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Unit-2 Macro Review

Unit-2 Macro Review. GDP, Unemployment, Inflation. Spending. Revenue. PRODUCT MARKET. PRODUCT MARKET. Goods and. Goods and. Goods. Goods. services. services. and services. and services. bought. bought. sold. sold. FIRMS. HOUSEHOLDS. HOUSEHOLDS. FIRMS. Labor, land,.

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Unit-2 Macro Review

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  1. Unit-2 Macro Review GDP, Unemployment, Inflation

  2. Spending Revenue PRODUCT MARKET PRODUCT MARKET Goods and Goods and Goods Goods services services and services and services bought bought sold sold FIRMS HOUSEHOLDS HOUSEHOLDS FIRMS Labor, land, Labor, land, Factors of Factors of capital & entrepreneurship capital & entrepreneurship production production FACTOR MARKET FACTOR Market FACTOR Wages, rent, Wages, rent, Income and profit and profit = Flow of inputs and outputs = Flow of dollars Circular Flow of a closed Economy

  3. BUSINESS CYCLE: rate of GDP Growth

  4. GDP growth by quarter 1st quarter 2012 +2.2% All 2011 +1.7%

  5. Business Investment, Consumer/Business Construction, & Change in Inventories. (new houses count as investment!) Calculating GDP: GDP = C + I + G + (X-M) What does not Count? Used goods International products Financial transactions Non-market transactions Gov’t Transfers (i.e. welfare, social security) What Counts? Only NEW & FINAL goods Domestic Products GDP does not measure: mix of goods, quality of products, quality of life, leisure time

  6. 2 Ways to measure GDP or Labor  Wages Land  Rent Capital  Interest Entrep.  Profit Talent GDP = C + I + G + NX All Spending = All Income: Y = C + I + G + (X-M) GDP = Aggregate Demand (AD) (all spending or all income)

  7. Allows for some Frictional & Structural Where: Cyclical = zero Seasonal “factored out” Natural Rate of Employment (or full employment) 4-Types of Unemployment • Structural • Skills do not match demand for labor • Cyclical • too low a level of GDP (recession) • Frictional • Temporarily between Jobs • Seasonal • Based on time of year

  8. In theory, if actual inflation = expected inflation, people have time to adjust for it. (less harmful) Actual Inflation Expected Inflation versus Nominal Interest Rate = Real Interest Rate + Expected Inflation COLA = cost of living adjustment

  9. What should be in basket? Called Base year GDP Deflator vs CPI • GDP deflator– prices of all goods/services produced domestically • CPI index – prices of a market basket of goods & services • (including internationalgoods) CPI Index: 1990 100 2000 115 Substitution Bias New goods Quality changes

  10. Practice Test #2 • Questions #1 - #20

  11. Multiple Choice Answers

  12. 2-Types of Inflation • Demand-Pull Inflation: • Too many dollars chasing too few goods • Example: printing money • Cost-Push Inflation • ↑cost of factors of production • example: price of oil or labor rises rapidly

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