Unit-2 Macro Review
GDP, Unemployment, Inflation
Circular Flow of a closed Economy
Revenue
Goods
and services
sold
PRODUCT
PRODUCT MARKET
MARKET
FIRMS
FIRMS
Factors of
production
Wages, rent,
and profit
Spending
Goods and
services
bought
HOUSEHOLDS
HOUSEHOLDS
FACTOR
FACTOR
FACTOR
Market
MARKET
Labor, land,
capital & entrepreneurship
Income
= Flow of inputs
and outputs
= Flow of dollars
BUSINESS CYCLE: rate of GDP Growth
GDP growth by quarter
1st quarter 2012
+2.2%
All 2011
+1.7%
Calculating GDP:
Business Investment, Consumer/Business Construction,
& Change in Inventories. (new houses count as investment!)
GDP = C + I + G + (X-M)
What Counts?
Only NEW & FINAL goods
Domestic Products
What does not Count?
Used goods
International products
Financial transactions
Non-market transactions
Gov’t Transfers (i.e. welfare, social security)
GDP does not measure: mix of goods, quality of products, quality of life, leisure time
GDP = C + I + G + NX
Spending
Revenue
Goods
and services
sold
PRODUCT MARKET
Goods and
services
bought
2 Ways to measure GDP
or
HOUSEHOLDS
FIRMS
All Spending = All Income:
Labor, land,
capital & entrepreneurship
Factors of
production
Y = C + I + G + (X-M)
FACTOR Market
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars
Labor
Land
Capital
Entrep.
Talent
GDP = Aggregate Demand (AD)




(all spending or all income)
Wages
Rent
Interest
Profit
4-Types of Unemployment
• Structural
– Skills do not match demand for labor
• Cyclical
– too low a level of GDP (recession)
• Frictional
– Temporarily between Jobs
• Seasonal
– Based on time of year
Natural Rate of
Employment
(or full employment)
Allows for some
Frictional & Structural
Where:
Cyclical = zero
Seasonal “factored out”
Expected
Inflation
versus
Actual
Inflation
• In theory, if actual inflation = expected inflation, people
have time to adjust for it. (less harmful)
Nominal Interest Rate = Real Interest Rate + Expected Inflation
COLA = cost of living adjustment
GDP Deflator vs CPI
• GDP deflator – prices of all goods/services produced domestically
• CPI index – prices of a market basket of goods & services
– (including international goods)
CPI Index: 1990 100
2000 115
What should
be in basket?
Substitution Bias
New goods
Quality changes
(115 – 100) X 100 = +15.0%
100
Called Base year
Practice Test #2
• Questions #1 - #20
Multiple Choice Answers
1
D
2
C
3
C
4
D
5
B
6
A
7
E
8
B
9
A
10
C
11
B
12
D
13
C
14
A
15
B
16
D
17
A
18
A
19
A
20
A
2-Types of Inflation
• Demand-Pull Inflation:
– Too many dollars chasing too few goods
– Example: printing money
• Cost-Push Inflation
– ↑ cost of factors of production
– example: price of oil or labor rises rapidly