Download 1 CRAM Unit-2 Macro Review

Unit-2 Macro Cram
GDP, Unemployment, Inflation
Circular Flow of a closed Economy
Revenue
Goods
and services
sold
PRODUCT
PRODUCT MARKET
MARKET
FIRMS
FIRMS
Spending
Circular Flow Speeds Up
Goods and
services
bought
GDP ↑
HOUSEHOLDS
HOUSEHOLDS
Price
Level
AD2
Factors of
production
Wages, rent,
and profit
FACTOR
FACTOR
FACTOR
Market
MARKET
Labor, land,
capital & entrepreneurship
Income
= Flow of inputs
and outputs
= Flow of dollars
AD2
AD1
Real GDP = Y
Business Cycle
PEAK
PEAK
2000
2006
2001
2014
?
TROUGH
2008-09
TROUGH
Measuring Economic Growth:
Calculating GDP:
Business Investment, Consumer/Business Construction,
& Change in Inventories. (new houses count as investment!)
GDP = C + I + G + (X-M)
What Counts?
Only NEW & FINAL goods
Domestic Products (made in USA)
What does NOT Count?
Used goods
International products
Financial transactions
Non-market transactions
Gov’t Transfer Payments
(i.e. welfare, social security, unemployment)
GDP does not measure: mix of goods, quality of products, quality of life, leisure time
GDP = C + I + G + NX
2 Ways to measure GDP
Price
Level
or
AD2
All Spending = All Income:
AD1
AD2
Real GDP = Y
GDP = Aggregate Demand (AD)
GDP is calculated by adding up all spending or
adding up all income)
Spending
Revenue
Goods
and services
sold
PRODUCT MARKET
Goods and
services
bought
HOUSEHOLDS
FIRMS
Labor, land,
capital & entrepreneurship
Factors of
production
FACTOR Market
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars
Y = C + I + G + (X-M)
Labor
Land
Capital
Entrep.
Talent




Wages
Rent
Interest
Profit
4-Types of Unemployment
• Structural
– Skills do not match demand for labor
• Cyclical
– too low a level of GDP (recession)
• Frictional
– Temporarily between Jobs
• Seasonal
– Based on time of year
Allows for some
Natural Rate of
Employment
(also called
full employment)
About 4.5% in USA
Frictional & Structural
Natural Rate is where:
Cyclical unemployment is zero
Seasonal “factored out”
Measuring Inflation
• GDP deflator – uses price of all goods/services included in GDP
– Very Broad index but only has domestically produced goods
• CPI index – uses prices of a consumer market basket of goods & services
– Very narrow index but has international goods
Inflation Index: 1990 100
2000 115
What should
be in basket?
(115 – 100) X 100 = +15.0%
100
Substitution Bias
New goods
Quality changes
Base year always 100
Use to calculate inflation rates
COLA = cost of living adjustment
Practice Test #2
• Questions #1 - #20
Multiple Choice Answers
8
B
9
A
10
C
11
B
12
D
13
C
14
A
15
B
16
D
17
A
18
A
19
A
20
A