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  1. 1. Chapter 7: Tracking the Macroeconomy •National accounts – keep track of the flow of money between different sectors of the economy •Stock – a share in the ownership of a company •Bond – IOU that pays interest •Government Transfers – payments by the government •Disposable Income – total income left after taxes and government transfers •Private Savings = disposable income – consumer spending •Financial Markets – where individuals, banks, etc. buy and sell stocks, bonds, and loans •Government Purchases of Goods and Services – total purchases by federal, state and local govts •Exports – goods and services sold to other countries •Imports – goods and services purchased from other countries •Inventories – stocks of goods and raw materials held to facilitate operations •Investment Spending – spending on physical equipment •Final Goods and Services – sold to the final or end user •Intermediate Goods and Services – inputs for production of final goods and services •GDP – total value of all final goods and services produced in the economy during a given year •Aggregate Spending – total flow of funds into the markets for goods and services −Calculating GDP GDP = Consumer Spending + Investment Spending + Government Purchases of goods and services + Exports – Import Spending (GDP = C + I + G + X – IM) •Value Added = value of sales – value of purchases of inputs •Real GDP: total value of all final goods and services produced in the economy during a given year, calculated using prices of a selected base year •Nominal GDP: total value of all final goods and services produced in the economy during a given year, calculated using the prices in the current year •Aggregate Price Level – measure of the overall level of prices in the economy •Market Basket – hypothetical set of consumer purchases of goods and services •Price Index in a given year = Cost of market basket in a give year X 100 Cost of market basket in base year •Inflation Rate = Price Index in year 2 – Price Index in year 1 x100 Price Index in year 1 •Consumer Price Index (CPI) – measures cost of market basket of a typical urban American family •Producer Price Index (PPI) – measures changes in prices of goods purchased by producers •GDP deflator – for a given year is 100x the ratio of nominal GDP to real GDP in that year Chapter 8: Unemployment and Inflation •Employment - # of people employed; part time or full time •Unemployment – total number of people actively looking for work but aren't currently employed •Labor Force Participation Rate = Labor Force x100 Population age 16 and older •Unemployment Rate = Number of unemployed workers x100 Labor force
  2. 2. •Discouraged Workers – nonworking people who are capable of working but have given up the job search •Underemployment - # of people who work part time because they can't find full-time jobs •Frictional Unemployment – amount of time spent between jobs •Structural Unemployment – more people seeking jobs than there are jobs available (economy changing structure) •Natural Rate of Unemployment = Frictional + Structural •Cyclical Unemployment – deviation of the actual rate or unemployment from the natural rate •Actual Unemployment = Natural + Cyclical Chapter 9: Long-Run Economic Growth •Number of years for variable to double = 70 Actual growth rate of variable •Labor productivity – output per worker •Explaining Growth in Productivity - Physical Capital: human-made resources (ex: buildings) - Human Capital: improvement in labor by education and knowledge - Technology: technical means for production •Why Growth Rates Differ - Savings and Investments - Foreign investments - Education - Infrastructure: roads, power lines, ports, info networks, etc. Provide underpinnings for economic activity - Research and Development: spending to create and implement new technologies - Political Stability - Protection of Property Rights •Convergence hypothesis – international differences in real GDP per capita tend to narrow over time •Under-developed countries are not converging w/ wealthy, developed countries Chapter 10: Savings, Investment Spending, and the Financial System •Savings = Investment Spending •Budget Surplus – tax revenue exceeds government spending •Budget Deficit – government spending exceeds tax revenue •Budget Balance – difference between tax revenue and government spending •National Savings – total amount of savings generated within the economy Interest Rate – amount borrowed charged by lenders •Rate of Return – profit earned on the project •Shifts of the Demand for Loanable Funds - Changes in perceived business opportunities - Changes in the government's borrowing •Shifts of the Supply of Loanable Funds - Changes in private savings behavior - Changed in capital inflows •Real Interest Rate = Nominal Interest Rate – Inflation Rate •According to the Fisher Effect, an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
  3. 3. •Three Tasks of a Financial System 1. Reducing Transaction Costs (expenses of negotiating and executing a deal) 2. Reducing Risk (uncertainty about future outcomes that involve financial losses or gains) 3. Providing Liquidity - An asset is liquid if it can be quickly converted into cash without much loss of value, illiquid if it cannot. •Financial Intermediates 1. Mutual Funds – creates a stock portfolio and then resells shares of this portfolio to individual investors 2. Pension Funds (holds assets to provide retirement income) and Life Insurance Companies (sells policies that guarantee a payment when the policy-holder dies) 3. Banks – provides liquid assets in the form of bank deposits •Efficient Markets Hypothesis – asset prices embody all publicity available information •The Great American Housing Bubble