Chapter 2 - OUTPUT, INFLATION AND UNEMPLOYMENT
❖ Aggregate output
I ntermediate good= a G used in the prod of anotherG
Final good= a G that is directly sold to consumer,to cover one’s needs/wants
GDP(has different def) =
1. Sum of value of final G&S produced in the eco during a given period
→ Only count final goods (not intermediate G)
2. Sum of value added in eco during a given period
→ Value added = value of prod minus value of intermediate G used in prod
3. Sum of incomes in eco during a given period
→ Value added = labor income (wages) + profit income
Nominal GDP(gross) = sum of Q of final G producedtimes their current price
→ Increases for 2 reasons:
- Production of most G increases
- Price of most G increases
SO if nominal GDP increases faster than real GDP → there is inflation
= C + G + I + NX
Real GDP(real gross) = sum of Q of final G timesconstant (notcurrent) prices
→ Important number, the one we want to look at
ATT reference year when real GDP = nominal GDP
EXAMPLE
There is deflation (bc real GDP proves that Q
→
increases, hence, for nominal GDP to be
stagnant, prices have to decrease).
EXAMPLE
,❖ Unemployment rate
- omeone is unemployed if: doesn’t have a job + has been looking for one in past month
S
- Unemployment rate = ratio of nb of people who are unemployed to nb of people in labor force
- Participation rate = Labor Force / total pop of working age
❖ Inflation rate
- I nflation= sustained rise in the general level ofprices (the price level)
- Inflation rate= rate at which the price level increases
- Deflation= sustained decline in the price level (negativeinflation rate)
- GDP deflatorin year t (Pt) = the ratio of nominalGDP to real GDP in year t:
TT it’s an index number → it has no direct eco interpretation. It’s used to compare
A
one year’s result with the previous one
SO to calculate inflation rate w/ GDP deflator: find Pt and Pt-1, then calc rate
- Rate of change(of inflation):
- Relationship bt/ nominal GDP, real GDP and GDP deflator:
- eadline inflation: the most-used one, “normal one”
H
VS core inflation: look at prices except for energy and food prices
BC very volatile → difficult for central banks to predict // i$ rates
- “Best” inflation rate: low and stable rate, bt/ 1% and 4%
BUT target (established by each Central Bank) varies from country to country
,Short run, medium run, long run
- Short run(a few years): year-to-year mvmts in outputare primarily drive by mvmts in D
→ ATT the one we will be looking at during the course (next months/couple of years)
- Medium run(decade): eco tends to return to levelof output determined by supply factors, like
K stock, lvl of techno and size of labor force
- Long run(a few decades or more): eco depends on itsability to innovate and introduce new
techno, how much people save, quality of country’s edu system, quality of gov, etc.
Relationships between diff indicators / variables
➢ Okun’s Law: output and unemployment
( each point = a year)
· Negative correlation
· High output growth → decs unemp rate
· Line’s slope: -0.4
SO growth incs 1% = unemp decrs 0.4%
· If growth > 3%, then unemployment decrs
(bc line crosses horizontal axis @ 3,0)
➢ Phillips Curve: unemployment and inflation rate
· Negative correlation, but not so clear
· Higher unemp leads to decrs in inflation
· When unemp < 6%, inflatº typically incrs
, Chapter 3 - THE DEMAND FOR GOODS AND SERVICES
❖ Demand for Goods
- Total demand for goods (Z):
· Consumption (C): G&S purchased by consumers
· Investment (I): the sum of nonresidential investment and residential investment
· Gov spending (G): purchases of G&S by the federal, state and local governments
· Exports (X): purchases of domestic G&S by foreigners
· Imports (IM): purchases of foreign G&S by local consumers, firms and gov
- In a closed economy (X = IM = 0):
➢ CONSUMPTION
○ Consumption (C): a functº of disposable income (YD)
(Y = income that remains once consumers have received gov transfers + paid taxes)
→ C(YD) is called theconsumption function
→ Graphical representation of consumption function:
○ Consumption function: linear relation w/ 2 parameters c0 and c1:
· c0: what people would consume if their disposable income equals zero
SO changes in c0 reflect changes in csumptº for given level of disposable Y
· c1: propensity to consume (assumed to be higher than 0 and lower than 1)
❖ Aggregate output
I ntermediate good= a G used in the prod of anotherG
Final good= a G that is directly sold to consumer,to cover one’s needs/wants
GDP(has different def) =
1. Sum of value of final G&S produced in the eco during a given period
→ Only count final goods (not intermediate G)
2. Sum of value added in eco during a given period
→ Value added = value of prod minus value of intermediate G used in prod
3. Sum of incomes in eco during a given period
→ Value added = labor income (wages) + profit income
Nominal GDP(gross) = sum of Q of final G producedtimes their current price
→ Increases for 2 reasons:
- Production of most G increases
- Price of most G increases
SO if nominal GDP increases faster than real GDP → there is inflation
= C + G + I + NX
Real GDP(real gross) = sum of Q of final G timesconstant (notcurrent) prices
→ Important number, the one we want to look at
ATT reference year when real GDP = nominal GDP
EXAMPLE
There is deflation (bc real GDP proves that Q
→
increases, hence, for nominal GDP to be
stagnant, prices have to decrease).
EXAMPLE
,❖ Unemployment rate
- omeone is unemployed if: doesn’t have a job + has been looking for one in past month
S
- Unemployment rate = ratio of nb of people who are unemployed to nb of people in labor force
- Participation rate = Labor Force / total pop of working age
❖ Inflation rate
- I nflation= sustained rise in the general level ofprices (the price level)
- Inflation rate= rate at which the price level increases
- Deflation= sustained decline in the price level (negativeinflation rate)
- GDP deflatorin year t (Pt) = the ratio of nominalGDP to real GDP in year t:
TT it’s an index number → it has no direct eco interpretation. It’s used to compare
A
one year’s result with the previous one
SO to calculate inflation rate w/ GDP deflator: find Pt and Pt-1, then calc rate
- Rate of change(of inflation):
- Relationship bt/ nominal GDP, real GDP and GDP deflator:
- eadline inflation: the most-used one, “normal one”
H
VS core inflation: look at prices except for energy and food prices
BC very volatile → difficult for central banks to predict // i$ rates
- “Best” inflation rate: low and stable rate, bt/ 1% and 4%
BUT target (established by each Central Bank) varies from country to country
,Short run, medium run, long run
- Short run(a few years): year-to-year mvmts in outputare primarily drive by mvmts in D
→ ATT the one we will be looking at during the course (next months/couple of years)
- Medium run(decade): eco tends to return to levelof output determined by supply factors, like
K stock, lvl of techno and size of labor force
- Long run(a few decades or more): eco depends on itsability to innovate and introduce new
techno, how much people save, quality of country’s edu system, quality of gov, etc.
Relationships between diff indicators / variables
➢ Okun’s Law: output and unemployment
( each point = a year)
· Negative correlation
· High output growth → decs unemp rate
· Line’s slope: -0.4
SO growth incs 1% = unemp decrs 0.4%
· If growth > 3%, then unemployment decrs
(bc line crosses horizontal axis @ 3,0)
➢ Phillips Curve: unemployment and inflation rate
· Negative correlation, but not so clear
· Higher unemp leads to decrs in inflation
· When unemp < 6%, inflatº typically incrs
, Chapter 3 - THE DEMAND FOR GOODS AND SERVICES
❖ Demand for Goods
- Total demand for goods (Z):
· Consumption (C): G&S purchased by consumers
· Investment (I): the sum of nonresidential investment and residential investment
· Gov spending (G): purchases of G&S by the federal, state and local governments
· Exports (X): purchases of domestic G&S by foreigners
· Imports (IM): purchases of foreign G&S by local consumers, firms and gov
- In a closed economy (X = IM = 0):
➢ CONSUMPTION
○ Consumption (C): a functº of disposable income (YD)
(Y = income that remains once consumers have received gov transfers + paid taxes)
→ C(YD) is called theconsumption function
→ Graphical representation of consumption function:
○ Consumption function: linear relation w/ 2 parameters c0 and c1:
· c0: what people would consume if their disposable income equals zero
SO changes in c0 reflect changes in csumptº for given level of disposable Y
· c1: propensity to consume (assumed to be higher than 0 and lower than 1)
