Summary
Summary Midterm Macroeconomics
- Course
- Institution
- Book
Summary of all the lectures for the midterm of Macroeconomics
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Summery macroeconomics - Maastricht University
-
Aim for the Stars in 2023-2024 with [Macroeconomics,Blanchard,8e] Solutions Manual
-
Macroeconomics Summary (Elective) BA3 RSM EUR
Seller
Followisavanderheijden
Reviews received
Content preview
Macroeconomics MidtermCHAPTER 1: A Tour of The World
The world economy has grown more rapidly than ever before, not only in advanced economies,
but also in emerging and developing countries.
1.1 Europe and the Euro
In 1957, six European countries decided to form a common market – an economic zone where
people and goods could move freely. Since then, 21 more countries have joined bringing the total
to 27. This group is now known as the European Union, or EU-27 for short.
When macroeconomists study an economy, they first look at three variables:
Output – the level of production of the economy as a whole – and its rate of growth.
The unemployment rate – the proportion of workers in the economy who are not
employed and are looking for a job.
The inflation rate – the rate at which the average price of the goods in the economy is
increasing over time.
,CHAPTER 2: A Tour of The Book
2.1 Aggregate Output
Aggregate is the word macroeconomists use for total.
System of National Accounts (SNA). The national income accounts first define concepts, and then
construct measures corresponding to these concepts.
Because you will occasionally need to know the definition of variable and how variables relate to
each other, the Focus ‘The circular flow of income’ gives you the basic accounting framework
used in European countries today.
GDP: Production and Income
The measure of aggregate output in the system of national accounts is called the growth
domestic product, or GDP, for short.
Aggregate output: the sum of the values of all goods produced in the economy.
Intermediate good: a good used in the production of another good. Some goods can be both
final goods and intermediate goods.
The definition of GDP:
1. GDP is the value of the final goods and series produced in the economy during a given
period. We want to count only the production of the final goods, not intermediate goods.
2. GDP is the sum of value added in the economy during a given period. The value added by
a firm is defined as the value of it production minus the value of the intermediate goods
used in production.
3. GDP is the sum of incomes in the economy during a given period. Some of the revenues
go to pay workers – this component is called labour income. The rest goes to the firm –
that component is called capital income or profit income.
To summarize: you can think about aggregate output – GDP – in three different but equivalent
ways.. GDP is the measure of aggregate output, which we can look at form the production side
aggregate production), or the income side (aggregate income). Aggregate production and
aggregated income are always equal.
From the production side: GDP equals the value of the final goods and serviced produced
in the economy during a given period.
Also from the production side: GDP is the sum of value added in the economy during a
given period.
From the income side: GDP is the sum of incomes in the economy during a given period.
Normal and real GDP
Nominal GDP is the sum of the quantities of final goods produced times their current price. This
definition makes clear that nominal GDP increases over time for two reasons:
The production of most goods increases over time.
The prices of most goods also increase over time.
If our goal is to measure production and its change over time, we need to eliminate the effect of
increasing prices on our measure of GDP. That’s why real GDP is constructed as the sum of the
quantities of final goods times constant (rather than current) prices.
If the economy produced only one final good, say a particular car model, constructing real GDP
would be easy: we would use the price of the car in a given year, and then use it to multiply the
quantity of cars produced in each year.
The problem in constructing real GDP in practice is that there is obviously more than one final
good. Real GDP must be defined as a weighted average of the output of all final goods, and this
brings us to what the weights should be.
,The relative prices of the goods would appear to be the natural weights. FI one good costs twice
as much per unit as another, then that good should count for twice as much as the other in the
construction of real output.
Nominal GDP is also called GDP at current prices.
Real GDP is also called GDP in terms of goods, GDP at constant prices, GDP adjusted for inflation.
GDP will refer to real GDP and Yt will denote real GDP in year t.
Nominal GDP, and variables measured in current prices, will be denoted by a euro sign in front
of them – for example €Yt for nominal GDP in year t.
GDP: Level versus Growth Rate
A country with twice the GDP of another country is economically twice as big as the other
country. Equally important is the level of real GDP per capita, the ratio of real GDP to the
population of the country. IT gives us the average standard of living of the country.
In assessing the performance of the economy from year to year, economist focus, however, on
the rate of growth of real GDP, on GDP growth. Periods of positive GDP growth are called
expansions. Period of negative GDP growth are called recessions.
GDP growth = (Yt- - Yt-1)/Yt-1
2.2 Other Major Macroeconomics Variables
The Unemployment Rate
Because it is a measure of aggregate activity, GDP is obviously the most important
macroeconomic variable. But two other variables, unemployment and inflation, tell us about the
important aspects of how an economy is performing.
Employment is the number of people who have a job; unemployment is the number of people
who do not have a job but are looking for one. The labour force is the sum of employment and
unemployment:
L= N + U
(Labour force = employment / unemployment)
The unemployment rate is the ratio of the number of people who are unemployed to the
number of people in the labour force.
Today, most rich countries rely on large surveys of households to compute the unemployment
rate. In Europe, this survey is called the Labour Force Survey (LFS). It relies on interview to a
representative sample of individuals. Each individual is classed as employed if she or he has
worked for at least one hour during the week preceding that t the interview in whatever activity.
Note that only those looking for a job are counted as unemployed; those who do not have a job
and are not looking for one are counted as not in the labour force. When unemployment is high,
some of the unemployed give up looking for a job and therefore are no longer counted as
unemployed. These people are known as discouraged works. Equivalently, a higher
unemployment rate is typically associated with a lower participation rate, defined as the ratio of
the labour force to the total population of working age.
Why Do Economists Care About unemployment
Economists care about unemployment for two reasons. They care about unemployment because
of its direct effect on the welfare of the unemployed. Economists also care about the
unemployment rate because it provides a signal that the economy may not be using some of its
resources efficiently.
, The Inflation Rate
Inflation is a sustained rise in the general level of prices – the price level. The inflation rate is
the rate at which the price level increases. Symmetrically, deflation is a sustained decline in the
price level. It corresponds to a negative inflation rate.
Macroeconomists typically look at two measures of price level, at two price indexes: the GDP
deflator and the consumer price index.
The GDP Deflator
We saw earlier how increases in nominal GDP can come either from an increase in real GDP, or
from an increase in prices. If we see nominal GDP increasing faster than real GPD, the difference
must come from an increase in prices.
The GDP deflator in year t, Pt is defined as the ratio of nominal GDP to real GDP in year t:
Pt= Nominal GDPt / Real GDPt = €Yt / Yt.
Note that, in the year in which, by construction, real GDP is equal to nominal GDP, this definition
implies that the price level is equal to 1. The GDP deflator is what is called an index number. Its
level is chosen arbitrarily and has no economic interpretation. But its rate of change (P t – Pt-1)/Pt-
1 (which we shall denote by πt in the rest of the book), has a clear economic interpretation: it
gives the rate at which the general level of prices increases over time – the rate of inflation.
One advantage of defining the price level as the GDP deflator is that it implies a simple relation
between nominal GDP, real GDP and the GDP deflator. To see this, reorganize the pervious
equation to get:
€Yt = PtYt
Nominal GDP is equal to the GDP deflator times real GDP. Or, putting it in terms of rates of
change: the rate of growth of nominal GDP is equal to the rate of inflation plus the rate of growth
of the real GDP.
The Consumer Price Index
The GDP deflator gives the average price of output – the final goods produced in the economy.
The set of goods produced in the economy is not the same as the set of goods purchased b
consumers, for two reasons:
Some of the goods in GDP are sold not to consumers but to firms, to the government or to
foreigners.
Some of the goods bought by consumers are not produced domestically but are imported
from abroad.
To measure the average price of consumption, or equivalently, the cost of living,
macroeconomist look at another index, the consumer price index, or CPI. In Europe, the price
index which is most frequently used is the harmonised index of consumer prices, or HICP,
measured by Eurostat, the Statistical office of the European Communities. The HICP gives
comparable measures of inflation in different subsets of European countries. They provide the
official measure of consumer price inflation in the euro area for the purposes of monetary policy.
They also allow the assessing of inflation convergence as required under the Maastricht criteria.
The HICP and the GDP deflator move together most of the time. In most years, the two
inflation rates differ by less then 0.5%.
There are clear exceptions of the first conclusions.
In what follows, we shall typically assume that the two indexes move together, so we do not
need to distinguish between them. We shall simply talk about the price level and denote it by P t,
without indicating whether we have the harmonised index of consumer prices or the GDP
deflator in mind.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller isavanderheijden. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.28. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
48298 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now