1. Unit-2 Macro Review GDP, Unemployment, Inflation

2. Circular Flow of a closed Economy Spending Goods and services bought Goods and services bought Revenue Goods and services sold Goods and services sold Labor, land, capital & entrepreneurship Labor, land, capital & entrepreneurship Income = Flow of inputs and outputs = Flow of dollars Factors of production Factors of production Wages, rent, and profit Wages, rent, and profit FIRMS HOUSEHOLDS FACTOR Market FACTOR MARKET PRODUCT MARKET PRODUCT MARKET

3. BUSINESS CYCLE : rate of GDP Growth

4. GDP growth by quarter 1 st quarter 2012 +2.2% All 2011 +1.7%

5. GDP = C + I + G + (X-M) Calculating GDP: What Counts? Only NEW & FINAL goods Domestic Products What does not Count? Used goods International products Financial transactions Non-market transactions Gov’t Transfers (i.e. welfare, social security) GDP does not measure: mix of goods, quality of products, quality of life, leisure time Business Investment, Consumer/Business Construction, & Change in Inventories. (new houses count as investment!)

6. GDP = C + I + G + NX GDP = Aggregate Demand (AD) (all spending or all income) All Spending = All Income: Y = C + I + G + (X-M) 2 Ways to measure GDP or Labor  Wages Land  Rent Capital  Interest Entrep.  Profit Talent

7. 4-Types of Unemployment Structural –Skills do not match demand for labor Cyclical –too low a level of GDP (recession) Frictional –Temporarily between Jobs Seasonal –Based on time of year Natural Rate of Employment (or full employment) Allows for some Frictional & Structural Where: Cyclical = zero Seasonal “factored out”

8. In theory, if actual inflation = expected inflation, people have time to adjust for it. (less harmful) Expected Inflation Actual Inflation Nominal Interest Rate = Real Interest Rate + Expected Inflation versus COLA = cost of living adjustment

9. GDP Deflator vs CPI GDP deflator – prices of all goods/services produced domestically CPI index – prices of a market basket of goods & services –(including international goods) Substitution Bias New goods Quality changes What should be in basket? CPI Index: 1990 100 2000 115 Called Base year

10. Practice Test #2 Questions #1 - #20

11. Multiple Choice Answers 1D 2C 3C 4D 5B 6A 7E 8B 9A 10C 11B 12D 13C 14A 15B 16D 17A 18A 19A 20A

12. 2-Types of Inflation Demand-Pull Inflation: –Too many dollars chasing too few goods –Example: printing money Cost-Push Inflation –↑ cost of factors of production –example: price of oil or labor rises rapidly