Traditional Classical thinking
no macro vs micro, not sr vs lr
emphasis on competitive equilibrium
market economy stability
Traditional Keynesian thinking
sticky prices and wages
need for government intervention
monetarism
monetary policy should be stimulative
New Classical and New Keynesian Idea
gov to be less involved, invisible hand to manage things well
government to be used for long term objectives
3 important economic metrics
RGDP, inflation rate, unemployment rate
endogenous variables of model vs exogenous
endogenous: Qd, Qs, P
exogenous: aggregate income, price of inputs, shifters in demand/supply
short run prices
sticky - adjust sluggishly in response to changes in supply or demand
demand may not equal supply, explaining:
- unemployment, surpluses
long run prices
flexible, markets clear
measures of big 3 economy metrics
RGDP, CPI (inflation), unemployment rate
Basic GDP definition
total expenditure on domestically produced final goods and services
precise definition of gdp
market value of all final goods and services produced within an economy in a given period of time
gdp components
C, I, G, NX
NX = X - IM
consumption portion of gdp
value of goods and services bought by households:
durable goods, nondurable goods, services
Investment portion of GDP
Spending on capital, a physical asset used in
future production
comprised of:
- business fixed investment (PP&E)
- residential fixed investment (housing units)
- inventory investment
government spending
includes all government spending on goods and services
excludes transfer payments bc they do not represent spending on goods or services
gross national product
Total income earned by the nation’s factors of
production, regardless of where located
GDP deflator
100 * Nominal / Real GDP
chain weighted rgdp
updates base year every year
why CPI overstates inflation
substitution bias
introduction of new goods
unmeasured changes in quality
substitution bias
The CPI uses fixed weights so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen
introduction of new goods (CPI vs inflation)
The introduction of new goods makes consumers
better off and, in effect, increases the real value of
the dollar
unmeasured changes in quality (CPI vs inflation)
Quality improvements increase the value of the
dollar but are often not fully measured
gdp deflator vs cpi
CPI reflects the price of imported goods, gdp deflator does not
pce deflator
only includes consumer spending, includes imported consumer goods
