Macro Final Preparation
Chapter 8: Short Run
Key Variables:
- Y: output, income, growth rate
- U: unemployment rate, productivity
- P: inflation rate (prices)
- I: interest rate
- E: exchange rate (international economy)
Bottom Up Model: microeconomic model → analyze choices of each agent
Top Down Model: macroeconomic model → behavior of entire group
- “Big picture”
- P & Q from micro become general price level (P) & national income/product (Y)
- Major issues: business cycles (fluctuation of Y in short term), growth of Y (trend in Y in
long term)
National Income (GDP): final market value of all goods/services produced in the economy
during a defined period of time (fiscal year)
- Not for resale, must be produced, supply and demand determined
Flow of income = Flow of expenditures
Equilibrium level of GDP = Flow of expenditures
Real vs. Nominal Values:
- Nominal: actual, current, money, change in price and/or change in quantity
- Real: constant, only change in quantity, price is constant
- Real = Nominal/Price
- Y is always real unless stated otherwise
Output Prices:
- Potential National Income = Y* = max real output
- Output Gap: Y - Y*
- Recessionary Gap: Y < Y*
- Inflationary Gap: Y > Y*
Unemployment:
- Y and U related
- U falling → short run effect
- Productivity rising → long run effect
- Labor Force: employment + unemployment
- Number of workers 15+ able and willing to work
, - Unemployment Rate: unemployment/labor force
- Employment Rate: employment/working age population
Types of Unemployment:
- Frictional: turnover U (changing jobs)
- Structural: mismatching U (economy wants a certain degree you don’t have)
- Cyclical: recessionary gap U
- Full: level of U to produce Y* (only frictional and structural)
Productivity:
- Real output per unit of output
- Labor Productivity: real output per unit of labor output
- Main cause of economic growth → caused by increase in human and physical capital
The Measurement of National Income:
- Double Counting: adding the value added to the final value of good/service
- Intermediate Good: output that is used as an input in another firm
- Final Good: output NOT used again as input
- Value Added: revenue - cost of intermediate goods
- Payments to factors of production
- Factor payments
- GDP:
- GDP (E): expenditure needed to produce the final output
- Consumption (C): “using up of production” = expenditure by final user (house)
- Investment (I): expenditure of firms (plant, equipment, inventory, residential
construction)
- Expenditure for goods not in C
- Expenditure on goods to produce other goods
- Expenditure for future consumption
- Government (G): expenditure of governments
- Net Exports (NetX): X - M (exports - imports)
- Inventory: production that’s not sold yet
- Residential Construction: expenditure over a long period of time
Gross: Net + Depreciation
- Depreciation: wearing out of K (capital)
- Capital Cost Allowance: income tax approximation for depreciation
Government Purchases:
- “G” includes Government Investment → valued at cost
- Reason: difficulty in valuing “costs”
- “G” excludes Transfer Payments
- Transfer Payments: expenditure not in return of service (redistribution of funds)
- Not necessarily a purchase
, Total Expenditures: Y = C + I + G + NetX (accounting definition)
GDP from Income Side:
- Income claims by factors and non-factors of production
- Factor payments + non-factor payments
Factor Payments: $ going to inputs (WRIP)
- Wages & salaries
- Economic rent
- Interest
- Profits
Non-Factor Payments: (IBT - Sub) + Depreciation
- Indirect Business Taxes Net of Subsidies
Net Domestic Product: WRIP + (IBT - Sub)
Gross Domestic Product: NDP + Depreciation
GDP vs. GNP
- GDP: income produced in Canada → domestic economic activity
- GNP: income received in Canada → economic well-being of Canada
- GDP - factor income produced in Canada received by foreigners + factor income
received by Canadians abroad
- Personal Income: GDP - Depreciation/RE + Transfer Payments
- Disposable Personal Income: personal income - personal income tax (PIT)
Implicit GDP Deflator: nominal GDP/real GDP
Omissions from GDP:
- Illegal activities → difficult to ascertain (drugs)
- Underground economy → underreported activities (gray markets)
- Non-Market activities → not traded in market (housework)
- Economic “bads” → not traded in markets → negative externalities (pollution, stress)
Output & Well-Being:
- Per Capita GDP: GDP/Population → measurement of standard of living
- Productivity: GDP/Employment → rate of technological change
Chapter 8: Short Run
Key Variables:
- Y: output, income, growth rate
- U: unemployment rate, productivity
- P: inflation rate (prices)
- I: interest rate
- E: exchange rate (international economy)
Bottom Up Model: microeconomic model → analyze choices of each agent
Top Down Model: macroeconomic model → behavior of entire group
- “Big picture”
- P & Q from micro become general price level (P) & national income/product (Y)
- Major issues: business cycles (fluctuation of Y in short term), growth of Y (trend in Y in
long term)
National Income (GDP): final market value of all goods/services produced in the economy
during a defined period of time (fiscal year)
- Not for resale, must be produced, supply and demand determined
Flow of income = Flow of expenditures
Equilibrium level of GDP = Flow of expenditures
Real vs. Nominal Values:
- Nominal: actual, current, money, change in price and/or change in quantity
- Real: constant, only change in quantity, price is constant
- Real = Nominal/Price
- Y is always real unless stated otherwise
Output Prices:
- Potential National Income = Y* = max real output
- Output Gap: Y - Y*
- Recessionary Gap: Y < Y*
- Inflationary Gap: Y > Y*
Unemployment:
- Y and U related
- U falling → short run effect
- Productivity rising → long run effect
- Labor Force: employment + unemployment
- Number of workers 15+ able and willing to work
, - Unemployment Rate: unemployment/labor force
- Employment Rate: employment/working age population
Types of Unemployment:
- Frictional: turnover U (changing jobs)
- Structural: mismatching U (economy wants a certain degree you don’t have)
- Cyclical: recessionary gap U
- Full: level of U to produce Y* (only frictional and structural)
Productivity:
- Real output per unit of output
- Labor Productivity: real output per unit of labor output
- Main cause of economic growth → caused by increase in human and physical capital
The Measurement of National Income:
- Double Counting: adding the value added to the final value of good/service
- Intermediate Good: output that is used as an input in another firm
- Final Good: output NOT used again as input
- Value Added: revenue - cost of intermediate goods
- Payments to factors of production
- Factor payments
- GDP:
- GDP (E): expenditure needed to produce the final output
- Consumption (C): “using up of production” = expenditure by final user (house)
- Investment (I): expenditure of firms (plant, equipment, inventory, residential
construction)
- Expenditure for goods not in C
- Expenditure on goods to produce other goods
- Expenditure for future consumption
- Government (G): expenditure of governments
- Net Exports (NetX): X - M (exports - imports)
- Inventory: production that’s not sold yet
- Residential Construction: expenditure over a long period of time
Gross: Net + Depreciation
- Depreciation: wearing out of K (capital)
- Capital Cost Allowance: income tax approximation for depreciation
Government Purchases:
- “G” includes Government Investment → valued at cost
- Reason: difficulty in valuing “costs”
- “G” excludes Transfer Payments
- Transfer Payments: expenditure not in return of service (redistribution of funds)
- Not necessarily a purchase
, Total Expenditures: Y = C + I + G + NetX (accounting definition)
GDP from Income Side:
- Income claims by factors and non-factors of production
- Factor payments + non-factor payments
Factor Payments: $ going to inputs (WRIP)
- Wages & salaries
- Economic rent
- Interest
- Profits
Non-Factor Payments: (IBT - Sub) + Depreciation
- Indirect Business Taxes Net of Subsidies
Net Domestic Product: WRIP + (IBT - Sub)
Gross Domestic Product: NDP + Depreciation
GDP vs. GNP
- GDP: income produced in Canada → domestic economic activity
- GNP: income received in Canada → economic well-being of Canada
- GDP - factor income produced in Canada received by foreigners + factor income
received by Canadians abroad
- Personal Income: GDP - Depreciation/RE + Transfer Payments
- Disposable Personal Income: personal income - personal income tax (PIT)
Implicit GDP Deflator: nominal GDP/real GDP
Omissions from GDP:
- Illegal activities → difficult to ascertain (drugs)
- Underground economy → underreported activities (gray markets)
- Non-Market activities → not traded in market (housework)
- Economic “bads” → not traded in markets → negative externalities (pollution, stress)
Output & Well-Being:
- Per Capita GDP: GDP/Population → measurement of standard of living
- Productivity: GDP/Employment → rate of technological change
