Macroeconomics Exam Unit 2 Hello, My Name is Macroeconomics

[ UNIT II ] Hello, my name is Macroeconomics. Macroeconomics: the study of a nation’s economy as a whole (UNIT II introduces all of the basic Macro lingo and measures.) AP Macroeconomics has a total of 5 IDEAS: 1. Output 2. Inflation (often substituted in practice by ΔPL) 3. Unemployment 4. Growth 5. Trade OUTPUT: Basic measure of output = real Gross Domestic Product (rGDP) GDP: the total market value of all final goods and services produced in an economy in a given year nominal GDP: the total market value of all final goods and services produced in an economy in a given year ▪ this is the simple measure of P•Q, or [the number of goods times their price] *** rGDP: the total market value of all final goods and services produced in an economy in a given year, adjusted for change in price rGDP per capita: the total market value of all final goods and services produced in an economy in a given year, adjusted for change in price and divided by the (#) population ▪ this is the best measure to evaluate standard of living in an economy, across economies, or in an economy over time ▪ Functionally, it is still just a mathematical average and does not speak to the actual distribution of wealth/income in a society. rGDP is the measure we employ most often in class to refer to real output, but we have many synonyms and identities: rGDP = C + I + G + Nx = rent + wages&salaries + interest + profit = RNI, and sorta = AE = AD We have TWO WAYS to COUNT rGDP: 1. [The Income Approach] The income approach simply adds rent + wages&salaries + interest + profit. ▪ Keynesian economics is most interested in the manipulation of income and demand, and this is their method of choice. ▪ In fact, the preferred Keynesian term for output is Real National Income (RNI) and, their primary emphasis for policy is to manipulate Aggregate Expenditure (AE). 2. [The Expenditure Approach] THIS IS OUR METHOD!!! ▪ Consumption expenditures + planned/autonomous/private Investment expenditures + Government expenditures on production + Net export expenditures [exports (x) – imports (m)] ▪ Use the memorized definition of rGDP above as a filter to determine what is counted as rGDP and how it is counted. a. consumption: includes final purchases of all new goods and services produced in an economy in a given year b. government: excludes transfer payments since they are simply a transfer of money from one person to another without any actual production occurring c. investment: This is part of our most important idea in the class. ▪ We refer to all “ I” as purchasing capital “K” which is a seed for future growth ▪ (victory > truth) ▪ (new houses and increases in inventories count as I) d. net exports: just (x – m) [Things that do not count, but are often in questions include]: non-market production, such as household production and black market production, intermediate goods included in the final price, and pure financial transactions, such as transactions including stocks/bonds, etc. 6 INFLATION: the rate of the increase in the overall average price level Price indexes are used to calculate changes in price level (inflation). Consumer Price Index (CPI): uses a constant quantity of goods, often referred to as a market basket of goods and compares their prices over time ▪ base year CPI value is always 100 [Basic CPI Formula]: [Basic formula for determining % change between two CPI values or other numbers]: GDP deflator is a similar tool used to determine real changes in GDP. Rather than constant quantities (baskets of goods) and changing prices over time, it employs constant (base year prices) and multiplies them times the changes in output. GDP deflator is employed to provide changes in rGDP. [Unemployment]: (Other rates called for could be labor force participation rate, employment rate, etc.) TWO CRITERIA must be met to be considered unemployed: 1. NOT have a job 2. Be looking for a job – (Other technical stuff about over 16, not institutionalized/military, etc. also exists in the definition but not in our practical definition.) 4 TYPES OF UNEMPLOYMENT: 1. Seasonal: not likely the answer ▪ [If you cannot figure out what this is, you should (insert sarcastic joke here).] 2. Frictional: this type of unemployment relates to physical or metaphorical movement ▪ people that physically move from one place to another ▪ recent graduates ▪ marriage/divorce ▪ all big life changes and moves could relate to this assuming no job and looking 3. Structural: the mismatch between jobs and skills within a society ▪ robot took my job 4. Cyclical: unemployment that is related directly to changes in the business cycle ▪ this is the ONLY type of unemployment that is EVER influenced by policy (fiscal and/or monetary)   Discouraged workers: people without jobs that have given up looking for work [Methods of counting UE]: asking people through surveys/phone calls ▪ door-to-door census procedures; people tend to report, “Yeah, I’m looking.”  Output and unemployment are inversely related to each other. As output goes up, more workers are required and vice versa. If an FRQ asks for ΔrGDP or ΔUE in its own letter, the answer must be explained through this relationship: More jobs leads to more output, etc… 7