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Macroeconomics Unit 2 Key Concepts

May 7, 2025

Macroeconomics Unit 2 Summary Notes

Introduction

  • Welcome by Jacob Clifford
  • Summary video for Macroeconomics Unit 2: Economic Indicators and the Business Cycle
  • Encourage students to download the study guide for key concepts and practice questions

Overview of Key Concepts

  1. Economic Indicators
    • Measurement of a healthy economy includes GDP, unemployment rate, and Consumer Price Index (CPI).
  2. Circular Flow Model
    • Illustrates the interactions between households, businesses, and the government.
  3. Gross Domestic Product (GDP)
    • Dollar value of all final goods and services produced in a country within a year.
  4. Types of Unemployment
    • Frictional, structural, and cyclical unemployment.
  5. Real vs. Nominal GDP
    • Real GDP is adjusted for inflation, while nominal GDP is not.

Detailed Topics

Topic 2.1: Circular Flow Model

  • Components:
    • Households own factors of production and sell them to businesses.
    • Businesses produce goods/services sold to households.
    • Governments tax and provide public goods/services.
    • Financial Sector: Money is saved and lent.
    • International Considerations: Closed economy perspective.
  • Economic Goals: Growth, limit unemployment, and stability in prices.

Topic 2.2: Measuring GDP

  • Three Methods:
    1. Expenditures Approach: C + I + G + X (Consumer, Investment, Government, Net Exports)
    2. Income Approach: Wages + Rent + Interest + Profit = Total Income
    3. Value Added Approach: Adds value at each production stage.
  • Key Points:
    • Investment in this context refers to business capital, not personal investments in stocks.
    • Government spending excludes transfer payments like welfare.

Topic 2.2: Limitations of GDP

  • Excludes:
    • Used goods, intermediate goods, non-production transactions (stocks/bonds), illegal transactions.
  • Practice with sample transactions to determine if they count towards GDP.

Topic 2.3: Unemployment

  • Definitions:
    • Labor Force: 16+, employed or actively seeking work.
    • Labor Force Participation Rate: (Labor Force / Working Age Population) x 100.
    • Unemployment Rate: (Unemployed / Labor Force) x 100.
  • Types of Unemployment:
    1. Frictional: Between jobs.
    2. Structural: Skills mismatch or industry changes.
    3. Cyclical: Recession-related job loss.
  • Natural Rate of Unemployment: Sum of frictional and structural unemployment, usually around 4-5%.

Topic 2.4: Measuring Inflation

  • Consumer Price Index (CPI):
    • Measures average change in prices over time.
    • Formula: (Current Market Basket Value / Base Year Value) x 100.
  • Key Terms:
    • Inflation: Prices rise.
    • Deflation: Prices fall.
    • Disinflation: Prices rise at a slower rate.
  • Biases in CPI: Substitution bias can lead to inaccuracies in inflation measurement.

Topic 2.5: Effects of Inflation

  • Who is Hurt?:
    • Lenders (fixed interest) and people on fixed incomes (e.g., retirees).
  • Who Benefits?:
    • Borrowers (fixed interest loans).
  • Importance of understanding inflation for salary negotiations and economic decisions.

Topic 2.6: GDP Deflator

  • Definition: Measures the change in prices for all goods/services relative to nominal and real GDP.
  • Calculation: (Nominal GDP / Real GDP) x 100.
  • Practice with question examples to reinforce learning.

Topic 2.7: Business Cycles

  • Phases:
    1. Trough: Lowest point.
    2. Expansion/Recovery: Growth phase.
    3. Peak: Highest point.
    4. Recession/Contraction: Decline phase.
  • Output Gaps:
    • Negative Output Gap: Recession.
    • Full Employment: Actual GDP = Potential GDP.
    • Positive Output Gap: Economy overheating.

Conclusion

  • Summary of key concepts in the unit.
  • Emphasis on practice and preparation for future units.

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