 - 5Midterm # 1 Study GuideLectures: 1 -9Topic 1Study of national economy, taken as a wholeMacroeconomics = Microeconomics + AggregationFocus is on economy-wide variables:– Gross Domestic Product (GDP)– Unemployment rate– Inflation– Interest and exchange ratesBudget and trade deficitsThese variables capture economic performance and are useful in studying:– Long run productivity and economic growth– Short run fluctuations (recessions and booms)– Increasing general price level (inflation)– Effects of globalization on a nation’s economy– Effects of government policies on economyPositive analysis (what does policy do?)Normative analysis (what is a good policy?)The Classical view:– Prices and wages adjust rapidly and economy achieves equilibrium.– All unemployment is “frictional” and voluntary.The Keynesian view:– Prices and wages are “sticky”; downward adjustment rarely occurs.Unemployment is a result of disequilibriumMath ReviewA concave function exhibits diminishing returns to scale (DRS).These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.– Marginal Product of Capital or “MPK” is the slope of the function in the k dimension (holding l constant)Marginal Product of Labor or “MPL” is the slope of the function in the l dimension (holding k constant)We are interested in rates of change or % changes in addition to changes in magnitudes. (e.g.) the rate ofchange of GDP (growth rate of GDP) between N periods isAnnual compounding: % DGDP = 100 * (GDPt+N - GDPt)(1/N) / GDPt Continuous compounding: % DGDP = 100 * ( log(GDPt+N) - log(GDPt) ) / NGDP per capita = GDP/PopulationIt is a measure of variability (or volatility) of the series around the average. The further away more numbers are from the average, the higher the standard deviation is.Two series are positively correlated when increases in one are usually accompanied by an increase in the other. If one tends to increase when the other decreases, the correlation is negative. (e.g.) GDP and investment in the US are positively correlated.The strength of correlation is measured by the correlation coefficient, which lies between -1 and 1.GDP: GDP is defined as the market value of final goods and services newly produced by domestically located capital and labor during the yearNewly produced: Counts only things produced in the given period; excludes things produced earlierFinal goods and services:Don’t count intermediate goods and services (used up production of other goods and services in the same period that they themselves were produced)Final goods & services are those that are not intermediateException: Capital goods (=goods used to produce other goods) are final goods since they are not used up in the same period that they are producedGDP can be measured in three ways:1- Production (Value Added) Approach: The total amount of output produced, excluding output used upin intermediate stages of production.2- Expenditure Approach: The total amount spent by the ultimate purchasers of output.3- Income Approach: The total income received by producers of output.Expenditure Approach: Y = GDP = C + I + G + NXwhere:C: ConsumptionI: Investment (purchases of capital goods)G: Government PurchasesNX: Net Exports = X – M (= Exports – Imports)Income Approach: Computes GDP by examining how the factors of production (labor and capital) are compensated National Income = Compensation+ Proprietor’s Income+ Rental Income+ Corporate Profits + Net InterestEmployee Compensation = Wages and benefits paid to employeesProprietor’s Income= Income of the self-employed (labor + capital income)Individual Rental Income = Income earned by renting out land or structuresCorporate Profits (very volatile)= Corporate Revenue - (wages + interest + rents + other costs)Net Interest = Interest earned - Interest paid by individualsAll approaches to GDP accounting yield the same result!Fundamental identity of national income accounting: Production = Expenditure = IncomeFirst equality: Arises from using the market value to measure production: consumers exhaust production with their expendituresSecond equality: Arises because individuals, businesses, and the government use their incomes to consume and invest GNP = Value of final goods and services produced by domestically owned factors of production within agiven period.GNP = GDP + Net Factor Income from AbroadInflation = Rate of growth of the price levelDiscrete compounding v. Continuous compounding CPI v. GDP deflator- two price indices The Consumer Price Index (CPI) measures how the price of a fixed basket of goods changes. The CPI overstates the cost of living because it doesn’t take into account consumer adjustment to changes in relative prices.Nominal GDP (or NGDP) is the value of output at current pricesReal GDP (or RGDP) is the value of output in base year prices (currently 1996)GDPD- GDP DeflatorGDPD is a variable-weight price indexIt reflect prices of goods people actually purchased in the current year instead of the basket they purchased in the base yearDisadvantage: The current basket may have goods that did not exist during the base year Measure of SavingsDistinguish between savings and wealth: Savings is a flow, wealth is a stockSavings (of any economic entity) = Current income minus Spending on current needsInvestment= Purchases of capital goodsS=IPrivate (household + business) saving:– Spvt = Private disposable income - Consumption = (Y + NFP – T + TR + INT) – CGovernment (federal + state + local) saving:– Sgovt = Govt. receipts - Govt. outlays = T – (G + TR + INT)National saving:S = Spvt + SgovtTopic 2Real Interest RateRate at which the real value or purchasing power of an asset (usually a riskless bond) increases over timeNominal interest rate is the rate at which the nominal value of increases over timeReal interest rate= Nominal interest rate - Inflation rateFormula: r = i - When you borrow or lend the inflation rate is unknown. People form expectations on inflation, and therefore we talk of expected real interest rate Formula: r = i -   re = i - eProduction Frontier: Recall that a production function relates the amount of output that can be produced to the amount of inputs and the level of productivityGeneral form: Y = A F(K, L)The inputs are called factors