Government g spending by all levels of government on

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Government (G): Spending by all levels of government on final goods and servicesNet Exports (NX): Exports minus importsGrowth Rates – percentage change of X= Change in X= (X2 – X1)Starting X X1Real versus Nominal GDPGDP is market valuesNominal GDP: raw GDP data, unadjusted for price changesGDP in “current dollars”Read GDP: GDP adjusted for price changesGDP in “constant dollars”Y = Real GDPP = Price LevelPY = Nominal GDPCalculating Real GDP:a.i.1.Divide to filter out old pricesa.i.2.Multiply to put in newa.i.3.Nominal GDPx 100Real GDPBusiness CycleRecession: Short run decrease in economic growth2/7/12 – UnemploymentStructural Unemployment – caused by changes in the industrial makeup of the economy“creative destruction” – new jobs created and some old jobs destroyedFrictional Unemployment – caused by time delays in matching available jobs and workersSome jobs are available and workers are unemployedBut: limited informationmore search timeAlthough it is natural, it has gone down because of technology making it easier to find jobsCan increase withhiring and firing regulationsopeople will be more careful with hiring and it will take longerunemployment compensationoreduces cost of search increases search time (less incentive to get new job)Cyclical Unemployment – caused by economic downturnsNatural Rate of Unemployment (u*) – rate of unemployment when cyclical is zerooonly structural and frictional unemployment
Full Employment - means we have the natural rate of unemploymentFull Employment Output (Y*) – the output level when unemployment is equal to the natural rate (u = u*)oThe output level sustainable for the long runThe long run average is 6%Unemployment rate (u): the percent of the labor force that is unemployedLabor force: people who are employed or actively seeking workPopulation – 242 million16 +Non – institutionalized (not in jail, etc.)CivilianLabor Force – 154,395,000Employed – 141,637,000Unemployed – 12,758,000 Not in Labor Force (88 million)Students Home-makersRetireesothersLabor Force Participation Rate: the portion of the population in the labor force2/9/12 – InflationMeasuring Inflation:1.Start with a general price level estimatea.Weighted average of relevant pricesb.Consumer Price Index (CPI) – the measure of the price level based on the consumption patterns of a typical consumer2.Calculate inflation as a growth ratea.I2011= (P2011– P2010)x 100P2010Normal Rate of Inflation is 4%Problems With Inflation:1.Future Price Level Uncertainty2.Signal Extraction Problem: difficult for suppliers to discern the source of price increases. Take different actions depending on the source of price increases. If:a.Increase in demand buy new resources, hire workers, etc. increase outputb.Inflation don’t change outputc.Misallocation of resources can lead to big problems3.Menu Costsa.Physicalb.Psychologicalc.Result: some prices don’t adjust4.Money Illusion – people interpret nominal changes as real changes
a.Normal Wage: wage expressed in current dollarsb.Real Wage: wage adjusted for price level changesc.Result: some prices don’t adjustWhat Causes Inflation:2/14/12 – Financial Markets, Savings, and Interest Rates*Test in CHEM 402 * *Review Session Sunday 3-6*Capital Goods – goods used to produce other goods and servicesMeans to an end

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