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Macroeconomics Week 1 summary
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Macroeconomics Week 1 summary with readings
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Week 1:Preparation: Chapter 1: The Science of
Macroeconomics
3 Macroeconomics tools: Real GDP, measuring the total income of everyone in
the economy; the inflation rate, measuring how fast prices are rising; the
unemployment rate, measuring the fraction of the labor force that is out of work.
GDP falling: recessions or depressions.
Falling prices = deflation.
Economists use models to understand the world, but made of symbols and
equations to explain economic variables.
2 types of variables:
- Endogenous: that a model tries to explain.
- Exogenous: That a model takes as given.
Ex: pizza market. Exogeneous: aggregate income + Price of materials.
Endogenous: price and quantity of pizza exchanged.
A model is only as good as its assumptions, and an assumption that is useful for
some purposes may be misleading for others.
Market-clearing model: the price of a good/ service moves quickly to bring
quantity supplied and quantity demanded into balance. -> They are flexible. But
IRL, can be sticky. Not a problem cuz that evolves. But tend to be more true in
the Long run.
Microeconomics: the study of how households and firms make decisions and how
the interact in the marketplace. Central principle: households and firms optimize.
Households max utility; firms max profits.
Economy-wide events arise from the interaction of many households and firms.
Chapter 2: The data of
Macroeconomics.
GDP: often use to tell how well the economy is doing. Computed every three
months by the Bureau of Economic Analysis.
It is the total income of everyone in the economy / The total expenditure on the
economy’s output of goods and services.
GDP is the market value of all final goods and services produced.
So GDP only includes the value of FINAL good, because value of intermediate
good is already included in its price.
The value added of a firm = value of the firm’s output – value of the intermediate
good the firm purchases.
Imputed value: Estimation of the value of a priceless good or service.
No imputation for the underground economy but made for gov services.
Nominal GDP: value of goods and services measured at current prices.
Real GDP: value of g and s measured using a constant set of prices -> better
measures than nominal one society’s ability to provide economic satisfaction for
it’s members ultimately depends on the quantities of g and s produced.
, Nominal GDP
GDP deflator or implicit price deflator for GDP ¿
Real GDP
Nominal GDP measures the current dollar value of the output of the economy.
Real GDP measures output valued at constant prices.
GDP deflator measures the price of output relative to its price in the base year.
Tip: Percentage Change in (P x Y) = Percentage change in P + Percentage
change in Y
Percentage change in (Y ÷ L) = Percentage change in Y – Percentage
change in L
Y (GDP) = C (Consumption) + I (Investment) + G (Government Purchases) + NX
(Net Exports)
Equation = Identity (must hold because of the way the variables are defined)
So National Income Accounts Identity
Consumption= good and services bought by households. 3 cat. : Nondurable,
durable and services.
Investment= goods bought for future use. 3 cat.= Business fixed, residential
fixed and inventory.
Government purchases= buying by federal, state and local gov. Excl. transfer
payments (social security etc) cause just reallocating.
Net export: trade with other countries. Value of G&S sold to others (export) –
value of goods and services that foreigners sell us (imports)
GNP (Gross National Product) = GDP + Factor Payments from abroads – Factor
Payments to Abroad.
GDP -> Domestically; GNP -> Nationals
NNP (Net National Product) = GNP – Depreciation (consumption of fixed capital)
NNP aprox. National income. Divided in 6 categories:
- Compensation of employees (63%); wages and fringes earned by workers.
- Proprietors’ income (8%); income of noncorporate businesses.
- Rental income (3%) expenses are subtracted (depreciation ..)
- Corporate profits (14%): corporations’ income after payments to creditors
and workers.
- Net interests (4%) interest payed by domestic business – interest received
+ interest from foreigners.
- Indirect business taxes (8%): certain taxes on business, such as sales
taxes _ offsetting business subsidies. Place a wedge btw consumers’ price
and price received by firms.
Personal Income = National Income – Indirect Business Taxes – Corporate Profits
– Social Insurance Contributions – Net interest + Dividends + Gov transfer to
individuals + Personal Interest Income
Disposable Personal Income = Personal Income – Personal Tax and Nontax
Payments
Consumer Price Index (CPI) is a measure of the level of prices, computed by the
Bureau of Labor Statistics.
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