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Introduction to Macroeconomics - FULL SEMESTER

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ECON 211

Macroeconomics Terms Recession Period of down time when unemployment is rising and the output is fallingDepression Deep and prolonged recession Expansion Periods of upturn when employment is rising and output is risingBusiness Cycle Peak When expansion turn into recessionBusiness Cycle Trough When the lowest point of a recession is hit and expansion beginsGDP Gross Domestic Product Market value of all final goods and services produced within a country in a given period of timeFinal Goods Intended for end user counts in GDPIntermediate Goods Used as components or ingredients in the production of other goods doesnt count in GDP GDP cannot count intermediate goods because to do so would value a single good twice AKA double counting GDP includes both tangible goods and intangible services goods counted as part of GDP must have been produce with a fixed time period and within the borders of said nations GDPGDP is comprised of four thingsConsumptionCIs total spending by households on goods and servicesInvestment ITotal spending on goods that will be used in the future to produce more goods in Economics an investment is not stocksbondsGovernment purchases GAll spending on goods and services purchased by the government at the federal state and local levelsNet Exports NXExportsImports Exports represent foreign spending on the economys goods and services imports are the portions of C I and G that are spent on goods and services produces abroadYCIGNX Real vs Nominal GDP Inflation can distort economic variables like GDP as a result GDP is measured in two types Nominal Values output using current prices not corrected for inflationReal Values output using the prices of a base year is corrected for inflation Nominal GDP is calculated by P x QP x Qof all goods in that year1122Real GDP is calculated by P x QP x Q of all the goods in that year 1Base12Base2GDP Deflator Measure of the overall level of pricesGDP DeflatorNominal GDP Real GDP x 100 Inflation rate percentage increase in the GDP Deflator from one year to the nextConsumer Price Index CPI CPI measures the typical consumers cost of living the basis of cost of living adjustments COLAs is tied into many contracts and social securityCPI is calculated by determining the average consumers shopping basket this is done by the Bureau of Labor Statistics BLS The BLS then determines the cost of the basket CPI is calculated by Cost of Basket in Current Year Cost of Basket in Base Year x 100What is factored into the CPI Housing Transportation FoodBeverage Medical Care Recreation Education and Communication Apparel OtherMiscellanea CPI Problems Substitution Bias Over time some prices rise faster than others Consumers substitute toward goods that become relatively cheaper mitigating the effects of price increases The CPI misses this substitution because it uses a fixed basket of goods In this case the CPI overstates increases in the cost of livingIntroduction of New Goods Introduction of new goods increases variety allows consumers to find products that more closely meet their needs In effect dollars become more valuable The CPI misses this effect because it uses a fixed basket of goods and as a result overstates the cost of living
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