Macroeconomics (intermediate)
Intermediate macroeconomics deck for adults. Covers national accounts, long-run growth, labor markets, money and inflation, IS-LM, AS-AD, open economy, monetary and fiscal policy, at Mankiw / Blanchard / Romer textbook level.
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- GDP (Gross Domestic Product): the market value of all final goods and services produced within a country's borders in a given period. Intermediate goods are excluded to avoid double-counting.
- Expenditure approach: GDP = C + I + G + NX, where C is consumption, I is gross private investment, G is government purchases, and NX = X − M (net exports). This is an accounting identity, not a behavioral equation.
- Nominal vs real GDP: nominal uses current-year prices; real uses base-year prices to strip out price changes. Real GDP measures actual changes in output and is the better proxy for living standards.
- GDP deflator: 100 × (Nominal GDP / Real GDP). Unlike CPI it is a Paasche-style index (current basket weights), covers all domestic production (not just consumer goods), and excludes imports.
- Consumer Price Index (CPI): Laspeyres-style index using a fixed base-period basket of consumer goods. Tends to overstate inflation because consumers substitute away from goods whose relative prices rise (substitution bias).
- Chain-weighted real GDP: updates the basket of weights each year (geometric mean of Laspeyres and Paasche), avoiding the substitution bias of a fixed base. The US BEA switched to chain-weighting in 1996.
- Value-added approach: GDP equals the sum of value added (sales minus cost of intermediate inputs) across all firms. Mathematically identical to the expenditure and income approaches.
- GNI vs GDP: Gross National Income counts income earned by residents regardless of location; GDP counts production inside the country regardless of owner nationality. GNI = GDP + net factor income from abroad.
- Net National Product (NNP) = GNP − depreciation (consumption of fixed capital). NNP approximates sustainable income because it nets out the capital used up in production.
- Saving-investment identity (closed economy): Y = C + I + G implies S = I, where national saving S = (Y − T − C) + (T − G) = private + public saving. With no foreign sector all saving must finance domestic investment.
- Open economy identity: S − I = NX = CA (current account). A country running a current-account deficit is by accounting necessity importing foreign saving; capital and financial accounts must show a matching surplus.
- Output gap = (Y − Y*) / Y*, where Y* is potential output. A negative gap signals slack (cyclical unemployment, disinflationary pressure); a positive gap signals overheating. Okun's law links the gap to unemployment.
- Economic growth: a sustained increase in real GDP per capita over time. Even small differences in annual growth rates compound dramatically over decades (the 'rule of 70': doubling time ≈ 70 / growth rate in %).
- Solow model setup: aggregate production Y = F(K, AL) with constant returns to scale. In per-effective-worker form y = f(k), with k = K/(AL). Capital accumulates via Δk = s·f(k) − (n + g + δ)·k.
- Solow steady state: k* satisfies s·f(k*) = (n + g + δ)·k*. Higher saving rate s raises k* and y* but the long-run growth rate of output per worker still equals g (the rate of labor-augmenting technical progress).
- Golden-rule capital stock k_gold: the level of k that maximizes steady-state consumption per effective worker. Characterized by f'(k_gold) = n + g + δ; the marginal product of capital equals the effective depreciation rate.
- Harrod-neutral (labor-augmenting) technical progress: Y = F(K, A·L). Only this form is consistent with a balanced growth path in which the capital-output ratio K/Y is constant over time.
- Absolute convergence: poor countries should grow faster than rich ones because diminishing returns to capital give them higher marginal products. Empirically holds within homogeneous groups (e.g., OECD) but not across the world.
- Conditional convergence: countries converge to their own steady states, which depend on saving rates, population growth, human capital, and institutions. Cross-country regressions strongly support conditional convergence.
- Solow residual (total factor productivity, TFP): the part of output growth not explained by growth of measured inputs. Computed as ΔA/A = ΔY/Y − α·ΔK/K − (1−α)·ΔL/L for a Cobb-Douglas Y = AK^α L^(1−α).
- Human capital extension (Mankiw-Romer-Weil): treating schooling as an accumulable factor explains far more of cross-country income variation than physical capital alone, and yields better fits than the bare Solow model.
- AK model: Y = AK with no diminishing returns to capital. Growth rate g = sA − δ depends permanently on the saving rate, so policies that raise s have long-run growth effects — unlike in Solow.
- Romer (1990) endogenous growth: ideas are non-rival and partially excludable. Long-run growth depends on the share of researchers and the productivity of R&D, generating increasing returns and scale effects in larger economies.
- Demographic transition and growth: as fertility falls, the dependency ratio first declines (demographic dividend, ~30 years of faster growth) and then rises again as the population ages, eventually dragging on per-capita growth.
- Unemployment rate = unemployed / labor force. The labor force counts people employed or actively searching; discouraged workers who have stopped searching are not counted, biasing the rate downward in recessions.
- Frictional unemployment: short-term joblessness as workers and firms search for matches. It exists even in well-functioning labor markets and rises with sector reallocation.
- Structural unemployment: persistent joblessness because skills or location do not match available jobs. Driven by technological change, trade, minimum wages above market-clearing, and labor-market rigidities.
- Cyclical unemployment: unemployment above the natural rate driven by deficient aggregate demand during recessions. Targeted by stabilization policy (monetary and fiscal).
- Okun's law: in the US, each 1 percentage-point fall in unemployment relative to the natural rate is associated with roughly a 2 percent rise in real GDP relative to potential. The ratio is empirical and varies by country and decade.
- Beveridge curve: a downward-sloping relationship between the vacancy rate and the unemployment rate. Outward shifts indicate reduced matching efficiency (e.g., COVID-era 2021-22 reallocation).
- NAIRU (non-accelerating inflation rate of unemployment) / natural rate: the unemployment rate consistent with stable inflation. Below NAIRU, inflation tends to rise; above, it tends to fall.
- Reservation wage: the lowest wage at which an unemployed worker will accept a job. Higher unemployment benefits, wealth, or expected future wages raise reservation wages and lengthen unemployment spells.
- Efficiency-wage theory (Shapiro-Stiglitz, Akerlof): firms voluntarily pay above-market wages to raise productivity, reduce turnover, or deter shirking. Creates involuntary unemployment as an equilibrium outcome.
- Mortensen-Pissarides search model: workers and firms meet via a matching function M(u, v). Job creation occurs when expected profit equals vacancy posting cost; equilibrium unemployment is determined by Beveridge condition and free-entry into vacancies.
- Hysteresis in unemployment: long recessions can permanently raise the natural rate via skill atrophy, insider-outsider dynamics, and discouragement. Used to argue against the strict natural-rate hypothesis (Blanchard-Summers 1986).
- Labor force participation rate (LFPR) = labor force / working-age population. Distinct from the unemployment rate; falling LFPR can mask labor-market weakness because non-participants are not counted as unemployed.
- Functions of money: medium of exchange (solves the double coincidence of wants), unit of account (common price scale), and store of value (transfer purchasing power over time). Fiat money relies on government decree, not commodity backing.
- Money demand decomposed (Keynes): transactions motive (scales with income), precautionary motive (buffer against uncertainty), and speculative motive (alternative to bonds when interest rates seem unusually low).
- Quantity theory of money: MV = PY. If velocity V and real output Y are roughly constant, then the price level P is proportional to the money supply M. Used to argue that sustained inflation is a monetary phenomenon.
- Fisher equation: i = r + π^e, where i is the nominal rate, r is the ex-ante real rate, and π^e is expected inflation. Distinguishing real from nominal rates is essential for any intertemporal analysis.
- Money multiplier (textbook): with required reserve ratio rr and no excess reserves, M = (1/rr)·MB, where MB is the monetary base. Reality is messier: banks hold excess reserves, especially since 2008.
- Bank balance sheet basics: assets (loans, reserves, securities) = liabilities (deposits, borrowings) + equity. Reserves include required and excess; central bank changes them via open market operations.
- Lender of last resort: a central bank that lends freely to solvent but illiquid banks at a penalty rate against good collateral (Bagehot's dictum, 1873). Aimed at halting bank panics without bailing out insolvency.
- Costs of inflation: shoe-leather costs (more trips to the bank), menu costs (changing posted prices), tax-distortion effects (nominal capital gains taxed), and arbitrary redistribution between debtors and creditors when inflation is unexpected.
- Seigniorage: real revenue a government raises by printing money. Approximately (ΔM/M) · (M/P), or equivalently the inflation tax π·(M/P) when real balances are constant.
- Hyperinflation: typically defined as inflation > 50% per month (Cagan, 1956). Almost always rooted in fiscal dominance: governments unable to borrow or tax monetize deficits, accelerating money growth and price expectations.
- Cagan money-demand: log(M/P) = a − b·π^e. Real money balances collapse as expected inflation rises, pushing the inflation tax base toward zero — a self-reinforcing spiral that helps explain hyperinflations.
- Monetary aggregates: M0 (currency in circulation), M1 (M0 + demand deposits), M2 (M1 + savings and small time deposits + retail money funds). The boundary between 'money' and 'near-money' is fuzzy and shifts with financial innovation.
- Keynesian consumption function: C = C₀ + c·(Y − T), where C₀ is autonomous consumption and c is the marginal propensity to consume (MPC), assumed 0 < c < 1. Saving is the residual: S = (Y − T) − C.
- MPC and MPS: MPC = ΔC/Δ(Y−T), MPS = ΔS/Δ(Y−T), and MPC + MPS = 1 by the budget identity. Both are between 0 and 1 in the standard model.