No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Unit 2: Top 10 Macroeconomic Performance Concepts to Know (Macro)



Unit 2: Top 10 things you must know for GDP, business cycles, unemployment, and inflation. This is geared toward college-level principles of macro courses and students enrolled in AP Economics and IB classes. Top 10 Concepts in this video: #1. Circular Flow Model, #2. Gross Domestic Product (GDP), #3. Excluded from GDP, #4. Real vs. Nominal GDP, #5. Business Cycles, #6. Unemployment, #7. Demand-Pull vs. Cost-Push Inflation, #8. Inflation Rate, #9. Fisher Equation, & #10. Winners and Losers of Unanticipated Inflation.

2.1 Circular Flow Model (Macro)

The circular flow model is a system of incentives that shows how businesses and households interact through product markets and resource markets.
Learning objectives: 
1. Students will be able to explain how the factor market is different from the product market. 
2. Students will be able to identify the flows in product and factor markets. 
3. Students will be able to show what households provide businesses in the factor market. 
4. Students will be able to understand how businesses incur costs in the factor market. 
5. Students will be able to explain the role of the government in the expanded version of the circular flow model.

2.2 Gross Domestic Product (Macro)

Learning objectives:
1. Students will be able to define GDP.
2. Students will be able to identify the four components to a nation's gross domestic product as consumption, gross investment, government spending, and net exports.
3. Students will be able to calculate nominal GDP using the expenditures approach.

2.3 Excluded from GDP (Macro)

Learning objectives:

1. Students will be able to explain a nation's gross domestic product as the production of goods and services produced legally for pay within a country's borders in one year. 

2. Students will be able to explain why the following items are NOT included in the calculation of a country's GDP:

a. Financial transactions (stocks,bonds)

b. Transfer payments

c. Used goods

d. Goods produced overseas

e. Non-market transactions

f. Illegal transactions

g. Unreported transactions

h. Intermediate goods

2.4 Real GDP vs. Nominal GDP (Macro)

Learning objectives:
1. Students will be able to define real GDP as output that has been adjusted to hold the price level constant. 
2. Students will be able to understand that real GDP is important because it allows us to measure the level of goods and services that are produced over a period of time without 3. worrying about changes in the price level.
3. Students will be able to distinguish between nominal GDP (GDP that has not been adjusted for changes in the price level and reflects the market value of all goods and services in the year everything was produced) and reall GDP.

4. Students will be able to calculate using a GDP deflator or price index (Real GDP = Nominal GDP / GDP Price Index).

2.5 Types of Unemployment (Macro)

Learning objective:

1. Students will be able to list and explain the three types of unemployment that make up the rate of unemployment in a given economy as:
a. Frictional unemployment (temporary, seasonal): includes recent graduates and people who quit their job to find something better.
b. Structural unemployment (skills no longer needed): includes people who are replaced by technology or new industries (creative destruction). These people need to retrain or move to find work.
c. Cyclical unemployment (due to recession): includes people who are laid off because the economy is weak (downturn in the business cycle).

2.6 Unemployment Rate (Macro)

Learning objectives:

1. Students will be able to define unemployment rate as a measure of the percentage of people in the labor force that are actively looking for employment.

2. Students will be able to calculate the rate of unemployment by taking the number of people that are unemployed and looking for work and dividing by the number of people that are working plus the number of people looking for work (Unemployment Rate = Quantity of people unemployed / Quantity of people in the labor force).

2.7 Inflation Overview (Macro)


Learning objectives:
1. Students will be able to define inflation.
2. Students will be able to calculate the inflation rate
3. Students will be able to distinguish between deflation and disinflation.
4. Students will be able to explain the causes and effects of demand-pull inflation.
5. Students will be able to explain the causes and effects of cost-push inflation.
6. Students will be able identify the winners and losers of unanticipated inflation.
7. Students will be able to describe an appropriate fiscal policy and monetary policy that can reduce the rate of inflation in the short run.

Unit 2: Measuring Economic Performance

  • Gross Domestic Product is the market value of all final goods and services produced in a nation in one year.  It is considered to be the most important measurement of production and output. GDP counts only final goods and services - not intermediate goods and services. 
  • GDP does not include second hand sales, buying and selling of stocks/bonds (financial transactions), transfer payments (public and private), unemployment compensation, and certain interest payments.
  • GDP includes profits earned by foreign owned businesses and income earned by foreigners in the United States, but excludes profits earned by US-owned companies overseas and income earned by US citizens abroad (this would be in the GNP which was used as the basic measurement of output until 1991).
  • GDP can be calculated through adding up all expenditures (GDP = C + Ig + G + Xn) or by adding up all incomes received by owners of productive resources.
  • Consumption (C) is the largest component of GDP through the expenditures approach
  • Wages and Salaries represent the largest component of GDP through the income approach
  • Other measures include: Net Domestic Product, National Income, Personal Income, and Disposable Income.
  • Net Domestic Product is GDP minus depreciation
  • National income is earned by all US resource suppliers.
  • Personal income is income that can be spent, saved, or taxed.
  • Disposable income can be spent or saved.
  • Business Cycle shows the ups and downs of economic activity over a period of years.  The phases are expansion/recovery, peak, contraction/recession, and trough.
  • Price indexes are used to measure price changes in our economy.  We compare the prices of a given "market basket" of goods and services in one year with the prices of the same "market basket" in another year.  A price index has a base year of 100 - the price level in all other years is expressed as a percentage of the price level in the base year.
  • Price index = (Current year prices/Base year prices) x 100
  • The most frequently used price indexes are the Consumer Price Index (CPI), Producer Price Index (PPI), and the GDP Deflator.
  • Percentage changes can be calculated (New index - Old index)/(Old index) X 100
  • Real GDP is adjusted for price changes and Nominal GDP is not adjusted for price changes.
  • Inflation is the general increase in the overall price level.  Savers, lenders, and people on fixed incomes are hurt by inflation.  Borrowers or people that make fixed payments gain from unanticipated inflation.
  • Fisher Equation: Real percentage change = Nominal percentage change - Inflation rate
  • Rule of 70: uses a percentage to predict how long it takes for a number to double (70/10% inflation = 7 years)
  • Unemployment Rate is the percentage of the labor force that cannot find work (# unemployed/#labor force) x 100
  • There are four types of unemployment: frictional, structural, seasonal, and cyclical.
  • Frictional unemployment occurs when someone quits a job to to seek employment elsewhere, is fired, or if a college grad begins looking for work. It is short-term or temporary.
  • Structural unemployment occurs when someone's job skills are no longer in demand; like a robotic arm that replaces an automobile worker. When this happens, the worker has to retrain or move to find employment.
  • Cyclical unemployment occurs when someone loses a job due to a contraction of the business cycle or recession.
  • Frictional and structural employment always exist - even when the economy is operating at full employment

Unit 2 Student Wiki

Circular Flow Model: The circular flow model is an important incentive system in Macroeconomics. It illustrates how households and businesses interact through the product market and factor market. (Justin A.)

Gross Domestic Product (GDP): GDP measures a nation's output in a given year by adding up the overall expenditures or incomes in an economy. It is a monetary value that only includes the production of final goods and services within a nation's borders. To calculate GDP, add together consumption, net exports, government spending and gross investment. (Justin A.)

Consumption: Consumption (C) is all household spending and is the largest of the four major components of computing gross domestic product. (Justin A.)

Gross Investment: Gross investment includes business expenditures, residential and non-residential construction, and adjustments to inventories. (Justin A.)

Private Sector: The private sector is a combination of gross investment (Ig) and consumption (C). (Justin A.)

Government Spending: Spending by the federal, state, and local governments.

Net Exports: Exports minus imports

Nominal GDP vs. Real GDP: Nominal GDP doesn't account for a change in price level. By dividing by the GDP price index, you will get the real GDP. (Justin A.)

GDP Price Index (GDP Deflator): Used to adjust nominal GDP into real GDP.

Business Cycle: The business cycle illustrates the general ups and downs of economic activity. When real GDP is increasing and employment is falling, the economy is in the expansionary phase. Real GDP reaches its maximum at the peak. (Justin A.)

Unemployment Rate: To calculate the unemployment rate we take the number of unemployed people and divide by the labor force, then multiply by 100 to get a percent. However, the unemployment rate that you read about every month is understated because it does not include discourage workers. (Sarah G.)

Labor Force: The labor force is comprised of those people looking for work and those that are currently working, including part time and full time workers. (Sarah G.) 

Discouraged Worker:Those people who have given up looking for work (Sarah G.)

Frictional Unemployment: Consists of people between jobs or recent college graduates look for their first jobs. We can also include seasonal unemployment in this category because frictional unemployment is temporary, transitional, and natural. (Sarah G.)

Structural Unemployment:This exists when someone loses his or her job because the skills of the individual are no longer needed. There people will have to retrain or move to find new work. This type of unemployment is also natural. (Sarah G.)

Cyclical Unemployment: This is when people are laid off because the economy is in recession. As the unemployment rate increases beyond its natural rate, cyclical unemployment now exists and the economy most likely is in a recession. (Sarah G.)

Natural Rate of Unemployment (NAIRU): Frictional plus structural unemployment = full employment.

Inflation Rate: (New CPI - Old CPI) / Old CPI           X 100

Demand-Pull Inflation: This happens when inflation is caused by an increase in consumption. it can also happen if there is an increase of aggregate demand. (Pablo R.)

Cost-Push Inflation: This is caused by an increase in production cost and a decrease of aggregate supply. (Pablo R.)

Unanticipated Inflation: Harms people lending at fixed interest rates (lenders) and people earning fixed income. Helps people making fixing payments (debtors).

Real Interest Rate vs. Nominal Interest Rate: Real interest rates are adjusted for changes in price level. Nominal interest rates are unadjusted.

Fisher Equation: Named after American economist Irving Fisher. He identified the relationship between interest rates and inflation through the following formula: Nominal rate of Interest= Real Rate of Interest + Inflation Rate (Sid)

This is part of a wiki project completed by Mr. Medico's students / Not responsible for typographical errors

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