Macroeconomics Unit 2 COMPLETE Summary - Economic Indicators

Summary

In this macroeconomics tutorial, Jacob Reed from reviewecon.com explores economic indicators, focusing on the circular flow model, GDP calculation methods, and the intricacies of unemployment and inflation. He discusses the output expenditure model for GDP, the significance of the natural rate of unemployment, and the impact of inflation on different economic agents. The video also touches on the business cycle, economic growth, and the challenges of achieving macroeconomic goals, providing a comprehensive review for students preparing for exams.

Takeaways

• 🌟 Economic Indicators are crucial for understanding the health of an economy, including the Circular Flow Model which involves households, businesses, product markets, and factor markets.
• 📈 Gross Domestic Product (GDP) measures the economic activity within a country and can be calculated using the value-added approach, income approach, or output expenditure model.
• 💼 The output expenditure model of GDP is a significant method used in AP Macroeconomics exams, represented by the formula C + I + G + (X - M), where C is consumption, I is investment, G is government spending, and (X - M) is net exports.
• 🏭 GDP per capita is used to assess a country's standard of living but has limitations such as not accounting for the underground economy, home production, or the distribution of income.
• 👨‍💼 Unemployment is defined as not working and actively looking for work, with the unemployment rate calculated as the number of unemployed divided by the labor force.
• 🔄 There are different types of unemployment including frictional, structural, and cyclical, each representing different aspects of labor market dynamics.
• 📊 The Consumer Price Index (CPI) and GDP deflator are tools for tracking inflation, with the CPI focusing on a basket of consumer goods and the GDP deflator considering all products within an economy.
• 💰 Inflation impacts different groups unequally, benefiting borrowers while hurting savers and those on fixed incomes, as it erodes the purchasing power of money.
• 🌀 The business cycle, with its phases of expansion and contraction, influences economic indicators like GDP and unemployment, and understanding it is key to analyzing economic trends.
• 📚 For a comprehensive study of macroeconomics, resources like the Total Review Booklet from reviewecon.com can provide additional games and activities to reinforce learning and prepare for exams.

Q & A

What are the two economic actors in the circular flow model of a free market economy?

The two economic actors in the circular flow model are households and businesses.

What are the two types of markets within the circular flow model?

The two types of markets within the circular flow model are the product market and the factor market.

How is Gross Domestic Product (GDP) defined?

GDP is defined as the total value of all final goods and services produced within a country in a calendar year.

What are the three methods for calculating GDP mentioned in the script?

The three methods for calculating GDP are the value-added approach, the income approach, and the output expenditure model.

What is the formula for the output expenditure model of GDP?

The formula for the output expenditure model of GDP is C + I + G + (X - M), where C is consumption, I is investment, G is government spending, and (X - M) is net exports.

What are the limitations of using GDP per capita as a measure of a country's standard of living?

Limitations of using GDP per capita include inaccuracies from the underground economy, non-measurement of home production, inclusion of bads as goods (like pollution), and not reflecting the distribution of income.

What does it mean to be unemployed according to the script?

To be unemployed, one must be not working and actively looking for work.

How is the unemployment rate calculated?

The unemployment rate is calculated by dividing the number of unemployed people by the labor force (unemployed plus employed) and multiplying by 100.

What are the three types of unemployment discussed in the script?

The three types of unemployment are frictional unemployment, structural unemployment, and cyclical unemployment.

How is the Consumer Price Index (CPI) calculated?

The CPI is calculated by taking the current year's value of a market basket of goods and services and dividing it by the base year's value of the same market basket, then multiplying by 100.

What is the business cycle and how does it affect the economy?

The business cycle is the natural ups and downs in a market-based economy's economic activity over time, affecting economic growth, unemployment, and inflation.

Outlines

00:00

📈 Introduction to Macroeconomic Indicators

Jacob Reed from reviewecon.com introduces Unit 2 on macroeconomics, focusing on economic indicators. He mentions that the video is supplementary to the review booklet available on their website and encourages viewers to like and subscribe. The discussion begins with the circular flow model, explaining the interactions between households and businesses in both the product and factor markets. The video then delves into the concept of a mixed economy, highlighting the role of the government in the economy. It introduces the calculation of GDP using three different methods: the value-added approach, the income approach, and the output expenditure model. The output expenditure model is emphasized, with a detailed explanation of its components: consumption (C), investment (I), government spending (G), and net exports (X - M). The video also clarifies what is not included in GDP calculations, such as used items, intermediate goods, and financial transactions.

05:01

💼 Unemployment and Its Types

This section of the video script discusses unemployment, defining it as the state of not working and actively seeking employment. It explains how the unemployment rate is calculated and introduces the labor force participation rate. The script points out issues with using the unemployment rate as a sole indicator, such as the exclusion of discouraged workers and underemployed workers. It then categorizes unemployment into frictional, structural, and cyclical, providing examples and explanations for each type. The natural rate of unemployment is also introduced, which includes frictional and structural unemployment, indicating a state where cyclical unemployment is zero.

10:01

📊 Inflation and Its Measurement

The video script's third paragraph focuses on inflation, defined as a general increase in prices. It explains how inflation is tracked using the Consumer Price Index (CPI) and the GDP deflator. The script provides a step-by-step guide on how to calculate the GDP deflator using nominal and real GDP. It also discusses how to calculate real GDP by adjusting for inflation using base year prices. The video further explains how to convert nominal values to real values using the GDP deflator and how to calculate the CPI for a market basket of goods. The impact of inflation on different groups, such as borrowers and savers, is also discussed, highlighting the uneven effects of inflation on the economy.

15:02

🌟 Macroeconomic Goals and the Business Cycle

The final paragraph of the video script addresses the three macroeconomic goals: economic growth, full employment, and stable prices. It explains the concept of the business cycle, which includes periods of expansion and contraction, and the associated economic indicators such as GDP and unemployment rates. The script introduces the terms 'inflationary gap' and 'recessionary gap,' describing situations where actual output is above or below potential output, respectively. It also touches on the long-term upward trend of potential output, known as economic growth. The video concludes by encouraging viewers to use resources from reviewecon.com for further study and practice, and it invites support for the channel through likes and subscriptions.

Keywords

💡Circular Flow Model

The Circular Flow Model is a fundamental concept in economics that illustrates the interactions between different economic agents within an economy. In the video, it is used to describe the movement of goods, services, and resources between households and businesses, which are the two primary economic actors. The model consists of two markets: the product market, where goods and services are exchanged, and the factor market, where resources like labor and capital are traded. This model helps to understand the basic structure of a free-market economy as discussed in the video.

💡Gross Domestic Product (GDP)

GDP is a key economic indicator that measures the total value of all final goods and services produced within a country in a given year. The video explains three methods for calculating GDP: the value-added approach, the income approach, and the output expenditure model. The output expenditure model is highlighted as the most common method used in the AP Macroeconomics exam, with a formula that includes consumption (C), investment (I), government spending (G), and net exports (X-M). Understanding GDP is crucial for assessing a country's economic performance and standard of living.

💡Income Approach

The income approach to calculating GDP focuses on the money that flows from businesses to households in the form of wages, interest, rent, and profit. This method is one of the ways to measure the total economic activity within an economy. In the video, it is mentioned as one of the three methods for calculating GDP, emphasizing the importance of considering all forms of income generated from the production process.

💡Output Expenditure Model

The output expenditure model is a method of calculating GDP by summing the expenditures made by all sectors of the economy on final goods and services. The video script explains this model using the formula C + I + G + (X - M), where C represents consumption, I represents investment, G represents government spending, and (X - M) represents net exports. This model is particularly relevant for the AP Macroeconomics exam, as it is a common method for assessing economic activity.

💡Unemployment Rate

The unemployment rate is a measure of the percentage of the labor force that is actively seeking employment but is currently without a job. The video script clarifies that to be counted as unemployed, one must be not working and actively looking for work. This rate is a critical indicator of the health of a country's labor market and is calculated by dividing the number of unemployed individuals by the total labor force, then multiplying by 100.

💡Inflation

Inflation refers to the general increase in prices of goods and services in an economy over a period of time. The video discusses two primary measures of inflation: the Consumer Price Index (CPI) and the GDP deflator. Inflation is an important economic indicator because it affects the purchasing power of money and can influence economic policies and decisions made by consumers, businesses, and governments.

💡Consumer Price Index (CPI)

The CPI is a measure that tracks the weighted average of prices of a basket of consumer goods and services, such as food, transportation, and medical care. It is used to assess price changes and inflation over time. In the video, the CPI is explained as a tool for measuring how the cost of living changes, which is crucial for understanding the impact of inflation on households.

💡GDP Deflator

The GDP deflator is a measure of price levels of all goods and services produced in an economy, including both the goods that are subject to the CPI and other goods, services, and government transactions. It is calculated by dividing the nominal GDP by the real GDP and then multiplying by 100. The video script uses the GDP deflator to illustrate how to adjust for inflation when comparing economic output across different years.

💡Business Cycle

The business cycle refers to the periodic fluctuations in economic activity that an economy experiences over time. The video script describes the business cycle as having phases of expansion, when economic activity is increasing, and contraction, when it is decreasing. These cycles can lead to periods of economic growth, recession, and recovery, which are important for understanding the dynamics of macroeconomic performance.

💡Natural Rate of Unemployment

The natural rate of unemployment is the rate of unemployment that exists in an economy when it is at full employment, with only frictional and structural unemployment present. The video script explains that this rate includes unemployment that is considered 'natural' or inevitable due to factors like job transitions and changes in the economy's structure. It is an important concept for understanding the baseline level of unemployment that can be expected even in a healthy economy.

Highlights

Introduction to Unit 2 for Macroeconomics focusing on economic indicators.

Circular flow model explanation with households and businesses as economic actors.

Differentiation between product and factor markets within the circular flow model.

Role of the government in a mixed economy like capitalism.

Gross Domestic Product (GDP) defined and its calculation methods explained.

Value-added approach to calculating GDP with an example.

Income approach to calculating GDP focusing on money flow from businesses to households.

Output expenditure model for calculating GDP with formula C + I + G + (X - M).

Explanation of each variable in the GDP formula: C for consumption, I for investment, G for government purchases, and Net Exports.

Items not counted in GDP such as used items, intermediate goods, and financial transactions.

GDP per capita as an indicator of a country's standard of living with its limitations.

Unemployment defined and the formula for calculating the unemployment rate.

Problems with using the unemployment rate as the sole indicator of a country's labor market health.

Types of unemployment: frictional, structural, and cyclical.

Natural rate of unemployment concept explained.

Inflation defined and tracked through Consumer Price Index (CPI) and GDP deflator.

Calculation of nominal and real GDP to derive the GDP deflator.

How to calculate the CPI and its significance in tracking price changes.

Impact of inflation on different economic agents such as borrowers, savers, and banks.

Macroeconomic goals of economic growth, full employment, and stable prices.

Business cycle phases: expansions, contractions, peaks, and troughs.

Concepts of inflationary and recessionary gaps in the context of the business cycle.

Economic growth as an upward trend in potential output over the long run.

Encouragement for students to use resources from reviewecon.com for exam preparation.

Transcripts

hi everybody jacob reed here from

reviewecon.com today we're going to be

looking at unit 2 for macroeconomics

this one is all about economic

indicators these videos go alongside the

total review booklet from reviewecon.com

if you want to pick yourself up a copy

head down to the links below also don't

forget to like and subscribe let's get

into the content

[Applause]

the first thing we're going to do is

look at the circular flow model of a

free market economy we have two economic

actors we have households and businesses

we also have two markets within this

circular flow model the first one is the

product market in the product market

businesses are providing households with

goods and services households are

providing money to those businesses in

the form of sales we also have another

market that's called the factor market

in the factor market resources land

labor capital and entrepreneurship are

going from the households to the

businesses and businesses are providing

those households with wages

interest rent and profit of course in

the united states we do not have a

purely free market economy we have a

mixed economy called capitalism or free

enterprise we have the government as a

third economic actor they get goods and

services from the product market and

they get resources from the factor

market they also provide public goods to

households and businesses and pay for

them through taxes gross domestic

product is a way of calculating the

economic activity within this circular

flow diagram we have couple of different

methods one of those deals with

calculating in the factor market and the

other two deals with calculating gdp in

the product market let's look at those

more closely now here's our definition

of gdp it is the total value of all

final goods and services produced within

a country in a calendar year there are

three methods for calculating gdp that

you need to know the first one is called

the value-added approach here we are

looking at the contributions of a

country's firms towards making a final

good for example a united states firm

may import eight dollars of fabric from

another country then they take that

eight dollars of fabric and turn it into

a fifteen dollar shirt that's seven

dollars of added value then a t-shirt

screener adds some graphics and then

sells that shirt for twenty dollars that

gives us a total of twelve dollars of

added value for the united states gdp

another way of calculating gdp focuses

on the factor market it's called the

income approach here we are looking at

the money that goes from businesses to

households in the factor market that's

rents wages interest and profit with

some minor adjustments like taxes and

depreciation the method for calculating

gdp that shows up most on the ap

macroeconomics exam is the output

expenditure model for calculating gdp

here we are looking at the sales that

are in the product market this is the

money that goes from households to

businesses the formula for the output

expenditure model of gdp is c

plus i sub g plus g

plus x sub n

let's look at each of those variables a

little closer the first variable is c

for consumption that's the consumer

purchases of goods and services it could

be the purchase of your lunch the

service of getting your car washed or

buying that t-shirt we just looked at

the next variable is gross investment

here we are looking at primarily

business purchases of physical capital

but we also look at changes in inventory

so if the business purchases some new

capital equipment that gets added to gdp

we also look at for example a shoe

factory that produces more shoes than it

sells that change in inventory will

actually be added to gdp as gross

investment a little side note unexpected

increases in inventories can be an

indication of economic downturn up ahead

the next variable is g that stands for

government purchases these are

expenditures by the government where the

government receives goods or services

for their money it can be the purchase

of a brand new tank for the military or

the services of a high school economics

teacher the last variable is net exports

here we have exports minus imports those

are the things that foreign countries

buy from us and subtract the things that

we buy from them make sure you keep this

formula in mind as you move throughout

this class it shows up on exams over and

over and over even in future units now

when it comes to gdp we're attempting to

calculate the total amount of wealth

produced within a country for a

particular year that leads us to some

items that are specifically not counted

in gdp first up we have used items used

items were already counted in a previous

year as a result when those items are

resold we don't count those transactions

in the output expenditure model for gdp

intermediate goods such as lumber

purchased by a contractor will not be

counted in gdp because the final house

or whatever is being built will be

counted it's that final production is

what we look at not those intermediate

goods the last thing we're not going to

count are financial transactions such as

the purchases of stock or transfer

payments in those transactions

goods and services are not being

produced money is being shuffled around

so we don't count those transactions in

gross domestic product per capita gdp

which is gdp divided by the population

of a country is often used by economists

to determine a country's standard of

living it has some inaccuracies though

that you need to be aware of first of

all we have the underground economy

there's a whole portion of the economy

where transactions are happening but

nobody's keeping track in the

underground economy things like drug

sales and illegal gambling rings those

transactions are not counted because

nobody is reporting those sales to the

government the next inaccuracy we have

is home production sometimes called

non-market activities if you cook your

own food we don't count that in gdp it

only gets counted in gdp if you go to a

restaurant and purchase food that

somebody else prepared the next one is

bads counted as goods sometimes

pollution or natural disasters occur and

the cleanup efforts are counted as a

positive in gdp making it appear as

though those disasters were better for

the economy the final limitation about

gross domestic product when being used

as a measure for standard of living is

the distribution of income gdp only

tells us the total well-being it doesn't

tell us who is getting that well-being

so we might want to look at the lorenz

curve or the genie coefficient that you

may have learned back in micro the next

thing we're going to do is look at

unemployment what does it mean to be

unemployed in order to be unemployed you

must be not working

and actively looking for work the

unemployment rate is the number of

people that are unemployed divided by

the labor force times 100. the labor

force that we're dividing by is the

unemployed people looking for work and

not working plus the employed people the

labor force participation rate is the

percentage of citizens that are part of

the labor force to find that take the

labor force divide it by the civilian

population and times that by a hundred

keep these formulas in mind for your

next test the unemployment rate has some

problems when it is used as the sole

indicator of what's going on in a

country's labor market the first reason

is discouraged workers those are workers

that don't have a job and aren't

actively looking for a job since they

aren't looking for work they are not

part of the labor force if unemployed

workers become discouraged workers the

unemployment rate falls even though

those workers didn't find jobs the

second problem is underemployed workers

that's part-time workers looking for

full-time work they are counted just

like anybody else who has a job so there

are three types of unemployment that you

need to know the first one is called

frictional unemployment frictionally

unemployed workers are people that are

in between jobs or looking for their

first job if you move from one job to

another either you quit or you were

fired you are frictionally unemployed

second type of unemployment is called

structural unemployment structural

unemployment exists when there are

changes in the economy which leads to a

mismatch in skills for example a lot of

electronic repair people have lost their

jobs as the price of electronics have

fallen it's no longer worth it to pay

somebody to repair most of those things

as a result those electronics repair

people are out of work and may need to

go back to school to learn new skills

for the new jobs available the third

type of unemployment is called cyclical

unemployment cyclical unemployment

exists when there's an economic downturn

in the overall economy that is caused by

the business cycle we'll learn about

that more in a minute since we will

always have some level of unemployment

we have what is called the natural rate

of unemployment that's frictional

unemployment plus structural

unemployment it also means cyclical

unemployment is zero the next economic

indicator we're going to look at is

inflation inflation is a general

increase in prices throughout the entire

economy one way of tracking inflation is

through the consumer price index the

consumer price index tracks price

changes in a market basket of products

typically purchased by an urban

household the other method of tracking

inflation that you need to know on your

ap macro economics exam is called the

gdp deflator that tracks price changes

for all products within an economy we're

going to look at calculating and using a

gdp deflator first and then we'll get to

the cpi the first thing you need to do

to calculate a gdp deflator is calculate

nominal gdp nominal gdp means gdp that

has not been adjusted for inflation in

order to find nominal gdp you find the

value of the current year's goods using

the current year's prices first we're

going to calculate the nominal gdp for

2010. we have 2010's quantities

and 2010's prices this is for a

fictitious economy that only makes lamps

and bookshelves we're going to multiply

the 2010 quantities times the 2010

prices and that gives us 7 000 for this

country's 2010

nominal gdp for 2020 the nominal gdp is

the 2020 prices times the 2020

quantities that gives us 20 000

of nominal gdp for 2020. next thing

we're going to do is calculate real gdp

real gdp is gdp that has been adjusted

for inflation in order to find that you

find the value of the current year's

goods but using the base year's prices

2010 is going to be our base year so

those are the prices we're going to use

for 2010 since it's both our current

year and our base year the real and the

nominal are equal at seven thousand

dollars for 2020 we're going to use the

2020 quantities and the 2010 prices that

gives us a real gdp

in 2010 prices of 12 000

for the year 2020. now that we have both

nominal and real gdp we can calculate a

gdp deflator in order to find that you

take the nominal gdp divided by the real

gdp times 100.

for 2010 since our nominal and real were

the same that gives us a gdp deflator of

100. the base year will always have a

gdp deflator and a cpi equal to 100. for

2020 we're going to take the 20 000 of

nominal gdp and divide it by the 12 000

of real gdp times 100 that gives us a

gdp deflator of 166 and two-thirds to

work backwards if you are given a

nominal value and you want to convert it

to a real value you can take the nominal

value divided by the gdp deflator times

100 and that will give you a real value

for example in 1961 a mcdonald's

cheeseburger was just 19 cents if we

divide by the

16.88 gdp deflator using 2012 as a base

that tells us the real value of that

cheeseburger in 2012 was one dollar and

13 cents you can calculate a consumer

price index in much of the same way that

we just saw what is a cpi well it tracks

the changes in prices for a market

basket of goods and services here we

have a market basket with shirts apples

and haircuts and we have both 2010

prices and 2020 prices the market basket

has some specific quantities but those

quantities will not change this is the

weighting of this market basket in order

to find the cpi for this market basket

we take the current year value of the

market basket and divide it by the base

year value of the market basket then

times 100 this is similar to the nominal

divided by real times 100 that we just

saw for the gdp deflator if we take the

quantities and use 2020's prices that

gives us a current value of this market

basket of 45

if we calculate it again using the base

year prices for 2010 that gives us a

base year value of 30

divide 45 by 30 then times 100 that

gives us a consumer price index of 150.

if you are given two cpi's or two gdp

deflators you can calculate the amount

of inflation between the two years by

using this formula

new

minus old divided by old times 100 you

probably used a similar formula for

elasticity coefficients back in micro so

if in 1997 we had a cpi of 160 then in

1999 we had a cpi of 176

we can do new minus sold divided by old

times 100 we can find out we had 10

percent inflation between those two

years inflation doesn't impact everybody

equally some people are helped by

inflation and some people are hurt the

people who are helped by inflation are

actually borrowers people in debt

actually will pay back fewer real

dollars when inflation is higher than

expected on the other hand unexpected

inflation will hurt banks because they

are paid back fewer real dollars savers

are also hurt because the money they

have saved is worth fewer real dollars

as time goes on this video so far has

been all about the three macroeconomic

goals those are economic growth usually

measured by gdp full employment meaning

low unemployment or the natural rate of

unemployment where there's zero cyclical

unemployment

and the third thing is stable prices

measured by the cpi or the gdp deflator

the reason we have trouble meeting all

of those macroeconomic goals all of the

time is because of this thing called the

business cycle the business cycle is the

natural ups and downs in a market-based

economy's economic activity over time we

will have real output increase then

decrease then increase then decrease and

so on we have some different areas that

you need to know we have the expansions

those are the times where the economy is

on the increase

gdp is rising unemployment is falling

things are pretty good when the economy

declines gdp is falling unemployment is

rising we call that a contraction if it

lasts more than six months it's often

called a recession the peaks are the

high points that's where unemployment is

low but inflation is often high at the

low points we call those troughs there

unemployment is high and inflation is

often low we may even have some

deflation which means falling prices and

that's not a good thing as you will

learn in future units occasionally our

gdp can be above our long run potential

output when that happens we call it an

inflationary gap the problem that occurs

with an inflationary gap is rising

prices on the flip side when our actual

output is below our long run potential

output we call that a recessionary gap

then unemployment is usually high and we

are in a recession if it lasts a long

time when our economy is functioning

properly we're also going to have this

upward trend in the long run that is our

potential output and when it increases

like that we call that economic growth

we got through it that was a lot of

information there and if you knew it all

you are on your way to acing your next

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you very much i'll see you guys next

time