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Macro - Review GDP = C + I + G + NX MV = P Q (= $GDP)

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Text of Macro - Review GDP = C + I + G + NX MV = P Q (= $GDP)

  • Slide 1
  • Macro - Review GDP = C + I + G + NX MV = P Q (= $GDP)
  • Slide 2
  • Circular Flow
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  • GDP: Real and Nominal Gross Domestic Product (GDP):Gross Domestic Product (GDP): the market value of all final goods and services produced within a country during a year. GDP = C + I + G + Ex Im = C + I + G + NX = C + I + G + NX Real GDPReal GDP adjusts for inflation Nominal GDP = $GDP = P x Q $ GDP = GDP Deflator x Real GDP Real GDP = Q = $GDP/P = Nominal GDP divided by (deflated by) the GDP Price Deflator
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  • Price Indexes (Base Year = 100) Consumer Price Index (CPI)Consumer Price Index (CPI) cost over time of a typical bundle of goods and services purchased by households. CPI = Cost of Typical Market Basket Now divided by Cost of the Same Basket in Base Year Inflation Rate = {Change in CPI} {Initial CPI} GDP Price Deflator (GDP Price Index)GDP Price Deflator (GDP Price Index) measures average prices over time of all goods and services included in GDP.
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  • Unemployment Rate of Unemployment = number unemployed number in the Labor Force Unemployment rate: % of labor force not working. Unemployed persons: not working and looking Labor force: Employed + unemployed noninstitutionalized persons 16+ years of age Underemployed workers are treated as employed Discouraged workers are not in the labor force (NAIRU)Natural or normal rate of unemployment (NAIRU) Seasonal Unemployment Frictional Unemployment: searching for jobs Structural Unemployment: Imperfect match between employee skills and requirements of available jobs. Cyclical Unemployment : Results from business cycle
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  • Interest Rates: Nominal and Real Nominal Interest Rate (i): the interest rate observed in the market. Real Interest Rate (r): the nominal rate adjusted for inflation ( ). Real Interest Rate = Nominal Interest Rate Inflation Rate r = i - IILow real interest rates spur business investment spending (the I in C + I + G + NX)
  • Slide 7
  • Aggregate Demand (AD): the economy- wide demand for goods and services. Aggregate demand curve relates aggregate expenditure for goods and services to the price level The aggregate demand curve slopes downward owing to price-level effects: Wealth Effect (Real Wealth/Real Balances) Interest Rate Effect International Trade Effect (Substitution)
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  • Shifting Aggregate Demand Curve
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  • Factors that Affect AD Shifts in AD Consumption Income Wealth Interest Rates Expectations/Confidence Demographics Taxes Investment Interest Rates Technology Cost of Capital Goods Capacity Utilization Expectations/Confidence AD = C + I + G + NX Government Spending Net Exports Domestic & Foreign Income Domestic & Foreign Prices Exchange Rates Government Policy
  • Slide 10
  • Aggregate Supply Aggregate Supply (AS): the quantity of real GDP produced at different price levels. Short-run Aggregate Supply SRAS slopes upward a higher price level (holding production costs and capital constant in short-run) higher profit margins firms want to produce more. Long Run Aggregate Supply LRAS is vertical: higher prices cannot elicit more output in the long-run. Resource costs are NOT fixed in the long-run. As prices rises, workers demand and get higher wages Profits dont rise with price in long-run AS is set by production possibilities in the long-run
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  • Aggregate Supply: Short Run & Long Run
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  • Aggregate Demand and Supply Equilibrium: Short-run and long-run responses to increase in aggregate demand
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  • Aggregate Expenditures = AE = GDP Y = AE = C + I + G + NX Disposable income = Y d = Y-T = after tax income. Y d = Y - T = C + S Consumption is related to disposable income (Y-T). C = C a +cY d where c = Marginal Propensity to Consume = mpc C a = Autonomous consumption Additional income not consumed is saved mpc + mps =1
  • Slide 14
  • Aggregate Expenditures = AE = GDP In a closed economy, saving either finances private investment (I) or the governments deficit (G T) S = I + (G T) at equilibrium Investment can be crowded out by the deficit I = S (G-T) Leakages from the spending stream (S + T) = Injections to the spending stream (I + G) S + T = I + G
  • Slide 15
  • Shifts in the Consumption Function Expected Future Income An increase in expected future income will cause current consumption to rise and your saving to fall. Wealth An increase in wealth raises current consumption and lowers current saving. Expected Real Interest Rate Higher real return incentive to save more but Higher return to saving less needs to be put aside to achieve the same desired future savings. Net effect: increased real interest rates reduce consumption and increase saving. Demographics Taxes Ricardian Equivalence: Anticipation of Future Taxes
  • Slide 16
  • Demand-Side Equilibrium and the Multiplier At equilibrium: Y = C + I + G + NX = AE Increase in Y = Spending Multiplier x {Increase in Autonomous Spending} Multiplier = 1/(mps + mpi)