Macroeconomics Core Concepts and Problem Solving: GDP, Unemployment, Inflation, and Economic Growth

Week 3 – Chapter 8: Measuring the Economy

Business Cycles

The business cycle refers to the fluctuations in economic activity that an economy experiences over time, typically measured by changes in real GDP.

• Contraction/Expansion: Periods of declining (contraction) or increasing (expansion) economic activity.

• Economic growth: Sustained increase in real GDP over time.

GDP and Its Components

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given period.

• Consumption: Spending by households on goods and services.

• Government purchases: Expenditures by the government sector.

• Investment: Spending on capital goods that will be used for future production.

• Net exports: Exports minus imports.

• Final goods vs. intermediate goods: Only final goods are counted in GDP to avoid double counting.

GDP Deflator/Price Index: Measures the change in prices of all new, domestically produced, final goods and services in an economy.

• $GDP = C + I + G + (X - M)$

Inflation and Price Indices

Inflation rate is the percentage change in the price level from one period to the next.

• Nominal vs. real GDP: Nominal GDP is measured in current prices; real GDP is adjusted for inflation.

• Per capita GDP: GDP divided by the population, indicating average economic output per person.

• Price level: Average of current prices across the entire spectrum of goods and services produced in the economy.

Other Key Concepts

• Transfer payments: Payments by the government to individuals, not in exchange for goods or services (e.g., social security).

• Uses of GDP, GDP/capita: Used to compare economic performance across countries and over time.

Problem Solving

• Calculating nominal and real GDP and GDP deflator

• Calculating growth rate: $\text{Growth Rate} = \frac{\text{GDP}_{t} - \text{GDP}_{t-1}}{\text{GDP}_{t-1}} \times 100$

Week 4 – Chapter 9: Unemployment and Inflation

Types of Unemployment

Unemployment measures the share of the labor force that is jobless and actively seeking work.

• Cyclical unemployment: Caused by economic downturns.

• Frictional unemployment: Short-term unemployment as people move between jobs.

• Structural unemployment: Mismatch between workers' skills and job requirements.

• Natural rate of unemployment: Sum of frictional and structural unemployment; the unemployment rate when the economy is at full employment.

• Full employment output: Level of output when the economy is at the natural rate of unemployment.

Labor Force and Measurement Issues

• Labor force participation rate: Percentage of working-age population in the labor force.

• Discouraged workers: Individuals not seeking work because they believe no jobs are available.

• Marginally attached workers: Not actively seeking work but want a job.

• Underemployment: Workers employed below their skill level or part-time when full-time is desired.

• Unemployment rate: $\text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labor Force}} \times 100$

Inflation Measurement

• Efficiency wage: Above-market wage paid to increase worker productivity.

• Problems with unemployment measure: Does not account for discouraged or underemployed workers.

• CPI (Consumer Price Index): Measures changes in the price level of a basket of consumer goods and services.

• Chained CPI: Adjusts for changes in consumer behavior and substitution between goods.

Problem Solving

• Calculating labor force participation rate and unemployment rate

• Calculating CPI: $\text{CPI} = \frac{\text{Cost of Basket in Current Year}}{\text{Cost of Basket in Base Year}} \times 100$

• Real vs. nominal value: $\text{Real Value} = \frac{\text{Nominal Value}}{\text{Price Index}} \times 100$

• Calculating inflation rate: $\text{Inflation Rate} = \frac{\text{CPI}_{t} - \text{CPI}_{t-1}}{\text{CPI}_{t-1}} \times 100$

Week 5 – Chapters 10 and 11: Economic Growth, Capital, and Financial Markets

Economic Growth and Capital

Economic growth is the increase in the productive capacity of an economy, often measured by real GDP per capita.

• Human capital: Skills and knowledge of the workforce.

• Industrial revolution: Period of rapid industrialization and economic growth.

• Labor productivity: Output per worker; key driver of economic growth.

• Economic growth model and policies: Theories and government actions to promote growth.

• Per worker production function: Relationship between output per worker and capital per worker.

Financial Markets and Investment

Financial markets facilitate the allocation of resources and investment in the economy.

• Foreign direct investment: Investment by a firm in another country.

• Loanable funds market: Market for borrowing and lending funds.

• Consumer funds flow: Movement of funds from savers to borrowers.

• Expected return: Anticipated profit from an investment.

• Interest rate: Cost of borrowing money.

• Investor confidence: Trust in the stability and profitability of investments.

• Shifts in demand and supply of loanable funds: Changes in saving and investment behavior affect interest rates.

Banks and Financial Intermediaries

• Banks, financial intermediaries: Institutions that channel funds from savers to borrowers.

• Bonds vs. stock: Bonds are debt instruments; stocks represent ownership in a company.

• Direct vs. indirect finance: Direct finance involves borrowers and lenders dealing directly; indirect finance uses intermediaries.

• Secondary markets: Markets where existing financial assets are traded.

• Securitization: Pooling financial assets to create new securities.

• Security: Financial instrument representing ownership or debt.

Problem Solving

• Loanable funds market analysis: Understanding equilibrium interest rates and the impact of shifts in supply and demand.

Summary Table: Types of Unemployment

Type	Description	Example
Cyclical	Due to downturns in the business cycle	Factory workers laid off during a recession
Frictional	Short-term, between jobs	Recent graduate seeking first job
Structural	Mismatch of skills and jobs	Coal miners displaced by automation

Summary Table: GDP Measures

Measure	Definition	Formula
Nominal GDP	Value of output at current prices	$\sum P_{t} \times Q_{t}$
Real GDP	Value of output at constant prices	$\sum P_{base} \times Q_{t}$
GDP Deflator	Price index for all goods/services	$\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$

Additional info: Some definitions and formulas have been expanded for clarity and completeness. The notes cover foundational macroeconomic topics suitable for college-level study, including measurement, problem solving, and key concepts in GDP, unemployment, inflation, and financial markets.