Macroeconomics Unit 2 COMPLETE Summary - Economic Indicators
Summary
TLDRIn 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
- đ 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.
- đ 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.
- đŒ 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.
- đ 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.
- đšâđŒ 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.
- đ There are different types of unemployment including frictional, structural, and cyclical, each representing different aspects of labor market dynamics.
- đ 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.
- đ° Inflation impacts different groups unequally, benefiting borrowers while hurting savers and those on fixed incomes, as it erodes the purchasing power of money.
- đ 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.
- đ 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
đ 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.
đŒ 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.
đ 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.
đ 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.
Mindmap
Keywords
đĄCircular Flow Model
đĄGross Domestic Product (GDP)
đĄIncome Approach
đĄOutput Expenditure Model
đĄUnemployment Rate
đĄInflation
đĄConsumer Price Index (CPI)
đĄGDP Deflator
đĄBusiness Cycle
đĄNatural Rate of Unemployment
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
exam if you need a little more help head
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practice the skills you need for that
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everything you need to know to pass your
final exam or ap economics exam thank
you very much i'll see you guys next
time
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