User:Takingsolace/MacroUnit2Guide

Hey, this is Sunny Maharjan's Unit 2 Study Guide for Macroeconomics. I would have normally used Google Docs for this, but I like the expendable text boxes on Wikipedia. This is on a personal Wiki page and not something that everyone can see.

Topics in Unit 2

 * Circular Flow
 * GDP: Calculation
 * GDP: Meaning
 * Unemployment: Calculation
 * Unemployment: Meaning
 * Inflation: Calculation
 * Inflation: Meaning

Circular Flow

 * circular flow: the flow of goods and services in an economy


 * household: a person or group of people who share income
 * firm: an organization that produces goods and services for sale
 * A company or business
 * product market: where goods and services are bought and sold


 * factor market: where resources, especially capital and labor, are bought and sold
 * government transfers: payments that the government makes to individuals without expecting a good or service in return
 * ex: Social Security benefits, unemployment benefits, welfare
 * inventories: stocks of goods and raw materials held to facilitate business operations
 * final goods and services: goods and services sold to the end user
 * intermediate goods and services: goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services
 * Ex: A car manufacturer buying steel to make cars

GDP: Meaning

 * GDP: total value of all final goods/services produced by the economy in a certain year.
 * includes: domestically produces goods/services, capital goods, expansion to inventory, new constructions
 * does not include: intermediate goods/services, inputs, used goods, financial assets (stocks, bonds), foreign produced goods/services


 * nominal GDP: the total value of all final goods and services produced in the economy during a given year
 * real GDP: the total value of all final goods and services produced in the economy during a given year, adjusted for changes in price

Limitations of GDP

 * it does not measure work that does not have a market value (parenting) or unrecorded transactions (trade between friends)
 * GDP usually correlates with human development, but not always. Does not consider wealth distribution or quality of life

Equations

 * value added: final outputs - inputs
 * expenditures: Consumer + Investment + Government + eXports - iMports                  C + I + G + X - M
 * income: Rent + Wages + Interest + Profit                                                                     R + W + I + P

Unemployment: Meaning

 * frictional unemployment: during job search, workers look for new jobs
 * inevitable and good - gives people time to find job that fits them
 * structural unemployment: when demand for job is higher than supply of jobs available
 * pretty bad
 * causes: minimum wages, labor unions, efficiency wages (employers pay higher to reward workers), and public policy raises wages. Higher wages increase demand for job above equilibrium.
 * cyclical unemployment: due to business cycle
 * ________________


 * natural rate of unemployment: frictional + structural
 * actual rate of unemployment: frictional + structural + cyclical

"natural" does not mean it stays constant; it changes over time and is affected by policy. it refers to ignoring the business cycle, which not all economists agree with.

changes in the natural rate come from changes from: labor force (women, younger), labor market institutions (unions, technology), and government policy (minimum wage, subsidy)

unemployment affects demographics differently: age, race, gender, etc.

Unemployment: Calculation

 * employed: is working
 * unemployed: not working, but looking for work
 * civilian labor force: total people that wants to work (excludes military and institutionalized)
 * employed + unemployed     ---  (aka, everyone that can work, regardless if they are)
 * _________________
 * population: number of people in a country
 * working age population: number of people 16+
 * labor force participation rate: all the people that can work, out of 16+ population
 * (employed + unemployed) / working age population  ---  (everyone that wants to work, out of population that can)
 * _________________


 * unemployment rate:
 * unemployed / labor force    ---     (all that want work but can't find it, out of population that can work)

Limitations of Calculating Unemployment
Unemployed are defined as those who don't have a job but are looking for one. Therefore, they don't count the below people:


 * discouraged workers: gave up looking for a job due to bad market
 * marginally attached workers: have looked for job in past, gave up
 * underemployed: part-time workers that want full-time jobs

On a smaller note, unemployment may overestimate, due to counting the frictionally unemployed

Inflation: Meaning

 * price level:
 * inflation: rise in overall price level
 * deflation: fall in overall price level

change in price level does not make people poorer. when price level rises, income rises to match.


 * real wage: wage rate / price level
 * real income: income / price level

what matters is rate of change of price.


 * inflation rate: percent increase in overall level of prices in a year
 * inflation rate = (Y2 price level - Y1 price level) / Y1 price level

Effects of Inflation

 * shoe-leather cost: cost of consumers doing increased spending
 * menu cost: cost of businesses to change prices
 * unit of account cost: cost due to uncertainty of prices

Interest Rate

 * nominal interest rate: interest rate actually paid for a loan
 * real interest rate:
 * nominal interest rate - rate of inflation          (if nom. is 8%, infl. is 5%, real is 3%)

Winners and Losers in Loan Inflation
if actual inflation is higher than expected: borrower is 😄, loaner is ☹️

if actual inflation is lower than expected: borrow is ☹️, loaner is 😄

Disinflation
disinflation: slowdown of inflation rate

it is very costly to create disinflation, so we try to stop inflation from getting so bad in the first place

Inflation: Calculation

 * aggregate price level: measure of the overall level of prices in the economy
 * price index: measures the cost of purchasing a given market basket in a given year
 * price index of given year = market basket of given year / market basket of base year * 100
 * notice that that the given year is the same as the base year, the price index is always 100
 * inflation rate:
 * (Y2 price index - Y1 price index) / (Y1 price index) * 100
 * market basket: hypothetical set of goods/services purchased by consumers
 * consumer price index (CPI): market basket cost for average American family
 * ex: food, housing, transport
 * producer price index (PPI): changes in price of goods/services purchased by producers
 * GDP deflator: ratio of nominal GDP to real GDP
 * nominal GDP / real GDP * 100

Limitations of CPI
CPI may overstate inflation due to changing amount of goods and technological innovation.

reflection
I get the logic behind the equations for calculating unemployment and GDP, but I don't feel confident recalling the equations from memory. I have to walkthrough the explanation in my mind everytime I do a "is the loaner or borrower happy about a high inflation", which I don't think is too bad?