ECON202 FINAL REVIEW SHEET LECTURE SLIDE 1 Macroeconomics studies the behavior of economic aggregates such as income unemployment and inflation on a national scale Deals with economy as a whole Positive economics statements of how the economy does work descriptive scientific devoid of value judgments includes descriptive economics economic theory and empirical economics Normative economics Statements of how the economy should work realm of opinions values and public policy LECTURE SLIDE 2 Economic models a formal statement of a theory either expressed in words equations or graphs describes relationships between variables of interest makes assumptions ceteris paribus and is an abstraction or simplification of reality Roots of Macroeconomics great depression a period of severe economic contraction and high unemployment that began 1929 and continued throughout the 1930s modernist still argue and are puzzled about the origins of the depression John Maynard Keynes 1936 published the general theory of employment interest and money During periods of low private demand the government can stimulate aggregate demand to lift the economy out of recession 3 major concerns of macroeconomics 1 Output growth 2 Unemployment 3 Inflation deflation 4 economic policy criteria 1 Efficiency 2 Equity 3 Growth 4 Stability Aggregate output the total quantity of goods and services produced in an economy in a given period Gross domestic product the most commonly used measure of aggregate output The Business Cycle the cycle of short term ups and downs in economy Expansion or boom the period in the business cycle from a trough up to a peak during which output and employment rise Contraction recession or slump the period in the business cycle from a trough up to a peak during which output and employment rise Recession a period during which aggregate output declines Two consecutive quarters of LECTURE SLIDE 3 decrease in output are typically considered to mark the beginning of a recession Depressions A prolonged and deep recession Has no technical definition of a depression Current U S GDP 15 8 trillion U S unemployment 7 7 U S inflation rate Feb 2012 to Feb 2013 2 GDP final sales change in business inventories Gross domestic product GDP the most common measure of the size of an economy GDP is the total market value of all final goods and services produced within a given period by factors of production located within a country Gross national product GNP the same as GDP except includes goods and services produced abroad by domestically owned factors of production and excludes goods and services produced domestically by foreign owned factors of production National income and product accounts NIPA are data collected and published by the government describing the various components of national income and output in the economy The Department of Commerce is responsible for collecting the data that allow us to measure GDP in the U S 3 methods for calculating GDP 1 Expenditure approach computes GDP by measuring the total amount spent on all 2 final goods during a given period GDP C I G EX IM Income approach computes GDP by measuring the income wages rents interests and profits received by all factors of production in producing final goods 3 Value added approach computes GDP by looking at the value added at each intermediate step of production Gross Investment the total value of all newly produced capital goods produced in a given period Depreciation the amount by which an asset s value falls in a given period Net Investment equals gross investment minus depreciation Capital at end of period capital at beginning of period net investment Deficiencies of GDP 1 Crime 2 Leisure 3 Household activities 4 Environmental problems 5 Underground economy LECTURE 4 Unemployment rate percentage of the labor force that is unemployed key indicator of economy s health Unemployment results in 1 Lost incomes and production and 2 Lost human capital Employed any person 16 years old or older who meets one or more of these conditions 1 who works for pay either for someone else or in his or her own business for 2 3 1 or more hours per week who works without pay for 15 or more hours per week in a family enterprise or who has a job but has been temporarily absent or on leave with or without pay Unemployed a person 16 years old or older who meets all three of these conditions Is not working Is available for works and 1 2 3 Has made specific efforts to find work during the previous 4 weeks If does not apply then not in labor force EQUATIONS Labor force employed unemployed Population labor force not in labor force unemployment rate unemployed employed unemployed labor force participation labor force population Current U S unemployment rate 7 8 Discouraged workers people who want to work but cannot find jobs They grow discouraged and stop looking for work thus dropping out of the ranks of the unemployed and the labor force reducing both the numerator and denominator of the unemployment rate Discouraged worker effect lowers the unemployment rate Measures of unemployment done by Bureau of Labor Statistics The narrower measures U 1 and U 2 focus on the personal cost of unemployment the broader measures U 4 U 5 and U 6 focus on assessing the full amount of unused labor resources U 1 Those unemployed for 15 or more weeks U 2 Unemployed job losers U 3 The official unemployment rate U 4 U 3 Discouraged workers U 5 U 4 Marginally attached workers U 6 U 4 Part time workers who want fulltime jobs 3 types of unemployment 1 Frictional unemployment 2 Structural unemployment 3 Cyclical unemployment Natural unemployment is unemployment associated with the result of the normal functioning of the economy frictional and structural unemployment combined Frictional unemployment the portion of unemployment that is due to the normal working of the labor market The creation and destruction of jobs requires that unemployed workers search for new jobs Workers that switch careers or who are promoted leave gaps that take time to fill A permanent and healthy phenomenon of a growing economy Increases in the number of people entering and reentering the labor force and increases in unemployment benefits raise frictional unemployment Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant and possibly permanent loss of jobs in certain industries May be caused by changes in technology or foreign