No results on the Midterm yet. I will post them as soon as the grader gets them to me.

Also, it is worth restating, that I do not plan to curve the exam or course. The grade scales are listed in the syllabus with cut offs of 90%, 80%, 67% and 55%.

The Topics of Macroeconomics

Read Chapter 5 pages 104-121.

I Growth of Real GDP and Business CyclesA) Terminology1) Real gross domestic product (real GDP),

is the total value of all final goods and services produced during a particular year or period, adjusted to eliminate the effects of changes in prices.

2) Nominal gross domestic product (nominal GDP), is the total value of final goods and services for a particular period valued in terms of prices for that period.

3) The business cycle is the economy’s pattern of expansion, then contraction, then expansion again.

4) A period in which real GDP is rising is an expansion.

5) A period in which real GDP is falling is a recession. Typically, an economy is said to be in a recession when real GDP drops for two consecutive quarters.

6) The point at which an expansion ends and a recession begins is called the peak of the business cycle.

7) The point at which a recession ends and an expansion begins is called the trough of the business cycle.

II Price-Level ChangesA) Terminology1) Inflation is an increase in the average

level of prices2) Deflation is a decrease in the average level

of prices.3) Hyperinflation which is generally defined

as an inflation rate in excess of 200 percent per year.

4) A price index is a number whose movement reflects movement in the average level of prices.

5) A base period is a time period against which costs of the market basket in other periods will be compared in computing a price index.

6) The consumer price index (CPI), is a price index whose movements reflects changes in the prices of goods and services typically purchased by consumers.

7) The implicit price deflator (also called GDP deflator), is a price index for all goods and services produced, is the ratio of nominal GDP to real GDP.

8) A value expressed in units of constant purchasing power is a real value.

9) A value expressed in dollars of the current period is called a nominal value.

B) Why is inflation bad?

1) When there is inflation, people will not hold as much money and will spend more time trying to avoid holding money than is good for the economy.

2) Inflation results in a reallocation of wealth from lenders to borrowers. (I.e., if you are in debt, you like inflation since the money you repay the loan with has lower value.)

3) Similarly, deflation represents a reallocation of wealth from borrowers to lenders. (I.e., if you have are in debt, you hate deflation since the money you repay the loan with has greater value. To some extent this is why farmers have such difficulties. They typically take out large debts at the begin of the growing season and if prices fall, they sometimes cannot raise enough from crop sales to repay their debts.)

C) Computing the price index.

1) Price index=

current cost of basket/base-period cost basket.

2) Example (Movie price index)

Cost of basket in 1999=$48.00

Cost of basket in 2000=$50.88

MPI(2000)=$50.88/$48.00=1.06

3) Sometimes this is written as 106.

D) Computing the Implicit price deflator

1) Implicit price deflator=

nominal GDP/real GDP.

2) Example

nominal GDP in 1999=$9,146.2 billion

real GDP in 1999 = $8,778.6 billion

Implicit deflator= 9,146.2/8778.6= 1.0418

3) Sometimes this is written 104.18

E) Computing the rate of Inflation or Deflation

1) Inflation =

change in index/initial value of index.

2) Example 1 (Movie inflation)

Index value in 1999 = 1.00

Index value in 2000 = 1.06

Inflation = (1.06-1.00)/1.00 =.06 = 6%

3) Example 2 (CPI)

CPI in December 1997=1.613

CPI in December 1998= 1.639

Inflation rate = (1.6391.613)/1.613=0.016=1.6%

F) Computing a real value

1) Real value of X at time t =

Nominal value X at time t/Price index time t

2) Example:

Wage rate in 1997= $6

CPI in 1997 = 1.605

Real wage rate in 1997=$6/1.605 = $3.74

G) Problems with inflation measures.

1) Because they use fixed baskets of goods, they tend to overstate the inflation rate.

2) Tend to leave out new goods and services.

3) Do not accurately account for quality changes.

4) Do not account for where consumers shop.

III Unemployment

A) Terminology

1) The labor force is the total number of people working or unemployed.

2) The unemployment rate is the percentage of the labor force that is unemployed.

B) How they determine the unemployment rate.

1) Once a month the Bureau of Labor Statistics survey’s people. They ask a sequence of questions.

a) Are you working. If yes then the person is employed and part of the labor force.

b) If no, they then ask whether the person is looking for work. If yes they are considered unemployed and part of the labor force.

c) If no, they are not part of the labor force.

2) Sample survey results from June 1999.

a) Of those called 133,432 said they were employed and 74,200 said they were not.

b) Of those who were not, 5,975 said they were actively seeking work.

c) The other 68,225 said they were not.

d) The unemployment rate is then found to be 5,975/(5,975+133,432)=0.043=4.3%

3) Problems with the survey.

a) Does not count discouraged workers.

b) Does not count underemployed workers.

C) Types of unemployment

1) The natural level of unemployment is the employment level at which the quantity of labor demanded equals the quantity supplied.

2) The natural rate of unemployment is the rate of unemployment consistent with the natural level of employment.

3) Frictional unemployment occurs because it takes time for employers and workers to find each other.

4) Structural unemployment occurs because there is a mismatch between worker qualifications and the characteristics employers require.

5) Cyclical unemployment is unemployment in excess of unemployment in excess of the natural level of unemployment.