Midterm 1

Y = C + I + G + NX, C, I, G are both but Y is only domestic gecause IMf = Cf + If + Gf

Percentage of total income (GDP) paid to the factor of production- 2/3 for labor and 1/3 for capital

Natural level of output for year t = output produced if unemployment is at natural rate

Nominal GDP ($Y) is the value of output measured in current $, Real GDP (Y) is the value of output measured in constant $, real GDP necessary because nominal may only rise because of higher prices

choice of the base year affects growth rates, different base year will change the growth of realGDP between all years

Periods of positive realGDP growth are expansions, periods of negative realGDP growth are recessions

u = U/L = U/(N+U)- N = number of employed people

Rate at which the price level increases (percent change in price level)

Ratio of nominal to real GDP in the same year, rate of change across two years = inflation

cost of basket in year t (t prices)/cost of basket in base year (b prices), inflation is rate of change across two years

Some goods are sold to firms, government or foreigners (included in GDP deflator but not CPI)
Some goods consumed are imported from abroad (included in CPI but not GDP deflator)
CPI uses fixed basket and fixed weights on prices independent of t, but GDP deflator uses changing weights on prices- more quantity of good, more important it is to GDP

nominal consumption ($C) / real consumption (C) Looks at overall consumption prices, not just typical consumption Uses changing baskets of goods Does not suffer from the substitution bias like CPI, which overstates cost of living because consumers move towards cheaper goods while more expensive good is overweighted

Leaves out food and energy

Higher output growth, lower unemployment rate because producing more requires more workers

Higher the unemployment rate, the lower inflation rate because a large pool of unemployed reduces upwards pressure on wage growth, which means lower cost growth for firms, which reduces the pressure to increase prices and therefore reduces inflation

70 / growth in percent = # of years to double

quantity of money in economy

Output produced on average per unit of input
APKt = Yt/Kt
APLt = Yt/Lt

Each input is productive (MPK > 0, MPL > 0)
Diminishing returns to each input- second derivatives < 0
Constant returns to scale- F(lK, lAL) - lF(K, AL) for all l > 0

When exponents add up to 1, if more than 1, irts, if less than 1, drts

If we have no capital, a tiny amount of capital is very valuable - limit as K goes to 0 of df/dk(k,1) = infinity
When capital is very high, an additional amount of capital is nearly worthless- limit as k goes to infinity of df/dk(k,1) is 0

output per effective unit of labor created by a given amount of capital per effective unit of labor
Yt/AtLt = F(Kt/AtLt , AtLt/AtLt) = F(Kt/AtLt, 1)
because of ctrs, only the ratio of the two factors matters and it can become a one factor PF
kt = Kt/AtLt
yt = Yt/AtLt
f(kt) = F(kt,1)

All prices rise by the same percentage

kdot = sf(k)−(n+g+δ)k

Lt+1 = (1+n)Lt, n is percent change in labor in a given time period

At+1 = (1+g)At

Kt+1 = It + (1-delta)Kt
Kt+1 = sYt + (1 - delta)Kt

if S > I, NX > 0
if S < I, NX < 0
S - I = NX

kt+1 = sf(kt)/(1+g)(1+n) + (1-delta)kt/(1+g)(1+n)
Set kt+1 = kt = k*

K and Y are g + n for small g and n since y* and k* are constant in s.s
K/L is g in s.s. since k* is constant and A0 is given
Y/L is g in s.s.
K* = k*AL- set to evolution growth rates

if s increases, all outputs have higher level but growth rates are unaffected
if n increases, Y/L will be lower but growth rate is unaffected, growth rate of total output Y will rise as n increases

If two countries have same parameters (s, n, g, delta), one with lower capital per effective worker will grow faster

If parameters differ, countries converge to their own steady states but the countries farther grow faster

Kdot(t) = I(t) - deltaK(t) or Kdot(t) = sY(t) - deltaK(t)

If it crosses 45 degree/depreciation line from above (from the left), stable
If it crosses from below, unstable