Summary
Macroeconomics - full exam summary
- Course
- Institution
- Book
An in-depth summary of the book Macroeconomics, including all necessary chapters for the final exam.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Samenvatting - Macroeconomie 2022/2023
-
Macroeconomics 1 lecture notes week 4, 5, 6 and 7
-
Macroeconomics 1 lecture notes ALL WEEKS - ENDTERM UVA EBE (Grade: 8)
Seller
Follow
natyprycova
Reviews received
Content preview
EBE – YEAR 1 - MACROECONOMICSCHAPTER 1 – THE SCIENCE OF MACROECONOMICS
- How economists think
o Tools: terminology, data, way of thinking
- Theory as a model building
o Mathematical variables → GDP, inflation, unemployment
▪ Relationship among the variables
o Two kinds of variables
▪ Endogenous
• Those variables that a model explains
• Determined within the model → output
• Example: price of pizza and quantity exchanged → variables
that the model explains
▪ Exogenous
• Those that a model takes as given
• Come from outside the model → input
• Example: aggregate income and price of materials → model
does not explain them – take them as given
o Exogenous variables → model → endogenous variables
- Demand for pizza
o Depends on the price of pizza P and aggregate income Y
o Qd = D(P,Y)
- Supply of pizza
o Depends on the price of pizza P and the price of materials Pm
o QS = S(P,Pm)
- Market is in equilibrium
o QS = Qd
o Holding aggregate income constant
o Supply curve slopes upward (higher price → selling is more profitable)
o Equilibrium price → consumers choose to buy the amount of pizza that
pizzerias choose to produce
o It is simplified – does not consider for example that every pizzeria has a
different location
▪ Is it realistic? → depends on our purpose
o The art of economics → judging and simplifying assumptions
- Using functions to express relationships among variables
o Function = mathematical concept that shows how one variable depends on a
set of other variables
o Qd = D(P,Y)
▪ Qd → quantity of pizza demanded is a function of price of pizza P and
aggregate income Y
▪ D is the function expressing hwo the variables determine the quantity
of pizza demanded
, o Qd = 60 – 10P + 2Y
o D(P,Y) = 60 – 10P + 2Y
▪ For any price of pizza and aggregate income → this function gives the
corresponding quantity of pizza demanded
▪ Example: Y=€10, P=€2 Qd = 60 pies
▪ Example: Y=€10, P=€3 Qd = 50 pies
- Use of multiple models
o Example: to study the impact of minimum wage laws, effect of inflation on
interest rates…
o To explain different phenomena
o Not single one is 100% correct
- PRICES: flexible vs sticky
o Concerning the speed at which wages and prices adjust to changing
conditions
o If they adjust quickly to changing conditions → flexible
▪ Markets are normally in equilibrium
▪ Assumption = market clearing
▪ Prices adjust instantly to changes in supply and demand
o Sometimes does not hold → prices are sticky
▪ Take time to adjust
▪ Wages → sometimes up to three years
▪ Example: magazine subscriptions (3-4 years)
▪ But prices are not stuck forever→ eventually they adjust
- Macroeconomic thinking and macroeconomic models
o Microeconomics → study of how households and firms make decisions
▪ They try to maximize utility
▪ Households decide how much pizza to buy, pizzerias decide how much
pizza to supply
▪ Households make decisions to maximize utility, firms to maximize
profit
o Linked with macroeconomics
o Macroeconomic models do not necessarily focus on the optimizing behaviour
of households and firms
- This book
o Part 1 → Introduction
o Part 2 → Classical theory – Economy in the long run
▪ Classical model, prices are flexible, markets clear
▪ Analysing a time horizon at least several years
o Part 3 → economy in very long run
▪ Build on classical model
▪ Emphasis on growth in capital stock, labour force, technological
knowledge
▪ How the economy evolves over period of decades
o Part 4 → Business cycle – economy in the short run
, ▪ Prices are sticky, non-market-clearing model
▪ Analysing changes from month to month or year to year
o Part 5 → Macroeconomic theory and policy
▪ Models of consumer behaviour
▪ Government policies, debt, financial crisis
CHAPTER 2 – THE DATA OF MACROECONOMICS
- Macroeconomics rely on theory and observation → more systematic observations
judge the theories
- Source of information → data (from surveys)
o To compute statistics that summarize the state of the economy
o GDP → nation´s income and total expenditure on its output of goods and
services
o CPI → measures the level of prices
o Unemployment rate → the fraction of workers that are unemployed
- Measuring the value of economic activity: GROSS DOMESIC PRODUCT
o The best measure of how well the economy is performing
o Measured every three months by the Bureau of Economic Analysis
▪ Sources: administrative data, statistical data
o Purpose: to summarise all these data with a single number representing the
dollar value of economic activity in a given period of time
o GDP
▪ The total income of everyone in the economy
▪ The total expenditure on the economy´s output of goods and services
▪ → gauge of economic performance
o How can GDP measure both income and expenditure on output?
▪ They are really the same → income must equal expenditure
- INCOME, EXPENDITURE AND THE CIRCULAR FLOW
o Example: single good – bread, single input – labour
o Flow of bread and labour
▪ Households sell their labour to the firms
▪ Firms use labour of their workers to produce bread
▪ Firms sell bread to households
▪ Labour flows from households to firms, bread flows from firms to
households
o Flow of dollars
▪ Households buy bread from the firms
▪ Firms use some of the revenue from the sales to pay the workers –
remainder is the profit to the owners
▪ Expenditure on bread flows from households to firms, and income in
the form of wages and profit flows back to households
o GDP measures the flow of dollars in the economy
▪ The sum of wages and profit
▪ Also the total expenditure on purchases of bread
, o To compute GDP we can either look at the flow of dollar from firms to
households or the flow of dollar from households to firms
▪ Must be equal
▪ Very expenditure must affect income and expenditure
- Stocks and flows
o Measure quantity
o Stock → quantity measured at a given point in time
▪ Example:
• The amount of water in the bathtub
• Person´s wealth
• Number of unemployed people
• Amount of capital in economy
• Government debt
o Flow → quantity measured per unit of time
▪ Example:
• The quantity of water coming out of the faucet (quantity
added)
• GDP is a flow variable
• Person´s income
• The number of people losing their jobs
• The amount of investment
• Government budget deficit
o Often connected → the flow of water represents the change in the stock
- RULES FOR COMPUTING GDP
o Gross domestic product is the market value of all final goods and services
produced within an economy in a given period of time
- Example: Apples and Oranges
o 4 apples and 3 oranges → not the same price
o GDP = (price of apples x quantity of apples) + (price of oranges x quantity of
oranges)
- Used goods
o GDP measures only currently produced goods and services
o Used goods are not included in the GDP
- Inventories
o Example: if workers fail to sell additional bread → how this affect GDP?
o If the bread spoils → no effect on GDP
o If the bread is sold → GDP rises
o If sold out of inventory (similar to used goods) → no effect on GDP
o General rule → when a firm increases its inventory of goods, this investment
inventory is counted as expenditure by the firms owners → increase in GDP
▪ A sale out of inventory → no effect on GDP
- Intermediate goods
o Goods produced in stages
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller natyprycova. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $22.25. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
79223 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now