Abraham's AP MacroEconomics Blog

Investment is money spent or expenditures on: New plants (factories) Capital equipment (machinery) Technology (hardware & software) New homes Inventories (goods sold by producers) Expected Rates of Return How does business make investment decisions?  Cost/Benefits Analysis How does business determine the benefits?  Expected rate of return How does business count the cost?  Interest costs How does business determine the amount of investment they undertake? Compare expected rate of return to interest cost If expected return > interest cost, then invest If expected return < interest cost, then do not invest Real (r%) vs. Nominal (i%) What's the difference?  Nominal is the observable rate of interest. Real subtracts out inflation (𝜋%) and is only known ex post factor. How do you compute the real interest rate? r% = i% - 𝜋% What then, determines the cost of an investment decision? The real interest rate r...

AGGREGATE SUPPLY The level of Real GDP  Long Run v. Short Run Long Run Period of time where input prices are completely flexible and adjust to changes in the price level. In the long run, the level of Real GDP supplied is independent of the price level. Short Run Period of time where input prices are sticky and do not adjust to changes in the price level. In the short run, the level of Real GDP supplied is directly related to the price level. LONG RUN AGGREGATE SUPPLY (LRAS) The Long Run Aggregate Supply or LRAS marks the level of full employment in the economy (This is similar to that of PPC) SHORT RUN AGGREGATE SUPPLY (SRAS) Because input prices are sticky in the short run, the SRAS is upward sloping.  Changes in SRAS An increase in SRAS is seen as a shift to the right.  A decrease in SRAS is seen as a shift to the left.  The key to understanding shifts in SRAS is per unit cost of production. Formula: Per-uni...

Circular Flow Graph The big picture demonstrates the flow of economy as a whole. Household- person or a group of people that share an income. Firms- organization that produces goods and services for sale Factor (Resource) Market -the market in which the factors of production (land, labor, capital, and entrepreneurship) are bought by firms and sold by households. Ex: if you go somewhere you expect to get paid. Giving your time and service. Product Market- market where goods and services are bought and sold. Factor payments: 1) land- rent 2) labor- wages 3) capital- interest 4) entrepreneurship- profits Student buying a hamburger is product market for buying goods Business paying rent is factor payment so ot is a factor market. Firm selling t shirts is a product market

GDP  GDP gross domestic product - total market value of all final goods and services produced within a country's borders with in each year.  GNP gross national product - the sum of all total goods and services produced by residents of a country during a given year. Using foreigners.  Intermediate goods-  goods that require further processing before they are ready for final use. Ex: steering wheel, something that you use to make a product What’s not included in GDP?  1.) Used goods/ second hand goods- Trying to avoid double or multiple counting.  Ex: whoever purchased that item once is official. So, if someone bought it again it can't be counted. 2.) Gifts or transfer payments- can be public or private. Ex: transferring funds from one institution/ individual to another. For private it would be scholarships for transfer it would be welfare or social security.  3.) Stocks and bonds- purely financial transactions 4.) Unreported...

Unemployment Unemployment- failure to use available resources, particularly labor to produce desire goods and services. Population- number of people in a country Labor force- number of people in a country that are classified by either employed or unemployed People that are not in the labor force: Kids- full time student Military personnel Homemakers Institutionalised Retired people Incarcerated Full-time students (college) Discourage workers Employed- people 16 years of age or older that have a job, in order to be considered employed you must work at least 1 hour every 2 weeks to be considered employed. Unemployed- people who are 16 years of age or older that do not have a job, but have actively searched for one in the last 2 weeks. Unemployment rate- # of unemployed/ total labor force (unemployed+employed) Unemployment types: Frictional- temporarily unemployed or between jobs (individuals are qualified and have transferable skills). High school gra...

Inflation Inflation - general rise in the price level new-old/old x 100 It reduces the purchasing power of money. Ex: (1982 gas cost .82 cents and 2018 3$) When inflation occurs, each dollar of income will buy fewer goods than before. 3 causes of inflation: 1.) The government prints too much money 2.) Demand- pull inflation (we have too many dollars chasing too few goods) Ex: favorite musician comes to town. Some would pay $ just to get to this concert.  3.) Cost- push inflation. Higher production cost increases prices.  Ex: Hurricane Katrina. Some of the oil refinery were destroyed. Prices would rise for basic necessities.  Unanticipated inflation- (unexpected)  Hurt by inflation: Lenders- people who loan money at fixed rates People on a fixed income- elderly, retirement, social security  Savers- saving account Helped by inflation: Borrowers- when we have to borrow money  Flexible income- money can come from va...

Real vs Nominal GDP Nominal GDP - the value of output produced in current prices can increase from year to year if either output or price increase. (Both things change) (PxQ) Real GDP - value of output (quantity) produced in constant base year ( first year) prices that is adjusted for inflation. can increase from year to year only if output increases (PxQ) In the base year the current price is going to be equal to the base year price. Base year: Real GDP= Nominal GDP In years after the base year nominal GDP exceeds real GDP in years before the base year, real GDP exceeds nominal GDP. GDP deflator - price index that is used to adjust from nominal to real GDP in the base year the GDP will equal to 100  After the base year it will be greater than 100 before the base year it will be less than 100 Deflator = New-old/old x 100 GDP Deflator = nominal/real GDP x100 Inflation - general rise in the price level Inflation rate - new-old/old × 1...