Studied by 1 personWhat is Economics?
Study of the exchange of money and how society allocates its scarce resources
Principle 1
People have to make tradeoffs
Principle 2
opportunity cost
Principle 3
People think at the margin
Principle 4
people respond to incentives
Principle 5
trade can make everyone better
Principle 6
markets are usually organized
Principle 7
Govs can sometimes improve market outcome
Principle 8
A country's standard of living depends on ability to produce
Principle 9
Prices rise when gov prints too much money (ex. stimulus checks for covid)
Principle 10
there is a trade off between unemployment and inflation
Microeconomics
individual level- interaction between consumers and individual firms
Macroeconomics
groups (counties, cities, states, regions countries, world) looks at things like cost of living, unemployment, economic growth, income taxes, interest rates, and recessions
Major Macro goals
-high economic growth -low unemployment -low inflation
What is GDP?
Gross Domestic Product- the total market value of all final goods and services newly produced in a given country/economy in a specific period of time
GDP Equation
GDP = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX which equals X-M)
Total GDP
overall economic size, health, and strength
GDP per person/capita
= total GDP/ total population -gives info about citizen well being or standards of living
Intermediate goods
goods purchased to be used in the production somethings else (ex. paper for a book)
Do intermediate goods count toward GDP
No as they aren't final
What is meant by "new" in the GDP definition?
Anything produced in that period of time (ex. a pack of pencils produced in 2020 will count for 2020 GDP regardless of what year it is actually bought by a consumer)
What is consumption spending?
anything households spend money on (ex. food, uber)
What is Investment spending?
-capital goods that will be used in the future to produce more goods -ex. machines, factories, inventory -doesn't include stocks and bonds -does include new houses
What is Gov spending?
-total gov spending on goods and services -excludes transfer payments (social security, welfare, unemployment)
What is net exports?
=exports-imports -exports = foreign spending -imports= domestic purchases
What is nominal GDP?
measures using current prices from that time period. Reflects both changes in prices and quantities. (inflated GDP)
What is real GDP?
measures using constant prices of a base year. Reflects changes in quantity only
Compute Nominal GDP 2017: $10 Q 400 and $2 and 1000 2018: $11 Q 500 and $2.5 Q 1100 2019: $12 Q600 and $3 Q 1200
2017: 6000 ($10 x 400 + $2 x 1000) 2018: $8,250 ($11 x 500 + $2.5 x 1100) 2019: $10,800 ($12 x 600 + $3 x 1200)
GDP growth rate or % change
= (new-old)/old x 100
Compute Real GDP (2017 base year) 2017: $10 Q 400 and $2 and 1000 2018: $11 Q 500 and $2.5 Q 1100 2019: $12 Q600 and $3 Q 1200
2017: $6,000 ($10 x 400 + $2 x 1000) 2018: $7,200 ($10 x 500 + $2 x 1100) 2019: $8,400 ($10 x 600 + $2 x 1200)
What is another name for Real GDP growth rate/ % change
Economic growth
GDP deflator
= nominal GDP / real GDP x 100
Compute GDP Deflator 2017: N 6000 R 6000 2018: N 8,250 R 7200 2019: N 10,800 R 8,400
2017: (6,000/6,000) x 100 = 100 2018: (8,250/7,200) x 100 = 114.6 2019: (10,800/8,400) x 100 = 128.6
Why is GDP not a perfect measure of citizen's lifestyle?
Doesn't include: -environmental quality -non-market activity (ex. paying a neighbor to mow lawn or providing child care at home) -leisure time -income distribution
How do resources flow from households to firms?
What is CPI?
Consumer Price Index- measures average consumer cost of living -overall cost of fixed goods and services bought by a typical consumer
What are COLAs?
Cost of living adjustments- help compare different earnings across cities or years
What is CPI inflation?
the percentage change in prices over a specific period of time
How is CPI calculated?
Fix typical "basket" of goods and services (done by Bureau of Labor and Statistics (BLS))
Associate Prices of items in basket
Compute total cost of the basket
Choose base year and compute
Compute inflation rate
CPI Equation
CPI= cost of basket in current month/cost of basket in base year x 100
Compute CPI and Inflation Rate 4 pizzas 10 pens 2017: Pizza $10 Pen $2 2018: Pizza $11 Pen $2.50 2019: Pizza $12 Pen $3
CPI 2017: ($60/$60) x 100 = 100 2018: ($69/$60) x 100 = 115 2019: ($78/$60) x 100 = 130
Inflation Rate 2017/2018: 15% = (115 – 100)/100 x 100% 2018/2019: 13% = (130 – 115)/115 x 100%
How to correct prices for inflation
Amount in recent dollars = amount old year x (CPI Recent/ CPI Old)
How much in the 1963 min wage in 2019 dollars? 1963 min wage: $1.25 CPI: 30.9 2019 min wage: $7.25 CPI: 256.9
$10.39 = $1.25 x (256.9/30.9)
Nominal interest rate
– Interest rate as usually reported. – Interest rate not corrected for inflation – Rate of growth in the dollar value of a deposit or debt
Real Interest rate
-= nominal interest rate - inflation rate – Interest rate corrected for inflation – Rate of growth in the purchasing power of a deposit or debt
How do you figure out the inflation rate when looking a a graph of nom and real interest rate
nom - real
– Nick loans $100 to Ricardo. – Next year, Ricardo pays Nick $105. – Suppose that inflation is 3.5% for that year. What is the nominal interest rate? What is the real interest rate?
Nom: 5% ((105-100)/100 x 100) Real: 1.5% (5-3.5)
CPI vs. GDP deflator
CPI: -price level G&S bought by consumers
includes imports -housing rent included -capital goods excluded -only includes things from a typical monthly budget
fixed basket
GDP: -price level of G&S produced by local firms
imports excluded -rent included (c)
capital goods included
variable basket
Problems with CPI
Doesn't include: -Substitution Bias -Introduction of New Goods -Unmeasured Quality Change
Substitution Bias
Substituting something you normally buy for something cheaper (ex. apples for pears)
causes CPI to overstate cost of living
Introduction of new goods
increases variety and allows consumers to find products that more closely meet their needs -dollars become more valuable
missed in CPI since it uses a fixed basket -causes CPI to overstate living cost
Unmeasured Quality Changes
improvements in quality of products increase the value of each dollar (ex. 3D movies) -CPI overstates increases in the cost of living -can't tell if increase in price is from inflation or increase in quality -BLS tries to account for improvements but miss some bc quality is hard to measure
How often does the BLS update the CPI basket?
Every 2 years
Who measures unemployment?
Bureau of Labor Statistics (BLS) in the U.S. Department of Labor
How is unemployment measured?
Based on a regular survey of about 60,000 households
Who is part of the adult population?
Anyone 16 or older
What are the the three categories of the adult population?
Employed, Unemployed, and Not in labor force
Employed
anyone with a job (part-time, full time, volunteer, self employed)
Unemployed
anyone actively looking for a job within the past month
Not in labor force
anyone not looking for a job (retired, disabled, stay at home parent, full time student)
Who makes up the labor force?
employed and unemployed
How do you calculate the unemployment rate?
unemployed/ labor force X 100
How do you calculate labor force participation rate?
labor force / adult population X 100
If you have a high labor force participation, you have ______ unemployment
low
When investment falls _____ rises causing _____ to fall
unemployment; GDP
Compute the number of people in the labor force, unemployment rate, total adult population, and labor force participation rate 151.1 Employed 7.8 Unemployed 94.5 Out of labor force
Labor force = 151.1 + 7.8 = 158.9 million Unemployment rate = 7.8/158.9 ×100 = Population = 158.9 + 94.5 = 253.4 million Labor Force participation rate = 100 x 58.9/253.4 = 62.7%
How do labor statistics differ across genders?
women have a higher unemployment rate due to the idea that they should stay at home and take care of the house
How do labor statistics differ across education levels?
the more education you have the lower the unemployment rate
Sue lost her job and begins looking for a new one. What happens to UR and does it give an accurate portrayal of the labor market?
UR Rises. A rising UR gives the impression that the labor market is worsening, and it is.
Alfonso, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work. What happens to UR and does it give an accurate portrayal of the labor market?
UR Falls. A falling UR gives the impression that the labor market is improving, but it is not.
Shanice, the sole earner in her family of 5, just lost his $80,000 job as a research scientist. Immediately she takes a part-time job at McDonald’s until she can find another job in his field. What happens to UR and does it give an accurate portrayal of the labor market?
UR does not change. The labor market is worse, but the UR fails to show it.
Issues with UR
excludes discouraged workers -does not distinguish between full time and part time workers -some people misreport work status in BLS survey
Natural Rate of Unemployment
The normal rate of unemployment around which the actual unemployment rate fluctuates. (Average or line of best fit)
Cyclical Unemployment
– The deviation of unemployment from its natural rate. – Associated with business cycles e.g. it’s high during recessions and low during booms.
Frictional Unemployment
– Occurs when workers spend time searching for the jobs that best suit their skills and tastes. – Short term
Structural Unemployment
– Occurs when there are fewer jobs than workers. – Explains longer spells of unemployment – Results when wages are set above the equilibrium • Minimum-wage laws, unions, and efficiency wages
Alejandro a type-writer repairman who is unemployed because there are no longer any type-writer to repair. Type of unemployment?
Structural
Camila is in the process of relocating to a new state to start his new job.
Frictional
Rachel quits her job because she doesn't like the working conditions and is in the process of looking for a new job.
Frictional
John gets fired because his company closes down the factory he works at.
Cyclical
Ways to decrease the natural rate of unemployment?
–Government programs to retrain workers who no longer have marketable skills. –Technologies' ability to retrain workers –Technologies' ability to work remotely, thus reducing time between jobs –Technologies' ability to foster "micro" work for those with untrained skills
Note
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