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Summary Macro Economics The Core
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Summary of Chapters 13, 14, 15, 17 & 18 from the Core Economics.
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Macro EconomicsCHAPTER 13
§13.1 Growth and fluctuations
Recession
o NBER definition -> Output is declining. A recession is over once the economy begins
to grow again.
o Alternative definition: The level of output is below its normal level, even if the
economy is growing. A recession is not over until output has grown enough to get
back
Unemployment is higher in recessions, and lower in an economic boom
§13.2 Output growth and changes in unemployment
Lower output growth is clearly associated with a larger increase in unemployment.
Okun’s Law = GDP growth is negatively correlated with the unemployment rate
o Fall in output -> Rise in the unemployment rate -> Fall in wellbeing
§13.3 Measuring the aggregate economy
Aggregate output (GDP) -> The output of all producers in a country
National accounts -> Statistics published by national statistical offices that use information
about individual behaviour to construct a quantitative picture of the economy as a whole.
3 ways to estimate GDP
o Spending: The total spent by households, firms, the government, and residents of
other countries on the home economy’s products.
o Production: The total produced by the industries that operate in the home economy.
Production is measured by the value added by each industry: this means that the
cost of goods and services used as inputs to production is subtracted from the value
of output. These inputs will be measured in the value added of other industries,
which prevents double-counting when measuring production in the economy as a
whole
o Income: The sum of all the incomes received, comprising wages, profits, the incomes
of the self-employed, and taxes received by the government.
o GDP = C + I + G + Ex – Im
o
Ways to measure the GDP
o The value of the sale to the final consumer
o The total value added in the economy, equal to the value of final production and
equal to total final expenditure
o Wages + Profits = Value final production
, The value added of government production is equal to the amount it costs the government
to produce
§13.4 Measuring the aggregate economy: The components of GDP
Consumption -> Goods and services purchased by households
o Durable goods -> Goods that last for more than 3 years
o Non-durable goods -> Goods that last for shorter than 3 years
o Goods -> Tangible, Services -> Intangible
Investment -> The spending by firms on new equipment and new commercial buildings; and
spending on residential structures
o Change in inventories or stocks
Government spending on goods and services -> Represents the consumption and investment
purchases by the government
o Purchases goods and services, investment spending is on the building of public
goods/services
o Government transfers (benefits and pensions) -> Not included in G, households
receive them as income
Export -> Domestically produced goods and services that are purchased by households, firms,
and governments in other countries.
Imports -> Goods and services purchased by households, firms, and governments in the
home economy that are produced in other countries.
Net exports (X – M)
o Trade balance -> This is the difference between the values of exports and imports
o Deficit -> If the value of exports minus the value of imports is negative
o Surplus -> If the value of exports minus the value of imports is positive
GDP -> What is produced in the country + The purchases by those in other countries
(exports) - The purchases by home residents of goods and services produced abroad
(imports).
Shortcomings of GDP as a measure
o It is a conventional measure of the size of an economy -> It is not taking the
environmental degradation in account
o Distinguish aggregate GDP from GDP per capita -> When discussing growth the focus
has been on GDP and the contributions of the different components of demand to its
growth. In other contexts, the relevant concept is a per capita measure.
o GDP per capita is a flawed measure of living standards
§13.5 How households cope with fluctuations
Economies fluctuate between good and bad times
Shock -> Used to refer to an unexpected event, extreme weather
o People anticipate that unpredictable events may occur, act on this beliefs
Strategies to deal with shocks specific to their household
o Self-insurance -> Households that encounter an unusually high income in some
period will save, they can spend their savings (Other households are not involved)
o Co-insurance -> Households that have been fortunate during a particular period can
help a household hit by bad luck.
o Altruism -> The willingness to bear a cost in order to benefit somebody else.
, Economy-wide shocks
o Co-insurance necessary -> As community survival requires that less badly hit
households help the worst-hit households
§13.6 Why is consumption smooth?
Desire of households to keep the level of their consumption of goods and services constant
Model of decision making highlights the desire of households for a smooth path of
consumption
What limits a households consumption smoothing -> Not being able to make/implement
long-term consumption plans
o Credit constraints/credit market exclusion -> This restricts a family’s ability to borrow
in order to sustain consumption when income has fallen. (Self-insurance)
o Weakness of will -> A characteristic of human behaviour that leads people to be
unable to carry out the plans that they know would make them better off. (Self-
insurance)
o Limited co-insurance -> So that those with a fall in income cannot expect much
support in sustaining their incomes from others more fortunate than them.
Credit constraints
o The amount a family can borrow is limited, people who most need credit to smooth
their consumption are often unable to do so
o A credit-constrained household that cannot borrow has to wait until the income
arrives before adjusting its standard of living.
o Household that can smooth consumption by borrowing is better off than the credit-
constrained household
Weakness of will
o The weak-willed household does not react to the news of the falling income, and
keeps consumption high until income falls.
Limited Co-insurance
o Most households lack a network of family and friends who can help out in substantial
ways over a long period when a negative income shock occurs.
A credit constraints, weakness of will, and limited co-insurance mean that, for many
households, a change in income results in an equal change in consumption.
§13.7 Why is investment volatile?
No motivation for firms to smooth investment spending
o Investment expenditures can be postponed
Innovation -> Lower cost, higher-quality output -> expand market share ; fail to follow ->
forced out of business
o Investment by 1 firm pushes other firms to invest (make sure they won’t lose market
share)
o Pull other firms to invest by helping to increase their market and potential profits
Credit constraints are another reason for the clustering of investment projects and the
volatility of aggregate investment.
o High profits -> Easy to get external finance
Capacity utilization rate -> A measure of the extent to which a firm, industry, or entire
economy is producing as much as the stock of its capital goods and current knowledge would
allow.
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