Unit 2.

Macro Measures  Add up all the spending on final goods

and services produced in a given year
3 Major Economic Goals
 GDP= C + I + G + (X-M)
1. Promote economic growth

2. Limit unemployment 2. Income approach

 Add up all income that resulted from

selling all final goods and services
GDP
produced in a year
 dollar value of all final goods and
 GDP= Rent + Wages + Interets + FP
services

 anything produced by the country

Kinds of GDP

1. Nominal
GDP per capita
 GDP measured in current prices
 divided by population
 Not account for inflation from year to
 identifies how much each person year
make
2. Real
%Change in GDP = ( x 100
 best measure of economic growth

 GDP expressed in constant or

Not included in GDP
1. Intermediate Goods
 Good inside the product don’t repeat
Price of chip inside the computer
unchanging dollars
 Adjusts for inflation
 Best way to show us through business
cycle

Inflation
1. Non-production transactions
 Difference between peak and line
 Financial transactions (nothing is
produced)

Stocks, bonds Unemployment

Used goods  Difference between line and trough in

the curve

FULL EMPLOYMENT OUTPUT (Y)

2. Non-market transactions-
 The Real GDP created when there is no
Black market cyclical unemployment.
Full employment
Drugs
 Difference between GDP line and GDP
curve
Ways to Calculate GDP
 Recession = contraction
1. Expenditure Approach
  Recovery = expansion  Caused recession

2. Limit unemployment  Demand fails, demand for labor fails

and workers are fired
Unemployment
 Goal is frictional and structural
 Actively looking for a job but
unemployment. These two will always
unemployed
be between jobs or replaced by
Unemployment rate technology

 Unemployed X 100 National Rate of Unemployment

labor force = Frictional + structural unemployment

Labor Force  Exists when economy is healthy and

growing
 No. of people willing and able to work
Real GDP
Labor Force Participation Rate
 if there is no cyclical unemployment
 % of population in the labor force

Criticisms of Unemployment rate

Three Types of Unemployment
UR can misdiagnose actual UR because of:
1. Frictional Employment
1. Discouraged workers
 temporary unemployment or being
between jobs  some people no longer looking for a
job and already given up
 individuals are qualified workers with
transferable skills 2. Underemployed

 wants more hours without equivalent

salary
 Seasonal

-Type of frictional
Inflation
-due to time of year and nature of job
 Reduce purchasing power

 rising general level of prices

2. Structural Employment
 each dollar of income will buy fewer
 Changes in labor force make some goods than before
skills obsolete

 Jobs that will never come back 3. Keep Prices stable

 Workers must learn new skills to get a Unexpected inflation

job
 helps borrowers

 hurts lenders and people with fixed

 Technological Unemployment income

-automation and machinery replace Nominal wage

human
 measured by dollars rather than
purchasing power

3. Cyclical Unemployment Real wage

  adjust for inflation

Nominal interest rate M- Money supply

 percentage increase in money not V- Velocity

adjusting for inflation
P- Price level
 real interest rate + inflation rate
Y- Quantity of output

Real interest rate

2. Demand-Pull inflation
 increase in purchasing power
 Demand pulls-up prices
 real interest rate = inflation rate
 Too many dollars chasing few goods
 Real = nominal – expected inflation
 Overheated economy with excessive
Consumer price index ( CPI) spending but same amount of goods

 most commonly used measurement for

inflation for customers
3. Cost-Push Inflation
 measures only goods bought by
customers  Higher production costs - increases
prices

x 100 Negative Supply Shock

 increases costs of production

 forces producers to increase prices

GDP Deflator

 measures all goods produced

domestically

Imported Goods

 Not part of GDP

 Don't show up in GDP deflator

Formula of GDP Deflator

GDP Deflator = x 100

3 Causes of Inflation

1. Government prints TOO MUCH money

(Quantity theory)

 results to hyperinflation

•Quantity theory of money identity

MxV=PxY