Principles of Macroeconomics

when market fails to allocate resources efficiently

may happen when: externality or market power

gross domestic product: GDP is the total market value of all final goods and services produced within a country in a given period of time. (excludes items that are sold illicitly, items that are produced and used at home, never enter marketplace)

Marginal changes are small, incremental adjustments to an existing plan of action 

• Economic growth - the increase in the inflation adjusted value of goods and services produced in an economy over a period of time. 

Productivity is the amount of goods and services produced from each hour of a

worker’s time 

Inflation is an increase in the overall level of prices in the economy

One cause of inflation is the growth in the quantity of money

When the government creates large quantities of money, the value of the money falls 

Inductive reasoning refers to the process of observation from which patterns might be formed which

provides evidence for a hypothesis which may lead to a theory. 

Deductive reasoning begins with a theory from which a hypothesis is drawn. The hypothesis is then subject to observation and either confirmation or rejection. 

its easier to measure total consumption, total investement and total governement purchases and then in the end subtract those who happen in foreign countries

Consumption (C): The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I): The spending on capital equipment, inventories, and structures, including new housing 

Government Purchases (G): The spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services.

Net Exports (NX): Exports (X) minus imports (M). 

a variable whose value is determined within the model. 

a variable whose value is determined outside the model. 

Real GDP values the production of goods and services at constant prices.

Real GDP is a more accurate measure of economic well-being than nominal GDP because changes in real GDP are not affected by changes in prices, but reflect only changes in production. 

define base year for price (in picture 2005)

Nominal GDP values the production of goods and services at current prices. 

(is affected by price changes, and therefore says less about the well being of a country)

in base year: GDP deflator always 100, because nominal=real GDP in base year.

The inflation rate is the percentage change in the price level from the previous period. 

Inflation refers to a situation in which the economy’s overall price level is rising. 

Deflation refers to situation in which the economy‘s overall price level is falling. 

Deflation can be as damaging as inflation because:

 There is little incentive to spend today if the expectation is for cheaper prices tomorrow.

 It might result in consumers not spending at levels that provide incentives for firms to invest in new capacity.

 little or no growth and with that....
 increased likelihood of unemployment.

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. It is used to monitor changes in the cost of living over time. When the CPI rises, the typical consumer has to spend more money to maintain the same standard of living. 

How to calculate CPI:

1.fix the basket: define what a typical consumer uses

2. Find the prices: Find the prices of each of the goods and services in the basket for each point in time.

3. Compute the basket’s cost: Use the data on prices to calculate the cost of the basket of goods and services at different times. 

4. Choose a base year and compute the index

5. Compute the consumer price inflation rate: The consumer price inflation rate is the percentage change in the price level – as measured by CPI – from the preceding period. 

The consumer price inflation rate is the percentage change in the price level – as measured by CPI – from the preceding period. 

1Substitution bias
2Introduction of new goods
3Unmeasured quality changes 

Economics is the study of how a society manages its scarce resources

Efficieny means society gets the most that it can from its scarce resources

equity means the benefits of those resources are distributed fairly among the members of society

The opportunity cost of an item is what you give up to obtain that item.

Marginal changes are small incremental adjustements to an exsiting plan of action

a market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

externality: which is the impact of one person or firm‘s action on the well being of a bystander

market power: which is the ability of a single person or firm to unduly influence market prices

the market value of all final goods and services produced within an economy within a country in a given period of time divided by the population of a country to give a per capita figure

Productivity is the amount of goods and services produced from each hour of a workers time.

refers to the process of observation from which patterns might be formed, which provides evidence for a hypothesis which may lead to a theory

begins with a theory from which a hypothesis is drawn. The hypothesis is then subject to observation and either confirmation or rejection.

endogenous: variable whos value is determined within the model

exogenous: variable whose value is determined outside the model

shows how dollars flow through markets among households and firms

When some amount of money is automatically corrected for inflation by law or contract the amount is said to be indexed for inflation

The nominal interest rate usually reported and not corrected for inflation

The real interest rate is the nominal interest rate that is corrected for the effects of inflation.