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Summary Macroeconomics - EBE
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This is a summary of Macroeconomics chapters 2 through 12.
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MacroeconomicsChapter 2:
National income and product account: national income account, government bookkeeping.
Measure of Aggregate output in the national income accounts= gross domestic product or GNP.
Intermediate good: used for other products, it is not the final product.
1. GDP= value of the final goods and services produced in the economy during a given
period. (only count production of final goods). Recording and adding up the production
of all final goods. (production side)
2. GPD= the sum of value added in the economy during a given period. Value
added= value production – intermediate goods used in production. (production side)
3. GDP= the sum of incomes in the economy during a given period (income side)
Some revenues go to pay workers= labor income
What goes to the firm= capital income/profit income
Nominal GDP= sum of the quantities of final goods produced times their current price. Increases
over the years, because the production and prices increase over time.
Real GDP= sum of the quantities of final goods times constant prices (common price).
Measure of real GDP in the US uses weights that reflect relative prices and change over time.
Measure= real GDP in chained (2012) dollars.
Real GDP per person: ratio of real GDP to the population of the economy. Focus on rate of growth of
real GDP: GDP growth. Positive GDP growth: expansions, negative: recessions
Employment (N): number of people who have a job.
Unemployment (U): number of people who do not have a job but are looking for one.
Labor force (L)= N + U
Unemployment rate: ratio of the number of people who are unemployed to the number of people in
the labor force: u=U/L
Discouraged worker: when unemployed give up looking (not counted as unemployed). Higher
unemployment rate is typically associated with lower participation rate.
Unemployment has impact on welfare economy, means economy is not using some of its resources.
Inflation: sustained rise in the general level of price – price level|
Inflation rate: rate at which the price level increases
GDP deflator: Pt = Nominal GDP/Real GDP = $Y/Y =Index number (produced)
To measure the average price of consumption, cost of living, look at another index, Consumer price index
(CPI). Base period the average =100 (consumed)
Pure inflation= higher inflation rate would mean a faster but proportional increase in all prices.
Okun’s law: output high, unemployment low. So to decrease unemployment we need a high rate of
growth.
To keep the unemployment rate constant, we need a rate of growth of 2%. Because labor force keeps
growing and the output per worker increases.
Philips curve: short-term relationship between inflation and unemployment. When unemployment is very
low, there will be more pressure on inflation
Core inflation rate: inflation rate by leaving out explosive prices, like food, energy, etc.
Successful economy, is an economy that combines high output growth, low unemployment and low
inflation.
Chapter 3
Consumption (C): goods and services purchased by consumers
Investment (I): (fixed investment) sum of nonresidential investment, purchase by people of new
houses or apartments.
Government spending (G): purchases of goods and services by the federal, state and local
, governments. Does not include government transfers, like medicare or social security payments.
Exports (X): purchases of US goods and services by foreigners.
Imports (IM): purchases of foreign goods and services by US consumers, firms, government.
Net exports: X-IM = Trade balance → trade surplus/trade deficit
Inventory investment: difference between goods produced and goods sold in a given year.
Total demand for goods = Z
Z ≡ C + I + G + X – IM → equity, defines Z
3 assumptions:
- All firms same good and can be used by everyone
- Firms are willing to supply any amount
- Economy is closed, so no trade with the rest of the world. E-IM = 0
So Z ≡ C + I + G
Consumption depends on disposable income (YD): income that remains once consumers have received
transfers from the government and paid their taxes. C=C(YD) (+)
C(Y) is consumption function. + means when Y increases, so does C = behavioral equation
C= c0 + c1YD
Parameter c1= propensity to consume: gives the effect an additional dollar of disposable income has on
consumption
c0= what people would consume if their disposable income is zero. Reflect changes in consumption.
YD ≡ Y-T → Y= income T= taxes
Endogenous variables: variables that depend on other variables. Exogenous variables: variables that
do not depend on other variables, they are given. For example investment I = I--
G describes fiscal policy: choice of taxes and spending by the government. (exogenous)
Z= c0 + c1( Y-T) + I-- + G
Equilibrium in the goods market: Y=Z (Y=production) → equilibrium condition
Can rewrite it: Y= (1/(1-c1)[c0 +I + G – c1T]
First part is the multiplier
Second part does not depend on output= autonomous spending
Balanced budget: T=G
total increase in production after n+1 rounds equals 1 + c1 + c12 + ….. + c1n =geometric series
The higher the propensity to consumer, the higher the multiplier.
The general theory of employment, interest and money:
Private saving (S): disposable income – C → S ≡ Yd – c → S ≡ Y – T – C
Public saving: (T-G) → I= S + (T-G) → investment= private saving + public saving
Equilibrium for the goods market is called the IS relation: Investment equals saving
So 2 ways of stating the condition for equilibrium in the goods market:
production = demand investment = saving
S= -c0 + (1- c1)(Y –T) → (1-c1) = Propensity to save: how much of an additional unit of income
people save.
Chapter 4
2 types of money: -Currency: coins and bills and –checkable deposits: bank account. For now only
work with currency.
Bonds: pay positive interest rate, i, but they cannot be used for transactions.
You should hold both money and bonds, because of the interest income. And you need to hold
money to buy things, so you don’t have to sell your bonds.
If the interest rate is high, you are more willing to put your money into bonds.
Money market funds pool together the funds of many people. They pay interest rate close to but
slightly below the interest rate on the bonds they hold.
Demand for money Md = sum of all individual demands for money.
Relationship between demand for money, nominal income and interest rate: Md= $L(I) (-) increase in
the interest rate decreases demand for money.
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