Scarcity: Human are not limited but the resources are so people must make choices to pursue their

goals. Economics: As people try to accomplish their goals, they interact in markets. Only one buyer and one seller are necessary to form a market. Markets may be physical or virtual and legal or illegal. Economics assume that as people interact in markets, they behave as follows 1. People are rational This means that people use all available as they act to action and chose an action only if the benets outweigh the cost. 2. This does not mean that people know everything or always make the best decisions it means people make decisions base on what they know at the time. 3. People respond to economic incentive An economic incentive is a factor such as the prospect of a nancial punishment or reward that motivates a particular course of action

4. The most effective policies encourage a change in behavior by using incentives rather than by expecting voluntary compliance. 5. Marginal change: some incremental adjustments to a plan of action.( whether study in Saturday or play). 6. MARGINAL ANALYSIS:Optimal decision (is to do something to the point where the marginal benet = marginal cost)are made at the margin while some decisions require choosing whether to do something. Many decisions require choosing how much to do something. Do little more of something. 7. Marginal benet > marginal cost then do it. 8. Marginal benet < marginal cost then do a little less of something. 9. Cost is not just monetary and sometimes it is not monetary at all. 10. Opportunity cost: Every choice has a next best alternative. The Economics Problem that every society must solve Tradeoff: Scare resources can only produce limited quantities of goods and services so every society faces trade-offs as it answers the questions: 1. What goods and services will be produced? 2. How will the good and services be produced? 3. Who will receive the goods and services produced? Answer--- Society organize their economics along a continuum between extremes 1. Centrally planned economy 2. Market economy

First economy has not been successful at producing low-cost high-quality goods and services. As the result, the standard of living of the average person in a centrally planned economy tend to be low. Second economy consumers rms and markets answer the three questions respectively. Consumers express their preference by buying or not buying particular goods and services so the goods and services produced are the goods and services consumers want.
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Competition drives rms to produce high-quality goods and services using the lowest-cost methods of production. Those who are most willing and able to pay for goods and services receive them markets determine ability to pay by rewarding an individual`s hard work or possession of valuable resources. Mixed economy : The U.S. and other high-income democracies are mixed economies with varying degrees of government intervention. Economic model is a circularow diagram and we can do the research between two countries even there are a lot of countries in the real life. such las diagrams and equations to answer questions about the real world. Models are often based on unrealistic assumption that simplify the problem at hand without substantially affecting the validity of the answer. Economists accept and use a model is it leads to hypotheses that are conrmed by statistical analysis. No one model can address all the issues we care about so we will learn different models.

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Positive analysis: Can be evaluated as true or false using data. A caused B. Normative analysis: What should to be which involve personal values as well as facts so they cannot easily be evaluated as true or false. C can stop A cause B. Our focus wii be on positive analysis.

1.4

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the study of how households and rms make decisions and how they interact in markets the study of economy-wide phenomena, including ination, unemployment, and economic growth
! because changes in overall economy arise from the decision of individual households and rms 1.5 economic term Household Firm

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Inputs=factors of production(Households sell) = labor , capital, human capital, natural resources, entrepreneurship.

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Outputs=goods and services(rms sell and households buy)=produced from inputs and technology.

Chapter 2
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THE PRODUCTION POSSIBILITIES FRONTIER:hows the combinations of outputin this case, cars and computersthat the economy can possibly produce. The economy can produce any combination on or inside the frontier. Points outside the frontier are not feasible given the economys resources.

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PPF is used to analyze the costs and trade-offs that individuals rms and countries face as a result of scarcity.

Combination inside the PPF is not efcient some resources are not being used( unemployment). So it is possible for the economy to produce more of one good without producing less of the other.

Combination outside the PPF are unattainable given the available and current technology(Scarcity).

If W uses all its available resources and current technology to produce laptop. It will produce 200 laptops and 0 TV per week.

200 Laptops= 400TV 1 Laptop= 2 TV 1 tv= 0.5 laptop

W`s marginal opp cost of 1 laptop is constant at 2 televisions. W`s marginal opp cost of 1 TV is constant at 0.5 laptop. S`s marginal opp cost of 1 laptop is constant at 5 TV, and S`s marginal opp cost of 1 TV is constant at 2 laptop.

A bowed-out PPF illustrates increasing marginal opp costs as the economy increases its production of one good in1-unit increment, it must decrease its production of the other good by larger and larger amounts.

SHIFT IN THE PRODUCTION POSSIBILITIES FRONTIER. An economic advance in the computer industry shifts the production possibilities frontier outward, increasing the number of cars and computers the economy can produce.

This occurs because some resources are better suited to produce one good rather than other. A bowed-out PPF is more realistic than a straight-line PPF, but we use straight line PPFs for simplicity( the conclusion are the same for both).
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If an economy gains resources its PPF will shift outward and if an economy loses resources its PPF will shift inward.

At any given time, the resources available to an economy are xed but over time the resource available to an economy may increase or decrease. PPF will shift outward when technology improves

Economic growth : Outward shift of an economy`s PPF represent economic growth.

With trade, both countries consume outside their PPFS,which illustrates the gains from trade. With trade W gains 20 laptops and 90 TV per week while S gains 20 laptops and 160 TV per week.

absolute advantage
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the comparison among producers of a good according to their productivity

comparative advantage
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the comparison among producers of a good according to their opportunity cost

The gains from trade are based on comparative advantage, not absolute advantage.

Consumption with trade and the gains from the trade. Increase in consumption.

imports goods produced abroad and sold domestically exports goods produced domestically and sold abroad

The gains from trade are not usually equally distributed between the participants. It is possible for a country as a whole to gain from trade while some individuals in that country are harmed.
Most important among these issues is that each country has many citizens with different interests. International trade can make some individuals worse off, even as it makes the country as a whole better off. When the United States exports food and im- ports cars, the impact on an American farmer is not the same as the impact on an American autoworker. Trade allows all countries to achieve greater prosperity. Qualied unemployed workers can use these fund to pay for retraining for searching for new jobs or for relocating to areas where new jobs are available. Trade restrictions reduce or eliminate the gains from trade. most economists advocate free trade.(principle of comparative advantage)

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2.3````The market system

In market economies, trade is carried out in markets.

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Households and rms interact in two types of market: Product markets, households are buyers and rms are sellers.
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Product markets: entrepreneur are buyer.

Factor market rms are buyers and households are sellers.

No modern country has a free market, but those that come closest to the free market benchmark have been more successful than countries with centrally planned economics in providing their people with rising living standards.

Chapter3: When buyers expect the future price of a good to increase they stock up on the good while its price is low thereby causing the demand for the good to increase now.(shift right) ...................... decrease, they wait to purchase the good until its price is lower and causing the demand for the good to decrease now.(shift left)
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The demand curve only shows what happens to quantity demanded as price changes these other variables are held constant. Change in quantity demanded: if price increases then move up and to the left along a stationary demand curve to a lower quantity demand

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quantity demanded the amount of a good that buyers are willing and able to purchase Price, income, prices of related goods, tastes, expectations.

demand curve a graph of the relationship between the price of a good and the quantity demanded

Market demand

SHIFTS IN THE DEMAND CURVE.

3.2 Supply side of the market

Quantity supplied:the amount of a good that sellers are willing and able to sell
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Supply schedule:a table that shows the relationship between the price of a good and the
quantity supplied

Supply curve:a graph of the relationship between the price of a good and the quantity
supplied Each point on a supply curve is a quantity supplied corresponding to a specic price the points represent supply over a range of prices There is a positive or direct relationship between the price if a product and the quantity of the product supplied so the supply curve slopes downward.
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Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

What determines the quantity an individual supplies?

S+ Input price technology price of sub in production the number if rms in the market expectation for future value input price Positive Tech P of sub in production Firms enter market Future valueinput price+

S-

Negative Tech P of sub in production + Firms exit market Future value+

When sellers expect the future price of a good to increase, they wait to supply the good until its price is higher, thereby causing the supply of the good to decrease now.

Technological change: By reducing rms costs, the advance in technology raised the

supply of ice cream. price of sub in production: alternative products that a rm could produce. When G and H are subs in production and the price of G increases, G becomes relatively more protable to produce and H becomes relatively less protable to produce so the quantity supplied of G increases and supply of H decrease (shift left) as resources are shifted from the production of H to the production of G

The supply curve only shows what happens to quantity supplied as price changes these other variables are held constant. Change in quantity supplied: if price increases, then move up and to the the right along a stationary supply curve to a higher quantity supplied If the price - then move down and to the left along a stationary supply curve to a lower quantity supplied.

Change in supply: If any other supply variable changes then shift the supply curve right for an increase in supply or left for a decrease in supply.

3.3~ Market Equilibrium: Putting Demand and Supply Together Market equilibrium

The price at which these two curves cross is called the equilibrium price, and the quantity is called the equilibrium quantity.

Here is one point at which the supply and demand curves intersect; this point is called the markets equilibrium. Demand and supply together determine the equilibrium quantity produced and sold and the equilibrium price of each good and service in a market economy. If a market is out of equilibrium then price will adjust to bring the market into equilibrium. Surplus:a situation in which quantity supplied is greater than quantity demanded A surplus gives rms an incentive to increase their sales by cutting price which simultaneously increase the quantity demanded and decreases the quantity supplied. Shortage: a situation in which quantity demanded is greater than quantity supplied. There are no shortages of scarce resources in a market economy.

Competitive market equilibrium: At a competitive market equilibrium all consumers willing and able to pay the market price and will be able to buy as much of the produce as they want, and all rms willing and able to accept market price will be able to sell as much of the product as they want. A market in equilibrium remains in equilibrium, ceteris paribus because no individual would be better off doing something different. If there is a change in the market, then the market will move to a new equilibrium.

3.4 The effect if demand and supply shifts on equilibrium

Skip the effect of shifts in demand and supply over time In the market for bologna an inferior good consumer income increase. Demand: decrease shift left,causing a surplus at the original P* Supply: stays the same Equilibrium price: Equilibrium quantity:Baby diapers, the price of adult diapers a substitue in production decrease Demand: stays the same Supply: + shifts right causing a surplus at the original p* E price: E supply:+ In the market for DVDs DVD players a complement become cheaper Demand:+ shifts right causing a shortage at the original P* Supply: stay the same E price: + Equilibrium quantity: + In the market for cars, sellers expect price to increase in the future D:stay the same S:-- shifts left causing a shortage at original P E p:+ E Q:-

Chapter 7
Macroeconomics : macroeconomists attempt to explain economic events and to formulate economic policy to improve the performance of an economy. Four of the most important measures of the performance of an economy are GDP, the unemployment rate, the ination rate, and the growth rate. 7.1~ Gross domestic product measures total production GDP is the market value of all nal goods and services produced in a country during a period of time, typically one year.

Market value... In micro, production of a good or service is measured using quantity. In macro,production of all good and services is measured using market values [ P1.Q1+... +Pn.Qn] of all. GDP does not include household production or production in the underground economy . Household production refers to goods and services people produce for themselves such as meals cleaning yard work and childcare. Underground economy: illegal drugs the services of assassins and paying worker under the table. nal goods and services or intermediate good or service intermediate goods are not consumed for their own sake, but are used in the production of other goods and services. The value of intermediate goods is included in the market prices of nal goods and services so we only use the value of nal good and services when computing GDP. The county of W produced the following 2010 product quantity produced Bread 1000 loaves Cheese 1000 pounds Flour used to pro bread 250 pounds Grapes used to pro wine 200 bushels wine 1000 bottles GDP: 1000+4000+10000=15000 GDP only includes the value of new production not the value of used goods that are sold. The value of land and real estate are not included in GDP, but the values of newly constructed houses and the service of real estate agents are included in GDP. GDP measures total production that occurs within the geographical boundaries of a country regardless of the citizenship of the producers In the U.S. the Bureau of economic analysis measures and reports GDP every quarter( 3 months) market price 1 per loaf 4 per pound 1 per pound 25 per bushel 10 per bottle

The BEA measures the value of total production during the quarter then multiplies that value by 4 so each quarterly report gives an annual measure of GDP. The BEA also adjust GDP for regular seasonal changes such as Christmas. GDP in USA is 13 trillions

Economists use the term GDP output production income and expenditure inter changeably. Every dollars spent by a buyer becomes income to the seller so GDP equals the value of total expenditures on the economy`s total production of goods and service by buyers( household rms the government and the rest of the world) and GDP equals the value of total income received by household who supplied the factors of production that produced the economy`s total production of goods and services( wage for labor interset for the use of natural resources and prot for entrepreneurs)

The BEA divides GDP to Consumption Investment Government purchases and Net exports. Y= C+I+G+NX is the national income accounts identity. Consumption ( no house) spending by households on goods and services, with the exception of purchases of new housing 14% consumption spending was on durable -- automobile 22 % was on nondurable 64% was on services -- education housing.

Investment : spending on capital equipment, inventories, and structures, including household purchases of new housing but a consumer`s spending on housing services counts as consumption.

In economics, investment refers to purchase of newly-produced goods that will be used in the future to produce more goods and services( new physical capital) not to purchase of stocks and bonds( nancial capital) or to the purchase of existing capital goods 82% of this investment spending was on capital and inventory and 18% was on new houses

government purchases spending on goods and services by local, state, and federal governments. Salaries of government workers are included in GDP, but transfer payments, such as Social Security and unemployment benets, are not included in GDP because they are not new goods or services.

42% is on federal spending and 58% is on local spending. Exports are goods and services produced domestically but sold in other countries. 13% of GDP. WTO--- US was the second largest exporter of good-- 8.4% and largest exporter was 14% BEA -- the top 3 goods exported by US in 2011 1. automotive vehicle parts and engines 2.Semi- conductor 3. imports are goods and service bought domestically but produced in other countries. According to the BEA, the top three goods imported by the US in 2011 were 1. crude Oil 2. automotive vehicles parts and engine 3. pharmaceutical preparations Countries don`t specialize completely because (1)not all goods and services are traded internationally.(2) production of most goods involves increasing marginal opportunity costs.and(3) tastes for products difer. International trade remains less important to the US than it is to most other countries whose imports and exports make up one-third to one half of hte GDP. Net exports: exports -- imports

Spending in imports is included in C I and G so it is subtracted in NX to eliminate the value of foreign products from domestic GDP. US net exports is -3% of GDP.

Y = C + I + G + NX.
Example
E= 500 I=400 Spending by rms on physical capital 1000 gov goods and services 2000 C:5000 I: 2000 G:2000 N:100 GDP: 9100

Transfer payment and stock are not calculated in the GDP because noting new is exchanged.
C: 8000 E: 7000 GDP:12000 I:3000 G:2000 I = 1700 7.2`~~ Does GDP measure what we want it to measure? GDP per capita which equals a country`s GDP divided by its population is a measure of the annual income of the average person in an economy. GDP per capita is often used as a measure of well-being but it is not a perfect measure of well-being for several reason: 1. It does not include the values of some things that contribute to well-being such as leisure , household production, volunteering and a population`s patriotism, wisdom, integrity,courage,health and creativity. 2.It is not adjusted for pollution or other negative effect of production or for changes in crime and other social problems such as divorce and substance abuse. 3. It measures income but does not consider income distribution.

On the other hand, usually the higher a country`s GDP per capita, the better off the country`s people are because they have more goods and services better nutrition health care and education and better pollution reduction.

7.3 Real GDP versus Nominal GDP GDP is calculated using both quantities and prices so change in GDP may reect changes in quantities change in price or change in both. The BEA separates quantity changes from price changes by calculating a measure of production called real GDP and a measure of the price level called the GDP deator. Nominal GDP : The value of nal goods and services evaluated at current year price. Real GDP: the production of goods and services valued at constant prices. ( base year for

everything) The percentage change in real GDP is a measure of the grown rate of an economy. Real GDP is what is reported in the news . Price level: A measure of the average prices of goods and services in the economy. GDP deator: A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100. The GDP deator holds quantities constant, so change in the GDP deator only reect changes in the price level. Nominal and real GDP are always equal in the base year, so the GDP deator is always 100 in the base year. A value of the GDP deator of 116 tells us that the average price of goods and services is 16% higher than the average price in the base year. Ination rate : The percentage increase in the price level from one year to the next. The percentage change in the GDP deator is one measure of the ination rate. % change = ( newer value -- older value/ older value)* 100% Example:

Hawkeye produces two goods: football and bases. The table below shows prices and quantities of output in H for four years The base year is 2006
Year 2005 2006 2007 2008 1 2 3 4 Price of football Quantity of football 10 20 20 10 1 2 2 4 Price of baseball Quantity of baseball 20 30 55 50

Nominal GDP in 2005=(1)(10)+(1)(20)=30 Nominal GDP in 2006=(2)(20)+(2)(30)=100 Nominal GDP in 2007=(3)(20)+(2)(55)=170 Nominal GDP in 2008=(4)(10)+(4)(50)=240 Real GDP 05=2.10+ 2.20=60 Real GDP 06=2.20+2.30=100 Real GDP 07=2.20+2.55=150 Real GDP 08=2.10+2.50=120 Real GDP answers a hypothetical question: What would be the value of the goods and services produced this year if we valued these goods and services at the prices that prevailed in some specic year in the past? By evaluating current production using prices that are xed at past levels, real GDP shows \ Growth rate in 2006= 100-60/60 . 100%= 66.66% in 2007= 50/100 .100% = 50% in 2008 = -30/ 150 .100% = -20%

GDP deator for 2005 = 30/60 .100= 50 for 2006 = 100/100 .100 = 100 for 2007 = 170/150 .100= 113.3 for 2008= 240/120 .100= 200 Ination rate in 2006= 100-50 / 50 * 100% = 100% in 2007= 113.3-100 /100 *100%=13.3% in 2008 = 200-113.3/ 113.3 * 100% = 76.5%

7.4~ Other measure of total production and total income GNP : Gross national product

GDP is the market value of all nal goods ans service produced within the geographical boudaries of a country in one year. while GNP is the market value of all nal goods and services produced by citizens of a country in one year.

Chapter 8:
Unemployment and ination 8.1~ Measuring the unemployment rate and the labor force participation rate The US department of labor`s bureau of labor statistics conduct a monthly survey of 60000 households and places each adult from the households into one of the following categories. Employed: the person worked during the week before the survey or was temporarily absent from their job because of vacation illness strike bad weather. includes people working in their own or their family`s business both full-time and part-time workers and those who are underemployed.

Unemployed: The person did not work during the previous week but was available for work and actively looked for work during the previous four weeks include on temporary layoff and people waiting for a new job to start. Not in the labor force: the person did not work during the previous week and did not actively look for work during the previous four weeks. includes retirees homemakers fulltime students military personnel. prisoners institutionalized or disable and discouraged workers. Labor force= employed+unemployed Labor force participation rate= Labor force/working-age population .100% US= 63.7% The working-age population(people live longer) becomes larger so the rate decline gradually. but the rate of women increase signicantly leaving the overall labor force participation rate higher today than it was in 1948. Unemployment rate= # of unemployed/ labor force .100%

US rate: 8.3% Like BEA does with GDP, the BLS adjusts the unemployment rate for regular seasonal changes. The unemployment rate of teenagers is greater than that of adults. B>H>A>W The unemployment rates of males and females are usually similar, and M> F because male dominated industries such as construction nancial service and manufacturing sufferd more compare with Female medical services education . P= 24000 E=180000 UE=20000 Labor= 200000 Unemployed= 20000/200000 l= 200000/240000

The unemployment rate reported by the BLS is a good indicator of how easy or difcult it is to nd a job given the current state of the economy, but it is not a perfect measure of joblessness. One problem is that the BLS categorize underemployed workers as employed and discouraged workers as not in the labor force, but both are essentially unemployed so the unemployment rate reported by BLS understates the true degree of joblessness in the economy. As of Jan 2012, the US civilian unemployment rate including underemployed and discouraged workers was 15.1%.

The numbers of underemployed and discouraged workers typically rise during recessions. Another problem is individuals who claim to be unemployed to qualify for government assistance, yet they are not trying to nd work, so they are not in the labor force or they are working in the underground economy so they are employed. Because of these individuals, the unemployment rate reported by BLS overstates the true degree of joblessness in the economy. Each year, millions of jobs are created and destroyed in the US because of changes in consumer tastes technological progress and the success and failure of entrepreneurs.

Consequently, the typical person who loses a job is unemployed for a relatively brief period of time, though that time lengthens during severe recession. natural rate of unemployment= frictional unemployment rate+ structural unemployment rate. 8.2 Type of unemployment

The data show that the unemployment rate increases during recessions and eventually decreases during expansions and it never fall to zero because there are always some people engaged in job search and there are always some labor markets out of equilibrium. Frictional unemployment Job search takes time, so even if there are enough jobs there is always some frictional unemployment in every economy. While any kind of unemployment is a reection of wasted resources ( inside PPF),some frictional unemployment is good for the economy because it represents workers and rms taking the time necessary to ensure a good match between the attributes of workers--skills interests abilities) and the characteristics of jobs which ultimately leads to higher productivity and GDP. structural unemployment If the wage is stuck above its equilibrium level in a certain labor market then there will be persistent surpuls of workers in that labor market. unemployment that results because the number of jobs available in some labor markets is insufcient to provide a job for everyone who wants one

We will examine three possible reasons for an above-equilibrium wage: minimumwage laws, unions, and efciency wages.
Structurally unemployed people are not searching for a good match, they are waiting for jobs to become available at the current wage eventually they may choose to learn new skills to allow them to seek jobs on other labor markets. Learning new skill is time-consuming so structural unemployment can last for longer periods than frictional unemployment. NROU is to be about 6%. Cyclical unemployment = unemployment rate - natural rate of unemployment (the deviation of unemployment from its natural rate) Cyclical unemployment causes the unemployment rate to uctuate around the natural rate of unemployment. When the only unemployment in an economy is frictional and structural , the cyclical unemployment rate is 0 and the economy is said to be at full employment. During recessions,sales -- so rms -- production and lay off workers causing the cyclical unemployment rate to be positive and the unemployment rate to rise above the natural rate of unemployment.

During expansions, sales+ so rms+ production and nally hire workers including some people who were frictinoally or structurallly unemployed causing the cyclical unemployment rate to be nagetive and the unemployment rate to fall below the natural rate of unemployment. As of Jan 2012, the US cyclical unemployment rate was 8.3-6.0= 2.3% The country of W has collected the data F U R= 3 S U R =4 U R= 5 N R O U= 7 C U R= -2 8.3~ Explaining Unemployment Government policies have a variety of impacts on frictional and structural unemployment: Government job search programs - frictional unemployment G unemployment insurance benets increase frictional unemployment G workers retraining programs decrease the structural unemployment Minimun wage laws: Increase the structural unemployment The minimus wage is binding in markets for workers with low skill and little experience. Because those receiving the minimum wage are a relatively small part of the labor force, most economists believe that, at its present level ( $7.25 per hour) the effect of the minimus wage on the US unemployment rate is small. Labor unions are organizations of workers that bargin with employers for higher for higher wages and better working conditions for their members. Unions raise the wage above the e wage resulting in Unemployment. Most industries in the US are not unionized, so the effect of unions on US unemployment is small.

Many studies have shown that workers are motivated to work harder by higher wage. Efciency wage: Efciency wages are especially effective in rms in which it is difcult to monitor workers 8.4~~ Measuring Ination Price level The US federal government complies statistics on 3 measures: GDP deator CPI PPI The BLS uses survey to determine a representative market basket of goods and services purchased by a typical urban family of four.

As of Dec 2011,expenditure shares within the market basket were as follows: 40.2% --housing 16.5%- -transportation 15% --food and beverage 6.9% --medical care 6.7%-- education and communication( ination rate is higher than anything else) 5.9%-- recreation 5.3%--other goods and services( tobacco and personal care) 3.5%--Apparel Employees of the BLS determines the price of each good and service in the basket every month then BLS computes the cost of the basket the CPI and the ination rate Consumer price index -- CPI CPI= cost of basket in current / cost of basket in base year)(100)

Since the basket is held constant, the CPI is used to measure changes in the price level over time. A value of the CPI of 316 tells us that the average price of goods and services is 216 percent higher than the average price in the base year. In ation rate The ination rate measures how quickly and in which direction price are changing on average. A positive ination rate indicates that the price level is rising( ination),and a negative ination rate indicates that the price level is falling(deation). Ination and deation do not imply that the prices of all goods and services in that economy are rising or falling, at any point some price are rising and some are falling. The percentage change in the CPI is the most widely used measure of the ination rate. Continuing with country of H from Chapter 7, we will x the basket at 1 football and 1 baseball. The base year is 2006. Year 2005 2006 2007 2008 1 2 3 4 Price of a Football 1 2 2 4 Price of a baseball

CPI: 2005--50 2006--100 2007--125 2008--200

Ination rate: 2006 -- 100-50 / 50 * 100= 100% 2007-- 25% 2008-- 60%

1.GDP 2.Growth rate 3.Unemployment rate Since the middle of 20th century, the US ination rate usually has been positive but low ( 4% per year) indicating that prices on average have tended to rise but at a slow rate. In Jan 2009, the US experienced deation for the rst time since 1950s. As of Jan 1 2012, the US annual ination rate was 2.9%. There are four biases that make changes in the CPI overstate the true ination rate:

1. Substitution bias: Since the basket is held constant, the CPI does not take into account consumers` ability to substitute toward goods that become relatively cheaper. 2. Increase in quality bias: Over time, many products improve in quality. Increases in the prices of these products partly reect their improved quality and partly reect pure ination. The BLS tries to capture only the pure ination, but it is difcult to accurately eliminate the value of improved quality. 3. New product bias: Since the basket is held constant, the CPI does not take into account increase in the purchasing power of the dollar due to the introduction of new products or the price decreases that often follow the introduction of new products. 4. Outlet bias: The BLS collects prices from traditional full-price retail stores so purchases from discount stores and internet sites are not taken into account. Most studies indicate that the CPI overstate annual ination by about 1/2 to 1 percentage point.

Chapter 8 Economists use both deator and the CPI to measure the price level and the ination rate in the economy. Though the GDP deator and the CPI generally move in the same direction the two measures sometimes diverge because of the difference in which goods and services are included in each. Inputs are not included in the GDP. Crude oil is the N0.1 input GDP deator: no imports includes industrial military products quantities change automatically. quantities change every two years. Changes in the CPI are the best measure of changes in the cost of living as experienced by the typical household. When CPI +, the typical household has to spend more dollars to maintain the same standard of living. Producer price index ( PPI) If the price of intermediate goods and raw materials rise, then the cost to rms of producing nal goods and services rises which may led rms to increase the prices of nal goods and services.

Change in the PPI can predict future changes in the CPI. 8.5~~ Using the price index to adjust for the effects of ination The prices of most goods and services rise over time, they also vary across locations. Price indexes give us a way to adjust for the effects of ination so that we can compare dollar values from different years or location.

Value in year 2 dollar = ( value in year 1) ( price level in year 2 / price level in year 1)

In Hawkeye, the price of a movie ticket was 0.5 in May 1948 and 4.00 in May 2008. Hawkeye`s CPI was 24 inMay 1948 and 240 in May 2008. Which one was cheaper? 1948 in 1948 = 0.5 2008 in 1948 = 4 * 24/ 240 = 0.4 2008 in 2008 = 4 1948 in 2008 = 0.5 * 240/24 = 5 The 2008 ticket was cheaper. the GDP deator reects the prices of all goods and services produced domestically, whereas the consumer price index reects the prices of all goods and services bought by consumers.

Boston - 60000 120 Houston- 50000 80 B- 60000 H-50000* 120/80 = 75000 H- 50000 B- 40000 Houston is better. 8.6~~ real versus nominal GDP interest rates

nominal interest rate the interest rate as usually reported without a correction for the effects of ination , the stated interest rate on a loan. 1.he return to lending/saving and the cost of borrowing before an adjustment for ination. 2.the rate at which the number of dollars in a savings account increase over time. 3. what is reported by nancial institutions

real interest rate the interest rate corrected for the effects of ination, Real interest rate =Nominal interest rate Ination rate. the return to lending/saving and the cost of borrowing after an adjustment for ination the rate at which the purchasing power of a saving account changes over time. usually what people really care about nally what matter is not the number of dollars but what those dollars represent in terms of real goods and services. (Purchasing power)

Important: Sally does have $100 more than she had before. In other words, the

number of dollars has risen by 10 percent. But if prices have risen at the same time, each dollar now buys less than it did a year ago. Thus, her purchasing power has not risen by 10 percent. If the ination was 4 percent, then the amount of goods she can buy has increased by only 6 percent. And if the ination rate was 15 percent, then the price of goods has increased proportionately more than the number of dollars in her account. In that case, Sallys purchasing power has actually fallen by 5 percent.

Because it is corrected for the effects of ination, the real interest rate provides a better measure of the true cost of borrowing and the true to lending /saving nominal interest rate.
Savings 100 100 100 100 Nominal rate 3 3 3 3 Ination rate -2 1 3 5 5 2 0 -2 bad for lenders Real rate good for lenders

Does ination impose costs on the economy When the price level rise,the value of a dollar falls Most people believe that the major problem caused by ination is that it lowers the purchasing power of a person`s income. But it is not right. However the higher prices paid by buyers are exactly offset by the higher incomes received by sellers so purchasing power is not affected by ination. Why is ination bad? (1) Ination arbitrarily alters the distribution of income. Ination does not reduce the affordability of goods and services to the average consumer but some people will nd their incomes rising faster than the rate of ination,so their purchasing power will rise. (2) People on xed cost are most hurt by ination. Ination causes resources to be wasted 1.Dollars in interest-bearing accounts do not lose as much value as dollars in wallets do when an economy experiences ination. For this reason when ination is presented people hold fewer dollars and go to bank more often. This wastes resources that could otherwise be used to produce goods and services. 2.Ination causes rms to incur MENU COSTS. This wasted resources that could otherwise be used to produce goods and services. 3.Ination reduces the incentive to save when nominal interest is taxed instead of real interest, as is the case in the US.

4. Low ination Real interest rate(given;determined by market) Ination rate Nominal interest rate( real+ination) 20% tax on nominal interest After-tax real interest rate( real-tax the incentive) 3 1 4 0.8% 2.2% High ination 3 10 13 2.6% 0.4%

4. Unanticipated ination causes a redistribution of wealth among borrowers and lenders. Nominal interest rate= 9% per year Expected ination rate= 5% per year Expected real interest rate=4% per year Actual ination rate=3% per year Actual real interest rate=6% per year Borrowers pay and lenders receive more real interest than expected the dollars paid /received have higher purchasing power than expected, which transfers wealth from borrowers to lenders. Actual ination rate=8% per year Actual real interest =1% per year Borrowers pay and lenders receive less real interest than expected

Chapter 9 9.1~~ Economic growth Long run economic growth Economic growth is measured by changes in real GDP and real GDP per capita. Both of which vary signicantly over time and across countries. One way to put growth rates in perspective is to use the rule of 70 to calculate approximately how many years it will take an economic

Country

Real GDP per capita Growth rate of real GDP

# of years takes to double 7.4 years 10.8 years 12.1 years 28 years 70 years

China Maldives Ecuador Belize

8400 8400 8300 8300

9.5% 6.5% 5.8% 2.5% 1.0%

In the long run, small differences in growth rates can result in big difference in living standards. For example, holding all else constant, after approximately 28 years, China`s real GDP per capita will be 134,400 but Belize`s real GDP per capita will only be 16,600. The rich will not necessarily stay rich ( UK fell from #1 to #33), and the poor will not necessarily stay poor ( Qatar rose from near the bottom before the 1970s to #2 today). THe only way for a country`s real GDP per capita to increase is for the country`s production of goods and services ( real GDP) to increase faster than the country`s population increases. Since the 1950s, this has happened most of the time in the US. Long-run economic growth Over the past 50 years, many countries have experienced long-run economic growth, but some countries in Africa and Asia have not. The average American today can buy more than 8 times as many goods and services as the average American in 1900, but many African and Asian people in severe poverty. What is behind the large variation in standards of living across countries and over time? What determines the rate of long-run economic growth? Labor productivity Increase in real GDP depend on increases in labor productivity. A country`s labor productivity depends on the country`s quantity of capital per hour worked and level of technology. Capital Like computers, factory buildings, machinery,tools,warehouse,and trucks As capital per hour worked increase, worker productivity increases, up to a point.

Capital is subject to diminishing returns: if workers have very little capital, then an additional unit of capital will increase their productivity by a lot and vice versa. Capital is a produced factor of production, so a country can change its capital stock. If a country produces a large quantity of capital goods today, then it will have a larger capital stock tomorrow so it will be able to produce more of all types of goods and services tomorrow. Therefore, one way to increase future productivity is to devote more current resources to the production of capital. Unfortunately, there is an opportunity cost of doing so: when resources are used to produce capital goods, they can`t be used to produce consumption goods. So, to increase future consumption, society must sacrice some current consumption. Because capital is subject to diminishing returns, long-run economic growth depends much more on technological change than on increases in capital per hour worked.

Technology refers to the processes a rm uses to turn inputs into outputs of goods and services. Technological change is change in the quantity of output a rm can produce using a given quantity of inputs. The three main sources of technological change are better machinery and equipment, better means of organizing and managing production and increases in human capital. Human capital is the knowledge and skills that workers acquire through education, training, and experience. As human capital + worker productivity +. Human capital is produced factor of production so a country can change its amount of human capital. Unfortunately, investment in human capital has an opportunity cost: when students are in class they are not producing goods and services. So, again to + future consumption, society must sacrice some current consumption. Entrepreneurs are important in implementing technological change in a market system because they are the ones who decide whether to introduce new technology and whether to allocate their rms` scare to research and development that can result in new technologies. Governments can promote the creation of new technological information by protecting intellectual property with parents and copyrights, subsidizing with grants and tax benets, and subsidizing education with public schools and nancial aid. Returning to the poor countries of Asia and Africa, there are four main reasons they have not experienced economic growth: (1) Failure to enforce the rule of law: The ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.

Property rights are the rights individuals or rms have to use their property, including the right to buy or sell it. For en in a market economy to succeed the gov must guarantee property rights and enforce contracts unless en feel secure in their property, they will not risk starting a business. (2) Wars and revolutions, which make capital accumulation, the adoption of new technologies and conducting business very difcult if not possible. (3)Poor public education and health, the need to reduce disesse and increase nutrition. (4) Low rates of saving and investment poorly functioning nancial systems Potential GDP The capacity of a rm is not the maximum output the rm is capable of producing it is the rm`s production when operating on normal hours using a normal workforce. potential GDP will increase over time as the labor force grows, new factories and ofce buildings are built new machinery and equipments are installed and technological change takes place. Growth in potential GDP in the US is estimated to be 3.5% per year, though actual GDP may grow faster or slower than this as the economy moves through the business cycle.

A healthy economy is one performing at or exceeding its long-run average values for the the gdp, unemployment ,rate ination ,rate growth rate. Long run average value Unemployment rate ination rate growth rate 5-6 2-3 3-4 8.3 2.9 3 Current value

-------------------------------------------------------------------------------------------------------------9.2 and 9.3 The nancial system and the business cycle Saving, investment,and the nancial system Economic growth depends on the ability of rms to expand their operation and adopt new technologies. Firms lacking sufcient funds to nance expansions and the adoption of new technologies and governments running budget decits may acquire funds from households through the nancial system.

Financial system : the system of nancial markets and nancial intermediaries through which rms acquire funds from households. Economic growth is impossible without a well-functioning nancial system. Financial security is a document that states the terms under which funds pass from the buyer of the security to the seller. Financial markets: Market where nancial securities such as stocks and bonds are bought and sold. One type of nancial market is the stock and market. A stock is a nancial security that represents partial ownership of a rm. Firms can raise funds by selling shares of stock in a primary market. The original buyers of stocks may resell them in a secondary market, where most daily trading takes place. While shareholders may receive dividends from stocks,most purchase stocks for the potential capital gains from selling a stock for more than they paid for it. Firms do not receive funds from transactions in the second markets. Another type of market is bond market. A bond is a nancial security that represents a promise to repay borrowed funds after a dened period of time and to pay a xed rate of interest on those funds during that period of time. Firms and govern can borrow funds by selling bonds in a primary market. As with stocks, the original buyers of bonds may resell them in a second market but rms and govern do not receive funds from these transaction. Some people purchase bonds to earn interest, while others purchase bonds for the potential capital gains from selling a bond for more than they paid for it. Financial intermediaries : rms such as bank credit unions mutual funds pension funds and insurance companies that borrow funds from savers and lend them to borrowers. One type of nancial intermediary is a bank. Banks accept deposits from and pay interest to savers lend some of those deposits to and receive higher interest from borrowers, and use the difference to cover expense and generate earnings for their shareholders. Another type of nancial intermediary is a mutual fund which is an institution that sells shares to savers and uses the proceeds to buy a portfolio of stocks bonds and other nancial securities.

The primary advantage of a mutual fund is that it allows savers with small quantities of nds to diversity. So,the nancial system matches savers households with excess funds and investor rms that need funds to purchase new capital and adopt new technologies. Macro model of saving and investment. GDP Y= C+I+G+NX A closed economy does not engage in international trade of goods and services or in international borrowing and lending while an open economy does. Globalization is the process of economies becoming more open to international trade and investment. G and economic growth are strongly positively associated: i trade based on comparative advantage allows a country to consume a greater variety and quantity of goods and services and investment in the country by forigners can help the country increase its capital stock and acquire new technology. We model a closed economy by NX=0 and Y=C+I+G To isolate investment , we - C and G Household receive income from supplying the factors of production to rms, (Y) and transfer payment from the government . Private saving(can`t be negative)=Y + TR-C-T Public saving is equal to what the govern retains of its tax revenue after purchasing goods and services and making transfer payment to households. Public saving(can be negative)= T-G-TR When the govern spends less than it collects in taxes,there is a budget surplus, S public is positive and S pub contributes to the economy`s total saving. When the govern spends the same amount that it collects in taxes, there is a balanced budge. S p is zero and S p neither contributes to nor takes away from the economy`s total saving. When the government spends more than it collects in taxes, there is a budget decit, S p is negative and S p takes away from the economy`s total saving when the US Treasury Department sells Treasury securities to households to borrow the funds it needs to nance the decit.

Total saving= S pr+S pu= Y-C-G This identity tells us that saving must equal investment in a closed economy. The nancial system directs the economy`s saving to the economy`s investment.

Market for loanable funds: The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged. The quantity of loanable funds is L. The price of loanable funds is the real interest rate (i) because it reect the true cost of borrowing and the true return to lending/saving. Note: There are many different interest rates in the economy, but they all tend to move together, so macro simply use the real interest rate in the loanable funds model.

The demand for loanable funds comes from rms that want to borrow for investment. Holding all else constant, the quantity of loanable funds demanded decreases as the real interest rate - and vice versa. The supply of loanable funds comes from households that spend less than they earn (S pr)and from govern saving or dissaving(S pu). Holding all else constant, the quantity of loanable funds supplied + as the real interest rate + and vice versa. crowding out : a decrease in investment that results from government borrowing Saving= investment when it is all equal. A surplus of loanable funds causes lenders to compete for borrowers, driving the real interest rate down, while a shortage of loanable funds gives lenders an incentive to raise the real interest rate. At the e real interest rate, the quantity of loanable funds demanded equals the quantity supplied, l is the quantity of saving and investment that actually occurs in the economy.

Surplus and Shortage

When L* + the economy