KEY CONCEPTS:
Macroeconomics: The study of the "big picture" economy; entails 3 main things - Employment, Inflation, Output
Nominal vs. Real: current value (nominal) vs. value adjusted to a value at a particular time period (real)
current value vs value adjusted for inflation
Gross vs. Net: The sum of all vs. the sum less the expenses
i.e. Gross wage is your entire paycheck
Net income is what you take home less taxes, etc.
Markets: Factor Market is where the household (consumer) sells and businesses buy
Product Market is where the business sells and the household buys
Final vs. Intermediate Goods: Final goods are the end product; intermediate goods are those used to produce the end product
Steel (intermediate product) is used to produce cars (final product) The final product is the "C" in the GDP expenditure calculation
Consumer expenditures: durable goods; expendable goods (food); services (haircut)
Capital: Factors of Production
Classical definition - Land, Labor, Technology, Entrepreneurship
Contemporary definition - Natural, Social, Produced, Human, Financial
GDP: Gross National Product measures the productivity of an economy. It's calculated of the Bureau of Economic Analysis. It calculates the final, current goods and services produced within a country's geographical boundaries (regardless of foreign ownership)
Expenditure approach measures the country's output
Income approach measures the country's payments from the factors of production (i.e. labor)
Value added approach measures the sum of value added to firms
* see the Formulas page for the calculation information
Issues with GDP - does not account for: non-market production (homemade, child care); quality changes; unreported or underground economy; social issues or losses (insurance companies paying out; civil unrest; poor working conditions)
GNP: Gross National Product measures GDP plus domestic produced goods and services in foreign countries. No longer used in the U.S. because other countries use GDP. The uniform system of measurement allows for more accurate comparisons
Index:: A series of numbers used to track a variable's rise or fall over time. It will always have a base line (starting point) of 100
* current year/base year X 100
CPI: Consumer Price Index is the common index used to compare the cost of goods over time. The Bureau of Labor Statistics devised a "basket of goods" that are used to track the price of consumer goods and services over time. The base year has been 1983. The CPI measures the price level of the economy.
* there are other price indexes - the CPI is the most common
PPI: Producers Price Index measures the average price paid by producers (firms) for raw and semi-finished (intermediate) goods and services
PCE: Personal Consumption Expenditure is a price index that utilizes the Consumer piece of the expenditure approach to calculating GDP
GDP Price Deflator: uses the GDP (nominal and real) as the "basket" of goods instead of the CPI
Limitations of CPI: it hasn't changed much in 30 years
- New goods bias: new goods replace old (not reflected in "basket") and raise the standard of living because they make life easier or more productive (new technology)
- Quality change bias: goods get better (doesn't account for this - good may be more expensive, but using less of it)
- Commodity substitution bias: consumers buy different goods depending on prices
- Outlet substitution bias: not buying goods in stores reflected in CPI (i.e. Costco vs. Target)
Inflation: Measures the percentage change in price level from one period to the next. It redistributes purchasing power in nominal terms. Increase in general level of prices.
Winners: Businesses collect more revenue
Losers: Buyers pay more and spend time and resources to shop for better prices
The impact depends on wages and whether they are rising as well.
Winners: Borrowers because the value of future payments is shifted away from the lenders. They make the same payments, but the lender's "real value" is reduced
Expected/anticipated: less impact on purchasing power shifting because workers may have COLAs (cost of living adjustments) built into their pay structure. This means their income goes up at a specified rate to match the expected rate of inflation.
Unexpected: DOES shift purchasing power in the form of winners and loser (above); especially true in lending when a lender set a current rate based on anticipated inflation and the rates drop (because the real value of money drops with inflation).
Deflation: Same measurements at Inflation, but is a decrease in general price levels.
Stagflation: Combination of Inflation and slowed economic growth. The economy is stuck. It is measured by the Misery Index (unemployment with inflation. Late 1970s
Interest Rates: Real Interest Rate is the rate of returns in terms of purchasing power. A rate is a fee charged by a lender for borrowing money.
Unemployment: willing and able to work, 16 yrs or older, not-institutionalized, not in the military, disabled (not institutionalized) has not worked 1 hour or more for pay in the previous week; have looked for work in the past 4 weeks (per weekly BLS survey of 60,000 people)
Types of unemployment:
Frictional Unemployment: between jobs; entering or reentering labor market; typically short term
Seasonal Unemployment: jobless as a result of changes in weather, tourism patterns (ski instructors, construction workers); considered short term since they will most likely return to the job
Structural Unemployment: mismatched employees to employers; skills or location do not match worker's; considered long term
Cyclical: joblessness resulting from cycles in the business cycle
Macroeconomics: The study of the "big picture" economy; entails 3 main things - Employment, Inflation, Output
Nominal vs. Real: current value (nominal) vs. value adjusted to a value at a particular time period (real)
current value vs value adjusted for inflation
Gross vs. Net: The sum of all vs. the sum less the expenses
i.e. Gross wage is your entire paycheck
Net income is what you take home less taxes, etc.
Markets: Factor Market is where the household (consumer) sells and businesses buy
Product Market is where the business sells and the household buys
Final vs. Intermediate Goods: Final goods are the end product; intermediate goods are those used to produce the end product
Steel (intermediate product) is used to produce cars (final product) The final product is the "C" in the GDP expenditure calculation
Consumer expenditures: durable goods; expendable goods (food); services (haircut)
Capital: Factors of Production
Classical definition - Land, Labor, Technology, Entrepreneurship
Contemporary definition - Natural, Social, Produced, Human, Financial
GDP: Gross National Product measures the productivity of an economy. It's calculated of the Bureau of Economic Analysis. It calculates the final, current goods and services produced within a country's geographical boundaries (regardless of foreign ownership)
Expenditure approach measures the country's output
Income approach measures the country's payments from the factors of production (i.e. labor)
Value added approach measures the sum of value added to firms
* see the Formulas page for the calculation information
Issues with GDP - does not account for: non-market production (homemade, child care); quality changes; unreported or underground economy; social issues or losses (insurance companies paying out; civil unrest; poor working conditions)
GNP: Gross National Product measures GDP plus domestic produced goods and services in foreign countries. No longer used in the U.S. because other countries use GDP. The uniform system of measurement allows for more accurate comparisons
Index:: A series of numbers used to track a variable's rise or fall over time. It will always have a base line (starting point) of 100
* current year/base year X 100
CPI: Consumer Price Index is the common index used to compare the cost of goods over time. The Bureau of Labor Statistics devised a "basket of goods" that are used to track the price of consumer goods and services over time. The base year has been 1983. The CPI measures the price level of the economy.
* there are other price indexes - the CPI is the most common
PPI: Producers Price Index measures the average price paid by producers (firms) for raw and semi-finished (intermediate) goods and services
PCE: Personal Consumption Expenditure is a price index that utilizes the Consumer piece of the expenditure approach to calculating GDP
GDP Price Deflator: uses the GDP (nominal and real) as the "basket" of goods instead of the CPI
Limitations of CPI: it hasn't changed much in 30 years
- New goods bias: new goods replace old (not reflected in "basket") and raise the standard of living because they make life easier or more productive (new technology)
- Quality change bias: goods get better (doesn't account for this - good may be more expensive, but using less of it)
- Commodity substitution bias: consumers buy different goods depending on prices
- Outlet substitution bias: not buying goods in stores reflected in CPI (i.e. Costco vs. Target)
Inflation: Measures the percentage change in price level from one period to the next. It redistributes purchasing power in nominal terms. Increase in general level of prices.
Winners: Businesses collect more revenue
Losers: Buyers pay more and spend time and resources to shop for better prices
The impact depends on wages and whether they are rising as well.
Winners: Borrowers because the value of future payments is shifted away from the lenders. They make the same payments, but the lender's "real value" is reduced
Expected/anticipated: less impact on purchasing power shifting because workers may have COLAs (cost of living adjustments) built into their pay structure. This means their income goes up at a specified rate to match the expected rate of inflation.
Unexpected: DOES shift purchasing power in the form of winners and loser (above); especially true in lending when a lender set a current rate based on anticipated inflation and the rates drop (because the real value of money drops with inflation).
Deflation: Same measurements at Inflation, but is a decrease in general price levels.
Stagflation: Combination of Inflation and slowed economic growth. The economy is stuck. It is measured by the Misery Index (unemployment with inflation. Late 1970s
Interest Rates: Real Interest Rate is the rate of returns in terms of purchasing power. A rate is a fee charged by a lender for borrowing money.
Unemployment: willing and able to work, 16 yrs or older, not-institutionalized, not in the military, disabled (not institutionalized) has not worked 1 hour or more for pay in the previous week; have looked for work in the past 4 weeks (per weekly BLS survey of 60,000 people)
Types of unemployment:
Frictional Unemployment: between jobs; entering or reentering labor market; typically short term
Seasonal Unemployment: jobless as a result of changes in weather, tourism patterns (ski instructors, construction workers); considered short term since they will most likely return to the job
Structural Unemployment: mismatched employees to employers; skills or location do not match worker's; considered long term
Cyclical: joblessness resulting from cycles in the business cycle