A measure of total goods and services produced within a country during a specific time period Chapter 7 Taking the Nation s Economic Pulse Wednesday October 19 2011 10 34 PM GDP A Measure of Output Definition of Gross Domestic Product GDP as a Measure of Both Output and Income First way to measure GDP expenditure approach GDP sum of purchases GDP Y C I G X o o I investment o G government spending o X net exports exports imports C consumption purchases of goods and services by consumers Investment buying stocks and bonds Investments businesses buying final goods and services to use in their production in another good Also includes consumers buying new houses Second way to measure GDP Income Approach Add up income generated in production of goods and services Adjusting for Price Changes and Deriving Real GDP Nominal money Real adjusted for inflation Use price index to change to adjust nominal data into real data Two indexes used to adjust nominal to real data CPI representative sample of goods bought by households called market basket GDP deflator accounts for almost all goods bought it s a much larger sample Inflation the percentage change each time goods are indexed Problems with GDP as a Measuring Tool for Income and Output Not an exhaustive list but some problems include the exclusion of GNP for the output of an economy and wealth distribution can be so extreme that a booming economy does not heighten the income of most citizens Chapter 8 Economic Fluctuations Unemployment and Inflation Thursday October 20 2011 12 02 AM Swings in the Economic Pendulum Economic Fluctuations and the Labor Market Categories of people Total population divided into two categories a Under age 16 and institutionalized people a Not in labor force i e students retired disabled b Over age 16 Over age 16 divided yet again b In labor force Labor force divided once again a Employed b Unemployed but want to be employed Definition of unemployment A person not currently employed but either actively seeking for a job or waiting to return to one http www bls gov news release pdf empsit pdf Two calculations to know Labor force participation rate employed unemployed population over 16 years Unemployment rate unemployed labor force Three Types of Unemployment Frictional Imperfect information Either the firm puts off hiring to asses more people or job seekers cannot find the right firm Structural Workers do not posses the correct skills Eg At the turn of the computer revolution people needed to have computer competency to compete for jobs Cyclical General shrinking of necessary labor during an economic slowing down Employment Fluctuations The Historical Record Some unemployment is unavoidable and arguably desirable Natural unemployment rate equals the normal amount of frictional and structural unemployment The natural rate occurs when economy is at a sustainable rate of growth Full employment exists when only the natural rate of unemployment is present Natural rate equals approximately 5 Actual and Potential GDP Potential output is the economy s maximum sustainable output occurs when only the natural rate of unemployment exists Potential output of the US is approximately 3 annually Actual output can be greater than less than or equal to the potential output Effects of Inflation Inflation is the persistent increase of price level of goods Why inflation is bad It can reduce investments since long term contracts and other such contracts such are risky It distorts information delivered by prices relative prices are skewed since some products can change their price more quickly than others o For example if inflation rises as will the price of bananas but the price of cars may not be Thus people believe the price of just bananas is rising and adjust incorrectly their financial strategy Chapter 9 An Introduction to Basic Macroeconomic Markets Monday October 24 2011 10 37 AM The Four Key Markets of the Economy 1 Resource Market coordinates the actions between businesses demanding resources and the households supplying them in exchange for income 2 Goods and Services Market coordinated the demand for and the supply of GDP 3 Foreign Exchange Market Bring purchases imports from foreigners into balance with sales exports plus net inflow of capital to them 4 Loanable Funds Market Beings the net household savings and the net inflow of foreign capital into balance with the borrowing of the government and businesses Aggregate Demand for Goods and Services What is aggregate demand The sum of all goods and services desired The relationship between two variables Amount of goods desired and the price level Aggregate Supply of Goods and Services What is aggregate supply Similar to AD it is the summation of all goods and services supplied in an economy AS is the relationship between the two variables Amount of goods offered for sale and the price level AD and AS are very closely defined Must Always Distinguish Between Short Run AS and Long Run AS Why SRAS is upwardly sloping In the short run many resource prices are fixed An increase in price level means increased profits for firms therefore heightening the incentive to produce more Why LRAS is straight up In the long run people fully adjust their behaviour to account for changes in price level Resource prices are flexible so an increase in the price level does not necessitate an increase in profit LRAS is determined by technology resources and efficiency Not price level LRAS is the economy s level of output at full employment LRAS potential GDP The natural rate of unemployment occur at LRAS Equilibrium in the Goods and Services Market Since there is both SRAS and LRAS there can be two different equilibrium points that occur LRE and SRE Key Points When the economy is in long run equilibrium o Actual GDP potential GDP o Actual unemployment natural rate o SRAS LRAS and AD are all equal Resource Market Labour is the primary resource When businesses want to produce more goods they need more labor Loanable Funds Market Coordinates transactions between borrowers and lenders Borrowers need money Lenders give money Interest is the price of borrowing Interest rates Money interest rate nominal interest rate Real interest rate nominal inflation Foreign Exchange Market Price is the amount of dollars needed to get one foreign currency Dollar appreciates when less dollars can purchase the same amount of foreign units of currency as before Tends to lead to importing more and exporting less Dollar
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