Macroeconomics Unit 2: Economic Indicators

Presented by Jacob Reed from ReviewEcon.com

Overview

• Focus on economic indicators.
• Part of the total review booklet available at ReviewEcon.com.
• Content accompanies existing resources for further study.

Circular Flow Model

• Economic Actors: Households and Businesses.
• Markets:
  • Product Market: Businesses supply goods/services; households provide money (sales).
  • Factor Market: Households supply resources (land, labor, capital, entrepreneurship); businesses provide wages, interest, rent, profit.
• Mixed Economy (US Context):
  • Government as a third actor, interacting with both markets.
  • Provides public goods funded by taxes.

Gross Domestic Product (GDP)

• Definition: Total value of all final goods/services produced within a country annually.
• Calculation Methods:
  1. Value-Added Approach: Measures contributions of firms to final goods (e.g., fabric to shirt transformation).
  2. Income Approach: Counts money from businesses to households via rents, wages, interest, profit, with adjustments for taxes/depreciation.
  3. Output Expenditure Model:
     • Formula: C + I_g + G + X_n
     • C: Consumption (consumer purchases).
     • I_g: Gross Investment (business capital purchases and inventory changes).
     • G: Government Purchases.
     • X_n: Net Exports (exports - imports).

Non-Countable GDP Items

• Used items, intermediate goods, financial transactions are excluded.
• GDP Per Capita: Used to measure standard of living with noted inaccuracies (e.g., underground economy, home production, etc.).

Unemployment

• Definition: Not working but actively seeking employment.
• Unemployment Rate Formula: (Unemployed / Labor Force) x 100.
• Labor Force Participation Rate: (Labor Force / Civilian Population) x 100.
• Types of Unemployment:
  • Frictional: Between jobs or first-time job seekers.
  • Structural: Skill mismatches due to economic changes.
  • Cyclical: Due to economic downturns (business cycle).
  • Natural Rate of Unemployment: Frictional + Structural unemployment.

Inflation

• Definition: General price level increase across the economy.
• Measurement:
  • Consumer Price Index (CPI): Tracks household product price changes.
  • GDP Deflator: Tracks price changes across all products.
• Calculation Concepts:
  • Nominal vs. Real GDP: Real adjusted for inflation.
  • CPI Calculation: [(Current Basket Value / Base Year Basket Value) x 100].
  • Inflation Calculation: [(New CPI - Old CPI) / Old CPI] x 100.

Effects of Inflation

• Borrowers benefit from unexpected inflation; banks and savers are harmed.

Macroeconomic Goals

• Economic Growth: Measured by GDP.
• Full Employment: Low or natural rate of unemployment.
• Stable Prices: Tracked by CPI or GDP deflator.

Business Cycle

• Phases:
  • Expansion: GDP rises, unemployment falls.
  • Contraction: GDP falls, unemployment rises (recession if >6 months).
  • Peaks: High inflation.
  • Troughs: High unemployment, possible deflation.
• Gaps:
  • Inflationary Gap: Output > Potential, leads to rising prices.
  • Recessionary Gap: Output < Potential, high unemployment.
• Economic Growth: Long-term upward trend in potential output.

Conclusion

• Comprehensive review of economic indicators and their implications.
• Additional resources and activities available on ReviewEcon.com for further practice and study.
• Encouragement to engage with additional study materials and support resources.

Note: These notes are intended as a study aid for reviewing key macroeconomic indicators and concepts in preparation for exams.