Recap of Lectures, Intro To Policies
Recap of Lectures, Intro To Policies
Recap of Lectures, Intro To Policies
C = households’ consumption
AD = C + I + G + (X- M) I = gross investments (including
changes in inventories)
Foreign Demand G = government consumption
Domestic Demand X = exports of goods and
services
Notes:
AD = GDP expenditure approach M = imposts of goods and
AD – refers to quantities demanded (Q) services
X- M = net exports
Aggregate Demand - AD is inversely related to prices – as
prices increase, less quantity is demanded
Aggregate Supply (AS) – is the total
supply in the economy
Prices of factors of
AS - depends on the availability, production or inputs:
price and productivity of the factors • Labour – wage
of production: land, labor, capital • Capital – interest
and entrepreneurship • Land – rent
• Entrepreneurship –
profit
Notes:
AS refers to quantities supplied
Aggregate Supply: on short and long run
Short-run AS – at higher prices firms are Long-run AS – is inelastic (vertical) it doesn’t
willing to supply more of goods and services depend on price changes (input prices have
(because the input prices are not completely completely adjusted to changes in the price
adjusted to changes in the price level of final level of final goods)
goods)
Macroeconomic Equilibrium
• Equilibrium in the market - occurs when
the price balances the plans of buyers and
sellers
• The equilibrium price - is the price at
which the quantity demanded equals the
quantity supplied
• The equilibrium quantity – is the quantity
bought and sold at equilibrium price
• In macroeconomics - equilibrium is
where AD and AS intersect
• In equilibrium, the inflation rate (Π)
equates AD and AS at the level of output Y
Changes to the Macroeconomic Equilibrium
AS is constant (without
changes):
• If AD increases -
Inflationary boom
• If AD decrease -
Deflationary recession
AD is constant (without
changes):
• If AS increases -
Deflationary boom
• If AS decrease -
Inflationary recession
Key macroeconomic variables: GDP, Inflation, Unemployment,
Balance of Payments (BoP)
• GDP - is a measure of the total income, total expenditures and total
production of an economy.
• Inflation - refers to a situation in which the economy’s overall price
level is rising. The inflation rate is the percentage change in the price
level from the previous period.
• Unemployment - mmacroeconomic problem that affects people most
directly and severely (micro level). Unemployment or job loss mean
lower living standard and psychological distress.
• Balance of Payments (BoP) - measures the flows of goods and
services, income and financial flows between one country and rest of
the world
Why study macroeconomics?
• Changes to AD and AS lead to changes in GDP and Inflation
• Changes in GDP and inflation ultimately lead to changes in unemployment and
BoP
• Governments are interested in management of each of these macroeconomic
variables
• Higher GDP can improve income levels across the economy
• Low and stable inflation is desirable for consumers and provide a preferable
investment environment for firms
• Decline in unemployment is connected with declining macro costs for
economy and micro aspects – better life for individuals
• BoP is connected with external country's position sustainability
Real GDPt
Exercises 1
1. Consider the following data on U.S. GDP:
a. What was the growth rate of nominal GDP between 2007 and 2008? (Note:
the growth rate is the percentage change from one period to the next.)
b. What was the growth rate of the GDP deflator between 2007 and 2008?
1.Compute nominal GDP, real GDP and the GDP deflator for each
year, using 2006 as a base year.
2.Compute the percentage change in nominal GDP, real GDP and
GDP deflator in 2007 and 2008 from the preceding year. For each
year, identify the variable that does not change.
Exercises 3
One day, Berry the Barber, Inc. collects 400$ for haircuts. Of this 400$,
Barry pays 30$ to the government as sales tax, takes home 260$ as
wages, and retains 110$ in the business to add new equipment in future.
From the 260$ that Barry takes home, he pays 70$ as personal income
tax. Compute Barry’s contribution to the following measure of income:
• a. GDP
• b. government revenues
• c. disposable personal income.
Exercises 4
An economy’s nominal GDP (NGDP), RGDP, and GDP deflator data are
given as follows (in billions of $)
2012 2013
NGDP 12 12.5
RGDP 10.4
GDP deflator 118
base-period prices
The inflation rate is the percentage change in the InfIation rate (%) = (CPI this year - CPI last year) * 100
price index (CPI) from the preceding period.
CPI last year
Calculating the Consumer Price Index and the Inflation Rate: An Example
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Nominal vs. Real variables
Real salary = Nominal salary / Price index *100
Real salary – refers to real purchasing power
Suppose you earned $40,000 in 2013 and you want to know how
much your father would have had to earn during 1983 to have had the
same purchasing power as you had with your $40,000 income in
2013. The CPI in 1983 was 100 and in 2013 CPI was 210.
Exercises 9
Jimmy is an avid candy consumer. Last year, he purchased 75 Snickers bars
costing $2 each and 100 Butterfinger bars costing $1 each. This year, he
purchased 120 Snickers bars for $1.50 each and 90 Butterfinger bars for $1.75
each.
• Assume that a typical consumer basket includes 50 bars of each type. Compute a
consumer price index for each year and determine the percentage change in the
index over the two years.
• Calculate Jimmy's nominal spending on candy bars in each year. Does nominal
spending increase or decrease?
• Using the first year as the base year, determine Jimmy's real spending on candy
bars in each year. Does real spending increase or decrease?
• Calculate the implicit price deflator (defined as nominal spending divided by real
spending). How does this deflator compare the CPI calculated in part (a)? Which
measurement do you think is more relevant in determining the change in Jimmy's
cost of living?
UNEMPLOYMENT
MEASURMENT:
TYPES: Labour Force Survey
Cyclical Working age population (WAP)
Classical Employed (E)
Frictional Unemployed (U)
Structural Inactive