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ECON 2133 – Class Outline 1
Introduction
ECONOMICS: The study of how people allocate their limited resources to try to satisfy their
unlimited wants.
Limited resources
versus unlimited wants
implies (economic) scarcity
And scarcity implies that we must make choices
So, Economics is the study of how people make choices in the context of economic scarcity.
MICROECONOMICS: The study of how households and firms make decisions and interact in
markets.
MACROECONOMICS: The study of the economy at the aggregate level (i.e., as a whole)
including
 Total output of the economy (GDP)
 Employment / unemployment
 Changes in overall price levels (inflation)
 Economic growth, productivity, and living standards
 How govt. actions affect the economy (monetary and fiscal policy)
Chap. 4: Macroeconomic Issues
Econ. Growth: Increasing __________ of goods and services by an economy over ______
(i.e., incr. real GDP)
See pgs. 90 – 92 & Fig. 1, p. 91
Living Standards: _________ per ________ (GDP / population)
Productivity: __________ per _________ (GDP / # of workers)
Rf. Chap. 8
Employment / Unemployment
Unemployment rate: the __________ of the _______ _______ not working.
See pgs. 92 – 94 & Fig. 2, p. 93
Short run s in the U rate are largely explained by __________ ________
See pgs. 93 – 94 & Fig. 3, p. 94
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Price levels and inflation
Price level (or index): A number that indicates the __________ level of prices at a given
time, relative to the level at a “_______” time
E.g. PLt = 1.2
PLb = 1.0
implies that prices at time t are _____% higher than at time b
Inflation: ___________ price levels over time
See pgs. 95 – 96 & Fig. 4, p. 95
The study of macroeconomics involves ____________
See pgs. 96 - 97
E.g.
Y = C + I + G + NX
Marcoeconomic policy: __________ actions that affect the economy’s performance over time
 Monetary policy influences the economy’s __________ __________
 Fiscal policy - govt. ___________ and __________ decisions that affect the economy
 Structural policy affects the basic way in which the economy works
Positive analysis studies “what is” and predicts “what will be” under given economic conditions
(measurement; scientific analysis)
Normative analysis: “what ought to be”
goes beyond positive anal. to express one’s value judgments
See p. 5 - 6, 98 - 99
Chap. 5 – Basic Macroeconomic Measures
Symbology
___
total output of products by an econ. (i.e., gross domestic product - acronym GDP)
___ “nominal” GDP
___ “real” GDP
___
disposable (personal) income
___
personal consumption expenditures
___
personal saving
___ (or Tx)
tax payments or receipts
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___
capital investment spending
___
govt. purchases of goods and services (govt. spending)
___
consumer price index
___
GDP deflator (a price index)
___
annual inflation rate (%)
___
unemployment rate (%)
The “Big Three” - Yr, U, 
GDP: the total market value of all final goods and services produced within a nation
annually.
 ________ products only
 Only ______ products
 No purely ____________ transactions or ________ transfers
Study pg. 104 - 107
Three ways to measure GDP:
Expenditures approach
Y = C + I + G + NX
C=
I=
G=
NX =
(NX = Ex - Im)
Ex = exports
Im = imports
See pg. 107 - 113
Practice: Do Pb. 1 (pg. 47 - 48, study. guide)
Factor payments approach
Y = w + i + r + pr + (tx (bus) + kd)
Ynd
(net domestic product)
Ynat
(national income)
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Ypers (personal income)
Disposable (personal) income
Yd = Ypers - Tx
Yd = C + S (“allocations equation”)
See pg. 114 - 116
Value added approach
Y =  value added for all final products (in all stages of their production)
Value added = _________ value of a product minus cost of __________inputs (from earlier
stages of production)
See pg. 114
Real vs. Nominal GDP
Nominal GDP (Yn): the production of products valued at __________ prices
Real GDP (Yr): the production of products valued at __________ (base year) prices
GDP deflator (Dy): a ____________ price index that measures changes in ________ - ______
price levels
See pg. 116 - 117
For any year x
Yr(x) =
Yn(x) / [Dy(x) / 100]
E.g.
Yn(x) = $8760 bil.
Dy(x) = 102.8
Yr(x) = ______ / [______ / ____ ] = $_______ bil.
More on PIs in Chap. 6
Uses of & problems with GDP measurements -- pgs. 117 - 120
Labor-related measures - Definitions
 Employed
 Unemployed
 Not in labor force
Labor force = employed + ____________
Unemployment rate
U(%) = (Unemployed / ________ ________) * 100
See Fig. 3, p. 124
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Labor force participation rate
LFPR(%) = (Labor force / _______ ____________) * 100
See pgs. 126 – 129 & Fig. 5 (p. 127), Fig. 6 (p. 128
Types of unemployment
Frictional
Seasonal
Structural
Cyclical
See pgs. 120 - 123
“Full employment” is when __________ unemployment = ___
See pg. 123
“Costs” of U - pgs. 123 - 126
Chap. 6 - Price levels and inflation
Study concepts of
Price level
Price index
PI(t) =
E.g.
(base = _____)
(base = ________)
(pg. 140)
Cost of “mkt. basket” in year t
------------------------------------------- x 100
Cost of “mkt. basket” in base yr.
CPI2004 = 2004 cost of mkt. basket
------------------------------------------ x 100
1983 cost of mkt. basket
(pg. 141)
To calculate an annual ∏ (inflation) rate from a PI:
∏(t) =
PI(t) – PI(t-1)
------------------ x 100
PI(t-1)
(pg. 142)
Note that ∏(t) will be a percentage number
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E.g.
PI(t) = 130
PI(t-1) = 120
∏(t) = [(_____ – _____ / _____] x 100 = ______ %
See Fig. 1, p. 143
How the CPI and Dy differ
CPI mkt. basket is products typically bought by U.S.
____________ -- C and Im
DY mkt. basket is products __________ in the U.S. economy
C, I, G, and Ex
Using a PI to calc. “real” values from “nominal” values
Yn(b) = $5000 bil.
Yn(t) = $6600 bil.
Dy(b) = 100
Dy(t) = 125
Yr(t) = Yn(t) / (Dy(t) / 100)
Yr(t) = $______ bil. / (_____ / _____) = $______ bil.
vs.
Yr(b) = $5000 bil.
Why?
Any PI series will have a base year.
For the base year, the PI = 100.0 - both by calculation and definition.
If a price level (PL) series, the base year value = 1.0
See pg. 145
The current CPI base is 1982 - 1984 avg. prices, with a 2002 mkt. basket.
Application: See Table 2, p. 145
CPI is not a perfect measure of price changes - it likely overstates the  rate by 1 - 2 %
Why?
__________ in product quality
_____ products (not in “mkt. basket”)
____________ when relative prices of products change
See pg. 151 - 152
The “costs” of 
____________ purchasing power of money
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Decreases __________
Redistributes ___________
Causes ________ of resources
See pg. 145 - 151
Nominal and Real Interest Rates
r=i-
E.g.
i = 10%
So that r = ___%
r is real interest rate
i is nominal interest rate
 = 4%
(pg. 148)
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