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Summary/lecture notes Economics 2
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Complete document with all the lecture notes of this course. A good summary for your final exam of Economics 2, complete with theory, images, formulas and explanations
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Economics 2(week 1)
Long-run growth
Growth is about the long run, business cycles are about the medium term.
Business cycles are important: recessions go hand in hand with increasing
unemployment. Small differences in growth rates can have important after a while
(CFR compound interest)
A difference in the growth of 1 percentage over long stretches of time is enormous.
Inflation is a rise in the overall level of prices
Deflation is a fall in the overall level of prices
Both are perceived as undesirable
Households
Income through factor markets
Households own factors of production,capital, etc.
Households spend money on markets for goods and services
The government
Has income through taxations and borrowing
The government spends by buying goods and services and through government
transfers.
Firms
Are financed through financial markets
Buy inputs from factor markets, engage in investment spending
Rest of the world
A country is not closed in our isolated
Goods and services are exported or imported
Countries can borrow or lend
GDP is the total value of all final goods and services produced in an economy in a
year.
Measuring:
1. Adding total value all final goods and services produced
2. Adding all spending on all domestically produced goods and services
3. Adding all total factor income earned by households from firms in the
economy.
GDP tells us the size of the economy, prices change over time so GDP can go up
only due to price changes.
Real GDP is the total value of final goods and services calculated as if prices had
stayed at the level of some given base year.
,Tracking prices
Price index: Cost of market basket in a given year/Cost of market basket in base
year.
(price index in year t) - (price in year t-1)
Inflation rate: ------------------------------------------------------------
(price index in year t-1)
Nominal GDP/Real GDP = GDP deflator x 100
Unemployment
The total number of people who are actively looking for work but aren’t currently
employed.
Labor force = employment + unemployment
Labor force participation rate: (labor force/population aged 16 and older) x100
Unemployment rate = number of unemployed workers/labor force
Three types: Frictional,Structural,Cyclical
Natural: Structural+Frictional
Actual: Natural+Cyclical = Structural + Frictional + Cyclical
Frictional
A worker and a firm need to match.
Job search takes time.
Structural
More people are looking for a job than there are jobs available at the current wage
rate, even when the economy is at the peak of the business.
(week 2)
Structural unemployment
- Labor unions
- Efficiency wages
- Governmental policies and regulation
- Mismatches between employees and employers
Shoe-leather costs: high inflation discourages you to hold money and you need to
put effort in ways to avoid holding money
Unit of account cost: it may become increasingly hard to use the currency as a unit
of account and makes various economic decisions less efficient, harder.
Real interest rate = nominal interest rate - inflation
, Comparing countries
- Nominal GDP
- Real GDP
- Nominal GDP per capita
- Real GDP per capita
A rule of thumb
Doubling time = 70 / % growth rate
Long-run growth
Sustained economic growth only occurs when the amount of output produced by the
average worker increases steadily. (Labor productivity: output per worker)
So what leads to higher productivity?
1. Physical capital (buildings, machines)
2. Human capital (education)
3. Technological progress
Aggregate production function: How productivity depends on the above.
So why do growth rates differ?
Savings and investment spending
- Increase physical capital
Education
- Increase human capital
Research and development
- Boost technological progress
Government plays a role too through infrastructure, education, protection of property
rights, political stability and good governance
At a macro level: as developing countries grow they become more hungry for energy
Incentives for dealing with climate?
At a micro level (households) incentives may not be there
At a macro level (country) neither
Economists favor market based incentives, for example make it expensive to pollute,
tricky because policy can affect behavior in unexpected ways.
(tutorial 1)
Paradox of thrift = the impact of a marginal consumer vs. the impact of a collective
effort, when one individual saves more (and everyone else behaves the same)
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