Macro Economics

Investment is total spending on goods that will be used in the future to produce more goods.

includes spending on:

• capital equipment (e.g., machines, tools)
• structures (factories, office buildings, houses)
• inventories (goods produced but not yet sold)

Goverment Purchases is all spending on the g&s purchased by govt at the federal, state, and local levels.

• G excludes transfer payments, such as Social Security or unemployment insurance benefits. They are not purchases of goods and services..

NX = exports–imports

• Exports represent foreign spending on the economy’s goods and services.
• Imports are the portions of C, I, and G that are spent on goods and services produced abroad.

Y = C + I + G + NX

• values output using current prices
• notcorrected for inflation

Compute nominal GDP for each year: Price x Quantity (+ Price x Quantity) = GDP

Compute level of increase: (start value - end value) / start value x 100 = %

• values output using the prices of a base year
• is corrected for inflation

Compute real GDP in each year, using the Price from base year:

Price (base) x Quantity (+ Price (base) x Quanity) = GDP

The GDP deflator is a measure of the overall level of prices.

GDP Deflator = 100 x (nominal GDP / real GDP)

to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.

Real GDP per capita is the main indicator of the average person’s standard of living.

But GDP is not a perfect measure of well-being.

The quality of the environment

Leisure time

Non-market activity, such as the child care a parent provides his or her child at home

An equitable distribution of income

Inflation is an increase in the general price level of goods and services in an economy over a period of time.

Percentage change of general price level in comparison to the previous period.

CPI measures the typical consumer’s cost of living

Fix a "basket" with all important goods and services and find out the prices.and compute the basket's cost.

CPI = 100 x (basket cost current year / basket cost base year)

Inflation Rate:

((CPI current year - CPI last year) / CPI last year) x 100

corrected for inflation

the rate of growth in the purchasing power of a deposit or debt

Real Interest Rate = nominal interest rate – inflation rate

the interest rate not corrected for inflation

the rate of growth in the dollar value of a deposit or debt

takes the form of a commodity with intrinsic value.

Exampels:Gold coins, cigarettes in POW camps

money without intristic value, used as money because of govt decree

Example: U.S. dollar

the quantity of money aviable in  the economy

Bank keep a fraction of deposits as reserves and use the rest to make loans

Regulation son the minimum amount of reserves that banks must hold against deposits

the amount of money the banking system generates with each dollar of reserves

money supply = money multiplyer x bank reserves

The purchase and sale of U.S. goverment bonds by the Fed

does not interact with other economies in the world

interacts freely with other economies around the world

domestically - produced goods & services sold abroad

foreign - produced goods & services sold domestically

= value of exports - value imprts