Macroeconomics Notes PDF

Owen Cummings Spring Macroeconomics Lee Coppock Rotunda Principles: 1.​ Trade creates value 2.​ Incentives affect behavior Trade: ​ Voluntary exchange between two or more parties ​ Four special properties of trades: trade helps both sides, trade creates value, trade is a positiv...

Owen Cummings Spring Macroeconomics Lee Coppock Rotunda Principles: 1.​ Trade creates value 2.​ Incentives affect behavior Trade: ​ Voluntary exchange between two or more parties ​ Four special properties of trades: trade helps both sides, trade creates value, trade is a positive sum game, trade encourages diverse interactions ​ Jonathan sacks: “It is through trade that a difference becomes a blessing, not a curse.” Five foundations of economics: 1.​ Incentives 2.​ Trade-offs 3.​ Opportunity cost 4.​ Marginal thinking 5.​ Trade creates value Factors in trade: ​ Marginal thinking: evaluating whether the benefit of one more unit of something is greater than its cost ​ Circular flow diagram: a diagram that shows how goods, services, and resources flow through the economy via commerce between households and firms ​ Endogenous: factors we can control ​ Exogenous: factors we cannot control Specialization: the limiting of one's work to a particular area Positive statement: what is Normative statement: what ought to be Ceteris paribus: changing one variable without shifting any others Why a trade is beneficial: ​ Comparative advantage: the situation in which an individual or business can produce at a lower opportunity cost than a competitor can, this is why trade occurs ​ Absolute advantage: producing more than a competitor with the same quantity of resources ​ Gains from trade: if each competitor specializes in a specific good and trades, they can operate above the ppc curve Gwen can produce 1 pizza for 2 wings (.5), Blake can produce 1 pizza for 3 wings (.33) ​ Gwen would produce pizzas, blake would produce wings (due to comparative advantage) ​ It would be advantageous to trade at a ratio between this, such as 19 pizzas for 47 wings (.4) ​ If the trade ratio doesn’t fall between these two ratios, one side would decline Differentiating the market: ​ Consumer good: any good that is produced for present consumption (shirt) ​ Capital good: any good that can help in the production of other goods or services in the future (truck, factories) ​ Investment: the process of using resources to create or buy new capital How the market operates: ​ Invisible hand: consumers are motivated by self-interest and are guided to the goods that they need or want the most (Adam Smith), which sets the market in societies best interest ​ Competitive market: a market so packed with producers and consumers that each has a negligible impact on market price and quantity ​ Market power: a firm's ability to influence the price of a good or service by exercising control over the demand and supply ​ Monopoly: a single company controlling a market Supply & Demand: ​ Price is the only thing that can change quantity demanded ​ Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded ​ Market demand: the sum of all of the individual quantities demanded by each buyer in a market ​ Purchasing power: how much you can afford ​ Normal good: demand increases when income increases, inferior good is opposite ​ Remember shortages and surpluses, complements and substitutes Theories: ​ Unconstrained vision: we have sufficient resources to satisfy everyone ​ Constrained vision: we have limited resources with unlimited wants at any point in time Measuring a national economy: ​ GDP = Output = income ​ GDP: market value of all final goods and services produced within a nation during a specific period of time ​ When GDP goes up, national output and income are higher ​ Real GDP is GDP adjusted for inflation ​ Economic growth: the percentage change in real per capita gdp ​ Recession: short term economic downturn ​ Business cycle: a short-run fluctuation in economic activity  ​ Economic expansion: occurs from the bottom of a trough to its next peak (economic activity is increasing) ​ Economic contraction: occurs from the top of a peak to its next trough (activity decreases) ​ Many people think recessions are more frequent than they are, in reality, they’re becoming more and more uncommon ​ Economic growth is defined by the percent change in real GDP per capita Details of GDP: ​ Intermediate goods: price not counted in GDP, goods that firms repackage or bundle with other goods to sell at a later stage ​ Final goods: price counted in GDP, what is actually sold ​ GNP: a measure of national input, such as nike shoes in thailand being included in US GNP ​ Resold items, stocks, bonds don’t count toward GDP GDP = C + I + G + NX Calculating GDPs: ​ NX = Exports - Imports ​ Nominal GDP: GDP calculated from current prices ​ Price level: an index of the average prices of goods and services throughout an economy ​ GDP Deflator: the price level in GDP data ​ Real GDP = nominal GDP / price level x 100 Trends and shortcomings in using GDP:  ​ The presence of nonmarket provides shortcomings (such as work done at home) when using GDP ​ Same thing with underground economy (such as narcotics and gambling) ​ The underground economy can account for up to 40% of the economy in underdeveloped countries ​ Per capita GDP is positively correlated with many human welfare outcomes that nearly everyone finds desirable South Korea GDP: 14th in world Per capita gdp: $34k ( Nom GDP / Price level for that year ) x 100 = adjusted price UNEMPLOYMENT: ​ Unemployment: when a worker is searching for a job, but unsuccessful ​ Unemployment rate: the percentage of the labor force that is unemployed ​ Creative destruction: introduction of new jobs and products leads the erasement of others ​ Labor force participation rate: (employed + unemployed actively seeking) / relevant pop. ​ Structural unemployment: result of jobs becoming obsolete from creative destruction, or changes in the industrial makeup of an economy ​ Frictional unemployment: caused by delays in matching available jobs and workers (affected by information availability and government policies) ​ Natural unemployment: no matter how healthy the economy is, there is always some of this unemployment. Natural (u*) is only structural and frictional ​ Unemployment insurance: guarantees unemployed workers receive a percentage of their former pay while unemployed ​ Cyclical unemployment: caused by economic downturns, generates greatest concern ​ Natural rate of unemployment: the rate of unemployment when the economy is growing normally, in US its around 4-5% ​ Full employment output: when the natural rate of unemployment is equal to the unemployment rate (no cyclical) (Y*) ​ When economy is in a recession, unemployment rises over natural (u > u*) ​ Unemployment rate = u = (number unemployed/labor force) x 100 ​ Marginally attached workers: those who looked for a job in the last twelve months, are willing to work, but have not sought a job in last four weeks ​ U-3 Unemployment is just unemployed over labor force ​ U-6 unemployment adds marginally attached individuals plus anyone who is working part time but would work full time if they could ​ RECESSION: u > u* y < y* INFLATION: ​ Deflation: when prices fall, negative inflation  ​ CPI: the measure of a price level based on the consumption patterns of a typical consumer (measures inflation) ​ ​ Price index shows growth ​ ​ Factors that can affect CPI: Substitution, changes is quality, new goods, services, and locations ​ CPI has to be accurate or workers or companies can get negatively affected ​ Chained CPI reduces the upwards bias of the traditional CPI updating monthly ​ Shoe-leather costs: the resources that are wasted when people change their behavior to avoid holding onto money ​ Money illusion: when people interpret changes in wage or prices as real changes ​ Menu costs: costs of changing prices ​ Capital tax gains: the gains created by selling a product for more than its price ​ Inflation and money supply growth are positively correlated ​ Equation of change: the long run relationship between price level and quantity of money (M x V) = (P x Y) ​ Price level is the average price of goods and services in an economy at a specific time. It's a key economic indicator that helps economists understand inflation, consumer spending power, and the supply-demand chain ​ Velocity of money: the number of times a unit of money exchanges hands over a given year ​ ALL THE FINANCIAL STUFF​ ​ Loanable funds market: the market where savers supply funds to borrowers ​ Every dollar borrowed requires a dollar saved ​ Interest rate = opportunity cost of consumption ​ Profit maximizing firms only borrow money if and only if their expected return is greater than the cost ​ Fisher equation: real interest rate = nominal interest rate - inflation rate (R = r + i) Shifters of supply in the loanable funds market: ​ income and wealth ​ time preferences ​ consumption smoothing Shifters of demand in the loanable funds market: ​ Productivity of capital ​ Investor confidence ​ Government borrowing Equilibrium occurs when savings = investments SECURITIES AND FINANCIAL MARKETS Financial intermediaries: firms that help channel funds from savers to borrowers Banks: private firms that accept deposits and extend firms Indirect finance: when savers lend money to financial intermediaries, who then loan the money to borrowers (banks) Direct finance: when savers lend money directly to borrowers (stocks and bonds) Security: a contract that entitles its owner to certain rights (tradeable) Bond: a type of security, represents a debt to be paid Default risk and interest rates are aligned; higher the risk, higher the interest rate All bond grades below BB are denoted “junk bonds” AAA are the best, such as Harvard or Apple Stocks: ownership shares in a firm Secondary markets are valuable for firms because they lower the cost of borrowing Treasury securities: bonds sold by the national government to pay for the national debt Securitization: the creation of a new security by combining otherwise separate loan agreements