Summary
Summary European Economy II: Macro (Y)
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Summary of the most important concepts of macroeconomics.
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WEEK 1 – UNEMPLOYMENT AND INFLATION- LOOKING FOR WORK AND AVAILABLE TO WORK.
UNEMPLOYMENT RATE: N OF UNEMPLOYED WORKERS/ LABOR FORCE x100
PEOPLE NOT INCLUDED IN UNEMPLOYMENT RATE:
- Discouraged workers
- Marginally attached workers
- Underemployment
1) FRICTIONAL UNEMPLOYMENT
Due to job search. It is a product of the constant job creation&destruction
process. it is also the result of new workers entering the labor market.
2) STRUCTURAL UNEMPLOYMENT
- Surplus of labour, less jobs offered
- Wage rates are always above equilibrium level
- It is caused by minimum wages, efficiency wages and labour unions.
NATURAL RATE OF U: FRICTIONAL + STRUCTURAL
- Changes because of changes in labour force, labor market institutions and
government policies (job training, employment subsidies).
CYCLICAL UNEMPLOYMENT IS THE DEVIATION OF THE ACTUAL RATE FROM
THE NATURAL RATE OF UNEMPLOYMENT.
KEYNES:
- CYCLICAL UNEMPLOYMENT IS CAUSED BY THE BUSINESS CYCLE.
SOLUTION: EXPANSIONARY FISCAL POLICIES LAUNCHED BY THE
GOVERNMENT.
- Self-regulating economy
- Fiscal policy uses changes in government spending and taxes to affect overall
spending
- Monetary policy uses changes in the quantity of money in order to alter
interest rates and affect overall spending.
, INFLATION AND DEFLATION
INFLATION is the average rise in prices of goods and services. (determined by money
supply).
-CONSUMER PRICE INDEX: cost of market basket year1/ cost of it in base year x100
- PPI
- GDP DEFLATOR (average price of domestically produced goods)
INFLATION RATE: price index year 2- PI year 1/PI year 1 x100
Causes: SHOE-LEATHER COSTS, MENU COST, UNIT-OF-ACCOUNT COST.
THE PHILIPS CURVe
- It links unemployment and inflation.
- Provides means to achieve low unemployment through expansionary fiscal
policies.
- Shifts due to shocks
- Higher expectations raise current inflation.
THE NOMINAL INTEREST RATE is the interest rate expressed in dollar terms.
THE REAL INTEREST RATE IS THE NOMINAL INTEREST RATE- RATE OF
INFLATION.
Unexpected inflation helps borrowers and hurts lenders.
GDP
1) Add up total value: value of sales- value of intermediate goods purchased
2) Measure gdp as spending on domestically produced final goods and
services.
3) Factor income earned from firms in the economy (wages+interest+profitS)
WEEK 2 ECONOMIC GROWTH
+ OUTPUT PER WORKER + PRODUCTIVITY + REAL GDP PER CAPITA
LONGRUN ECONOMIC GROWTH!
RULE OF 70: how long it takes for real gdp per capita to double:
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