CH 2a
● GDP = ∑P ∗ Q
○ All final goods produced in an economy
● Value added
○ GDP(va) = GDP(final) = GDP(income)
○ GDP(va) = gross revenue - intermediate costs
● Income side
○ GDP(Y) = ∑incomes of all factors of production = income to labor + income k +
dividends or profits
○ GDP(Y) = (W ∗ L) + (r ∗ k) + profits
■ Where (W ∗ L=labor income) and (r ∗ k=k’s income)
CH 2b
● Level of a Variable = a # which depends on the quantity of that #
○ e.g. the level of income at time t = the level of GDP at time t
● Pt = level of the Price Index at t
● Growth Rates
○ % Δ in the level of a variable between 2 periods of time
9/1/2022
● Potential GDP (Yn) = Level of GDP produced when all factors of production are at full
employment, that is u = the natural rate of unemployment. Also known as Natural
Output, Full Employment Output
● Nominal GDP = Sum of P ∗ Q (current prices and quantities)
● Real GDP = Sum of P0 ∗ Q (base year prices)
● Labor force (L): sum of employment (N) and unemployment (U)
○ L=N+U
○ N = number of people who are employed
○ U = number of people who don’t have a job and are looking for one
𝑈
● Unemployment rate (u): ut =
𝐿
● Natural rate of unemployment (un): the rate of unemployment at full employment for
natural output. Composed of frictional and structural unemployment. un > 0
● Cyclical unemployment: Unemployment that varies within the business cycle. Increases
during recessions and deacreases during expansions.
● Price Index (P): weighted average price of a basket of goods and services
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑡
○ GDP deflator (P): Pt =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑡
𝑃 𝑡
∗𝑄 0
○ CPI (P): Pt = Σ𝑖, 𝑡 for all goods i
𝑃 0
∗𝑄 0
9/6/2022
● Okun’s Law
, ○ Negative relationship between output growth and unemployment
● Philips Curve
○ Negative relationship between inflation and unemployment
● Short run
○ Year to year fluctuations, in output are mostly driven by changes in demand.
Prices fixed, unemployment rate varies
● Medium run
○ Decade
○ Economy tends to return to the natural rate of output (potential GDP) deternined
by supply factors, such as K stock, technology level, and size of labor force. P
flexible, un
● Long run
○ Several decades or longer
○ Economy depends on technologic progress and innovation, level of savings,
quality of education system and government, and other institutions
● The Goods Market
○ Focus on interactions among production, income, and demand
○ Z = C + I + G + NX
○ 𝑍 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
○ Z = total demand for all goods
● Consumption function
○ Describes the relationship between C and disposable income (YD). A behavioral
equation
○ C = C0 + c1(YD)
○ YD = Y - Tbar + (Tg)bar
○ c1 is the propensity to consume, 0<c1<1
○ C0 is what people would consume if their disposable income equals zero
○ Changes in C0 reflect changes in consumption for a given level of disposable
income
● Endogenous variables
○ Variables that depend on other variables in the model. That is, they are
determined within the model
● Exogenous variables
○ Variables not explained within the model but are instead taken as given or fixed
at a point in time. Denote them by a bar over them
● Equilibrium in goods markets
○ Y=Z
○ Y = (1/(1-c1))(C0 + Ibar + Gbar + c1Tbar + c1(Tg)bar)
● Autonomous spending
○ Spending independent of Y or i
○ Abar = C0 + Ibar + Gbar + c1Tbar + c1(Tg)bar
■ Abar > 0
● The Keynesian Multiplier
○ The simple multiplier
, ■ β = 1/(1-c1)
■ β>1
■ β is a positive function of c1
■ β represents the waves of consumption that amplify a change in A
9/8/2022
● The Keynesian Cross
○ ZZ = Z = Abar +c1(Y)
○ Y = Z = (1/(1-c1))(C0 + Ibar + Gbar + c1Tbar + c1(Tg)bar)
○ Y = β*Abar
● Changes in Abar can be due to Fiscal policy or sentiments
● Fiscal Policy: used by the government to change the level of output (Y). Implemented
by changing G, T, or Tg
○ Expansionary FP: Increases Y at every level of P and i rates (up G, up Tg, or
down T)
○ Contractionary FP: Decreases Y at every level of P and i rates (down G, down Tg,
or up T)
○ Only affects Goods Markets
○ Exogenous variables taken as given
● Sentiments
○ Changes in C0 or Ibar that are due to optimism or pessimism about the future even
if current disposable income has not changed
○ Increase in C0 or Ibar → increase in Abar
○ Decrease in C0 or Ibar → decrease in Abar
● Increase in weath can cause an increase in C0
● Private Savings (S)
○ S = YD - C
○ S = (Y - T + Tg) - C
● Public Savings (Sg)
○ Sg = T - (G + Tg)
○ Sg > 0 → Budget Surplus
○ Sg < 0 → Budget Deficit
● National or Domestic Savings: S + Sg
● Investment = Savings
CH2 HW notes
● Q1 - During a givenyear, the following activities occur in twostages:
i. A silver mining company pays its workers $200,000 to mine 75 pounds of silver.
The silver is then sold to a jewelry manufacturer for $300,000.
ii. The jewelry manufacturer pays its workers $250,000 to make silvernecklaces,
which the manufacturer sells directly to customers for $1,000,000.
● GDP = ∑P ∗ Q
○ All final goods produced in an economy
● Value added
○ GDP(va) = GDP(final) = GDP(income)
○ GDP(va) = gross revenue - intermediate costs
● Income side
○ GDP(Y) = ∑incomes of all factors of production = income to labor + income k +
dividends or profits
○ GDP(Y) = (W ∗ L) + (r ∗ k) + profits
■ Where (W ∗ L=labor income) and (r ∗ k=k’s income)
CH 2b
● Level of a Variable = a # which depends on the quantity of that #
○ e.g. the level of income at time t = the level of GDP at time t
● Pt = level of the Price Index at t
● Growth Rates
○ % Δ in the level of a variable between 2 periods of time
9/1/2022
● Potential GDP (Yn) = Level of GDP produced when all factors of production are at full
employment, that is u = the natural rate of unemployment. Also known as Natural
Output, Full Employment Output
● Nominal GDP = Sum of P ∗ Q (current prices and quantities)
● Real GDP = Sum of P0 ∗ Q (base year prices)
● Labor force (L): sum of employment (N) and unemployment (U)
○ L=N+U
○ N = number of people who are employed
○ U = number of people who don’t have a job and are looking for one
𝑈
● Unemployment rate (u): ut =
𝐿
● Natural rate of unemployment (un): the rate of unemployment at full employment for
natural output. Composed of frictional and structural unemployment. un > 0
● Cyclical unemployment: Unemployment that varies within the business cycle. Increases
during recessions and deacreases during expansions.
● Price Index (P): weighted average price of a basket of goods and services
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑡
○ GDP deflator (P): Pt =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑡
𝑃 𝑡
∗𝑄 0
○ CPI (P): Pt = Σ𝑖, 𝑡 for all goods i
𝑃 0
∗𝑄 0
9/6/2022
● Okun’s Law
, ○ Negative relationship between output growth and unemployment
● Philips Curve
○ Negative relationship between inflation and unemployment
● Short run
○ Year to year fluctuations, in output are mostly driven by changes in demand.
Prices fixed, unemployment rate varies
● Medium run
○ Decade
○ Economy tends to return to the natural rate of output (potential GDP) deternined
by supply factors, such as K stock, technology level, and size of labor force. P
flexible, un
● Long run
○ Several decades or longer
○ Economy depends on technologic progress and innovation, level of savings,
quality of education system and government, and other institutions
● The Goods Market
○ Focus on interactions among production, income, and demand
○ Z = C + I + G + NX
○ 𝑍 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
○ Z = total demand for all goods
● Consumption function
○ Describes the relationship between C and disposable income (YD). A behavioral
equation
○ C = C0 + c1(YD)
○ YD = Y - Tbar + (Tg)bar
○ c1 is the propensity to consume, 0<c1<1
○ C0 is what people would consume if their disposable income equals zero
○ Changes in C0 reflect changes in consumption for a given level of disposable
income
● Endogenous variables
○ Variables that depend on other variables in the model. That is, they are
determined within the model
● Exogenous variables
○ Variables not explained within the model but are instead taken as given or fixed
at a point in time. Denote them by a bar over them
● Equilibrium in goods markets
○ Y=Z
○ Y = (1/(1-c1))(C0 + Ibar + Gbar + c1Tbar + c1(Tg)bar)
● Autonomous spending
○ Spending independent of Y or i
○ Abar = C0 + Ibar + Gbar + c1Tbar + c1(Tg)bar
■ Abar > 0
● The Keynesian Multiplier
○ The simple multiplier
, ■ β = 1/(1-c1)
■ β>1
■ β is a positive function of c1
■ β represents the waves of consumption that amplify a change in A
9/8/2022
● The Keynesian Cross
○ ZZ = Z = Abar +c1(Y)
○ Y = Z = (1/(1-c1))(C0 + Ibar + Gbar + c1Tbar + c1(Tg)bar)
○ Y = β*Abar
● Changes in Abar can be due to Fiscal policy or sentiments
● Fiscal Policy: used by the government to change the level of output (Y). Implemented
by changing G, T, or Tg
○ Expansionary FP: Increases Y at every level of P and i rates (up G, up Tg, or
down T)
○ Contractionary FP: Decreases Y at every level of P and i rates (down G, down Tg,
or up T)
○ Only affects Goods Markets
○ Exogenous variables taken as given
● Sentiments
○ Changes in C0 or Ibar that are due to optimism or pessimism about the future even
if current disposable income has not changed
○ Increase in C0 or Ibar → increase in Abar
○ Decrease in C0 or Ibar → decrease in Abar
● Increase in weath can cause an increase in C0
● Private Savings (S)
○ S = YD - C
○ S = (Y - T + Tg) - C
● Public Savings (Sg)
○ Sg = T - (G + Tg)
○ Sg > 0 → Budget Surplus
○ Sg < 0 → Budget Deficit
● National or Domestic Savings: S + Sg
● Investment = Savings
CH2 HW notes
● Q1 - During a givenyear, the following activities occur in twostages:
i. A silver mining company pays its workers $200,000 to mine 75 pounds of silver.
The silver is then sold to a jewelry manufacturer for $300,000.
ii. The jewelry manufacturer pays its workers $250,000 to make silvernecklaces,
which the manufacturer sells directly to customers for $1,000,000.
