Chapter 1
State of health of a country depends on:
- Output growth
- The unemployment rate
- The inflation rate
Zero lower bound: the interest rate/federal funds rate can’t be negative (lower than zero)
Chapter 2
Gross domestic product (GDP): the measure of aggregate output in the national income accounts
Ways to measure GDP:
- GDP equals the value of the final goods and services produced in the economy during a
given period
- GDP is the sum of value added in the economy during a given period
- GDP is the sum of incomes in the economy during a given period
Aggregate production and aggregate income are always equal
Intermediate good: a good used in the production of another good
Final good: the end good, product you sell to customers
Value added: the value of its production minus the value of the intermediate goods used in
production
Nominal GDP: the sum of the quantities of final goods produced times their current price
Real GDP: the sum of the quantities of final goods times constant prices
Nominal GDP = dollar GDP = GDP in current dollars
Real GDP = GDP in terms of goods = GDP in constant dollars = GDP adjusted for inflation = GDP in
chained (base year) dollars = GDP in ‘base year’ dollars
Real GDP per person: the ratio of real GDP to the population of the country; gives us the average
standard of living of the country
GDP growth: the rate of growth of real GDP
Expansions: periods of positive GDP growth
Recessions: periods of negative GDP growth
Employment (N): the number of people who have a job
Unemployment (U): the number of people who do not have a job but are looking for one
Labor force (L) = N + U
Unemployment rate (u): the ratio of the number of people who are unemployed to the number of
people in the labor force
u = U/L
current populations survey: survey in the US to find who is unemployed
not in the labor force: people who are not looking for a job and do not have a job
discouraged workers: unemployed who give up looking for a job and therefore are no longer
counted as unemployed
participation rate: the ratio of the labor force to the total population of working age
inflation: a sustained rise in the general level of prices
price level: the general level of prices
inflation rate: the rate at which the price level increases
deflation: a sustained decline in the price level
GDP deflator: Pt = nominal GDPt/real GDPt = $Yt/Yt
GDP deflator is an index number
Cost of living: the average price of consumption
Consumer price index (CPI): not the same as GDP deflator, but are closely to each other most of the
time, if we talk about the price level we don’t distinguish between de CPI and GDP deflator
, Okun’s law: if output growth is high, unemployment will decrease:
- Line is downward sloping, and fits the cloud of points quite well; there is a tight relation
between the two variables. The slope is -0,4; on average an increase in the growth rate of
1%, leads to an decrease in unemployment of 0,4%
- The line crosses the horizontal axis at the point where output growth is about 3%; it takes a
growth rate of about 3% to keep unemployment constant.
- Change in Unemployment rate (vertical axis) & output growth (horizontal axis)
Phillips curve: if the unemployment decreases, the inflation increases:
- The line is downward sloping, the fit with the clouds is not as good as the Okun’s law. So it is
only true on average
- The line crosses the horizontal axis where unemployment rate is about 6%; so if
unemployment is above 6% inflation will decrease & if unemployment is below 6% inflation
will increase.
- Change in Inflation rate (vertical axis) & unemployment (horizontal axis)
Short run: movements in output are primarily driven by movements in demand
Medium run: output is determined by supply factors; capital stock, level of technology, size of the
labor force
Long run: output is determined by education system, saving rate, the role of the government
Chapter 3
GDP = Y
Y = C + I + G + X – IM
Consumption (C): goods and services purchased by consumers
Investment (I) (fixed investment): sum of nonresidential investment (purchase by firms of new
plants or new machines), and residential investment (purchase by people of new houses or
apartments)
Government spending (G): purchases of goods and services by the federal, state, and local
governments.
It does not include government transfers; like medicare or social security payments, nor interest
payments on the government debt
Exports (X): purchase of US goods and services by foreigners
Imports (IM): the purchases of foreign goods and services by US consumers, US firms and US
government
Net exports/trade balance: X – IM
Trade surplus: if exports is higher than imports
Trade deficit: if exports are less than imports
Inventory investment: the difference between production and sales
Z: the total demand for goods
Z ≡ C + I + G + X – IM
This equation is an identity (that’s why it uses ‘≡’)
We assume that the economy is closed; IM = 0
Z≡C+I+G
C = C(Yd) = C0 + C1Yd = C0 + C1(Y-T)
Consumption function: C(Yd)
Behavioral equition: if the equation captures some aspect of behavior; C(Yd) (+)
Propensity to consume/marginal propensity to consume = C1; it gives the effect an additional dollar
of disposable income has on consumption
C0: what people would consume if their disposable income in the current year where ewual to zero
Disposable income (Yd): the income that remains once consumers have received transfers from the
government and paid their taxes
Yd = Y – T
State of health of a country depends on:
- Output growth
- The unemployment rate
- The inflation rate
Zero lower bound: the interest rate/federal funds rate can’t be negative (lower than zero)
Chapter 2
Gross domestic product (GDP): the measure of aggregate output in the national income accounts
Ways to measure GDP:
- GDP equals the value of the final goods and services produced in the economy during a
given period
- GDP is the sum of value added in the economy during a given period
- GDP is the sum of incomes in the economy during a given period
Aggregate production and aggregate income are always equal
Intermediate good: a good used in the production of another good
Final good: the end good, product you sell to customers
Value added: the value of its production minus the value of the intermediate goods used in
production
Nominal GDP: the sum of the quantities of final goods produced times their current price
Real GDP: the sum of the quantities of final goods times constant prices
Nominal GDP = dollar GDP = GDP in current dollars
Real GDP = GDP in terms of goods = GDP in constant dollars = GDP adjusted for inflation = GDP in
chained (base year) dollars = GDP in ‘base year’ dollars
Real GDP per person: the ratio of real GDP to the population of the country; gives us the average
standard of living of the country
GDP growth: the rate of growth of real GDP
Expansions: periods of positive GDP growth
Recessions: periods of negative GDP growth
Employment (N): the number of people who have a job
Unemployment (U): the number of people who do not have a job but are looking for one
Labor force (L) = N + U
Unemployment rate (u): the ratio of the number of people who are unemployed to the number of
people in the labor force
u = U/L
current populations survey: survey in the US to find who is unemployed
not in the labor force: people who are not looking for a job and do not have a job
discouraged workers: unemployed who give up looking for a job and therefore are no longer
counted as unemployed
participation rate: the ratio of the labor force to the total population of working age
inflation: a sustained rise in the general level of prices
price level: the general level of prices
inflation rate: the rate at which the price level increases
deflation: a sustained decline in the price level
GDP deflator: Pt = nominal GDPt/real GDPt = $Yt/Yt
GDP deflator is an index number
Cost of living: the average price of consumption
Consumer price index (CPI): not the same as GDP deflator, but are closely to each other most of the
time, if we talk about the price level we don’t distinguish between de CPI and GDP deflator
, Okun’s law: if output growth is high, unemployment will decrease:
- Line is downward sloping, and fits the cloud of points quite well; there is a tight relation
between the two variables. The slope is -0,4; on average an increase in the growth rate of
1%, leads to an decrease in unemployment of 0,4%
- The line crosses the horizontal axis at the point where output growth is about 3%; it takes a
growth rate of about 3% to keep unemployment constant.
- Change in Unemployment rate (vertical axis) & output growth (horizontal axis)
Phillips curve: if the unemployment decreases, the inflation increases:
- The line is downward sloping, the fit with the clouds is not as good as the Okun’s law. So it is
only true on average
- The line crosses the horizontal axis where unemployment rate is about 6%; so if
unemployment is above 6% inflation will decrease & if unemployment is below 6% inflation
will increase.
- Change in Inflation rate (vertical axis) & unemployment (horizontal axis)
Short run: movements in output are primarily driven by movements in demand
Medium run: output is determined by supply factors; capital stock, level of technology, size of the
labor force
Long run: output is determined by education system, saving rate, the role of the government
Chapter 3
GDP = Y
Y = C + I + G + X – IM
Consumption (C): goods and services purchased by consumers
Investment (I) (fixed investment): sum of nonresidential investment (purchase by firms of new
plants or new machines), and residential investment (purchase by people of new houses or
apartments)
Government spending (G): purchases of goods and services by the federal, state, and local
governments.
It does not include government transfers; like medicare or social security payments, nor interest
payments on the government debt
Exports (X): purchase of US goods and services by foreigners
Imports (IM): the purchases of foreign goods and services by US consumers, US firms and US
government
Net exports/trade balance: X – IM
Trade surplus: if exports is higher than imports
Trade deficit: if exports are less than imports
Inventory investment: the difference between production and sales
Z: the total demand for goods
Z ≡ C + I + G + X – IM
This equation is an identity (that’s why it uses ‘≡’)
We assume that the economy is closed; IM = 0
Z≡C+I+G
C = C(Yd) = C0 + C1Yd = C0 + C1(Y-T)
Consumption function: C(Yd)
Behavioral equition: if the equation captures some aspect of behavior; C(Yd) (+)
Propensity to consume/marginal propensity to consume = C1; it gives the effect an additional dollar
of disposable income has on consumption
C0: what people would consume if their disposable income in the current year where ewual to zero
Disposable income (Yd): the income that remains once consumers have received transfers from the
government and paid their taxes
Yd = Y – T
