Macroeconomics Chapter 1 and 2 Mankiw Study Guide PDF

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A summary and study guide for Macroeconomics chapters 1 and 2 mankiw edition 9 ...

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Home-owners “pay” “rent” to themselves Dep. of Commerce uses imputed rent

Chapter 1: The Science of Macroeconomics 3 primary ways to measure economy 1. Real GDP Total Income of everyone in economy 2. Inflation Rate How fast prices are rising 3. Unemployment Rate Fraction of labor force out of work

Imputed rent in GDP does not apply to All durable goods i.e. Lawn mower, jewelry Underground economy

Endogenous Variables = Variables that Model explains Exogenous Variables = Variables Model takes as given

Imputed Value = Estimated value of good (Not in marketplace) I.e. Government Jobs

Exogenous  MODEL  Endogenous

Value Added =

Market-Clearing = Markets normally in equilibrium Prices and wages are flexible Long-Run Stick Prices = Prices and wages are fixed Short-Run

Real Versus Nominal GDP Nominal = Measured at current prices Real = Measured at base year prices

Chapter 2: The Data of Macroeconomics GDP = Total Income = Total Expenditure

GDP Deflator / Implicit Price Deflator Nominal GDP=Real GDP∗GDP Deflator Nominal GDP G DP deflator = Real GDP

Stock Variable = Flow Variable =

Measured in units 5 Gallons, 4% Measured in units/time 5 Gal/minute, 4% per month

GDP Nuances Used Goods?  Not Included  “Transfer of asset” GDP only measures value of currently produced gs Inventories? If inventory goes unsold  GDP unchanged Firm pays ↑ Wages + Firm profits ↓ = y If inventories stored  GDP increases Firm owners “buy” inventory, Worker’s wages ↑ Investment in Inventory = Expendi by firm owners Note: when firm does sell good, treat as used

Real GDP=

Just like it sounds, Value added 4 each intermediate stage

Nomnial GDP GDP Deflator

See in this equation how it “Deflates” GDPnom = GDPreal The GDP deflator reflects what’s happening to prices Chain-weighted Measures of GDPreal Over time, one year’s price will become outdated  inaccurate measurement of GDPreal So, use base year that changes with time Ex: avg prices 2014-15 used to get 2014-15 GDPreal These year-to-year growth rates make chain Arithmetic tricks

C I G Xn

 Consumption  Investment  Government Spending  Net Exports (Exports – Imports)

National Income Accounts Identity Y =C +I +G+ X n Consumption Household expenditure on goods + services Goods are tangible items 1) Durables ∋ Cars, TVs 2) Non-Durables ∋ Food, clothing Services are intangible purchases ∋ Haircuts, doctor visits Investment Items bought for future use 1. Business/Nonresidential Fixed Investment Firms buy capital ∋ factories, equipment ∋ I.P. ∋ software, R+D, Artistic originals 2. Residential Fixed Investment Households + Landlords Purchase new housing 3. Inventory Investment Increase in firms’ inventories Note: Can be negative if II is falling Government Purchases Federal, state, and local ∋ Military equipment, highways ∌ Transfer payments to individuals Social security, welfare Net Exports Exports – imports Gross Domestic Product – GDP Total income produced domestically Gross National Product – GNP Total income earned by nationals

% ∆(x∗y )≈ % ∆ x + % ∆ y Intermediate Goods?  Not included Value of intermediate goods already included in market price of final goods Housing Services?  Complicated… Think of all houses as “housing service” Rent = GDP to landlord

GNP=GDP +Factor payments ¿ abroad−Factor payments

()

x ≈ % ∆ x−% ∆ y %∆ y Example: GDPreal = +3% GDP deflator = +5% % ∆ nominalGDP ≈ 5 % + 3 % ≈ 8 % Components of Expenditure

Net National Product – NNP GNP – depreciation of capital (cost of creating output) NNP= GNP− Depreciation National Income – NI How much everyone in economy earned

NI = NNP, except statistical discrepancy National Income=NNP−Statistical Discrepency Six Categories of National Income 1. Compensation of Employees 2. Proprietor’s Income Non-corporate businesses ∋ small farms 3. Rental Income Landlord income – expenses (∋ depreciation) ∋ “Self-payment” 4. Corporate profits Income of corporations after payments to workers and creditors 5. Net interest Interest domestic business pay minus interest they receive, plus interest to foreigners 6. Taxes on production and imports Tax on businesses (∋ sales tax) – subsidies Personal Income Amount of income households and non-corporate businesses receive

Personal Income=National Income−Indirect business taxes −C

Disposable Income Disposale Income=Personal Income−Personal Taxes

Since economy fluctuates regularly with seasons (Best quarter = Q4, Worst quarter = Q1) We account with “seasonal adjustment”...