Chapter 2 – A Tour of the book Small recap of the concepts learned in ECO 2302 Concepts we will cover in the next chapters

GDP – Output – Aggregate Income/Production Gross Domestic Product: Market value of all final goods & services produced in a period in a country

GDP – Output – Aggregate Income/Production Three approaches to calculate GDP: Expenditure approach: GDP = C + I + G + Ex – Im Income approach: Since expenditure of one side is the income of the other side, we can also use this approach Value added approach: Add value added at each production stage

GDP – Output – Aggregate Income/Production Does GDP really tell us anything about the standard of living?  Look at GDP per capita for standard of living US GDP (2012): $ trillion Population: 316,384,000 GDP per capita: $ trillion/ 316,384,000 ≈ $50,000 Ethiopia (2012): $40.5 billion Population: 91,195,675 GDP per capita: $40.5 billion / 91,195,675 ≈ $500

GDP – Output – Aggregate Income/Production Real vs. Nominal GDP Nominal GDP uses current prices: Real GDP fixes prices and uses a base year

UNEMPLOYMENT Unemployed: 16 or older, not institutionalized, does not have a job but is actively looking for one. Unemployment rate = U/LF Labor Force Participation Rate = LF/Pop. Real numbers (in thousands - July 2013): UR = 11514/ = = 7.4% LFPR = / =0.63 = 63%

INFLATION Inflation: a sustained increase in the price level We consider two price levels: GDP Deflator = 100*Nom. GDP/R.GDP CPI = Consumer Price Index How to calculate inflation? P t : Price level in year t Inflation = (P t – P t-1 )/P t-1

INFLATION (CPI vs. Deflator)

Okun’s Law Higher output growth decreases unemployment  For the US, output growth of about 3% is needed to keep the unemployment rate in check

Phillips curve There is a trade-off between unemployment and inflation  Below 6% of unemployment, the economy “heats up” and inflation increases whereas above, inflation decreases.

Next chapters Analyze the macroeconomy within three intervals: Short run: IS-LM model Medium run: AS-AD model Long run: Solow model and economic growth