Expert answer:Create a MS Word document of all the vocabulary wo
Answer & Explanation:Good afternoon,I am taking Intermediate Macroeconomics at my college and I have having a heck of a time understanding the course. So I need someone with a very strong understanding of economics to do the following things for me for Chapter 1 and Chapter 2 of my macroeconomics book.1) Create a MS Word document of all the vocabulary words in each of the chapters and provide easy-to-understand definitions so simple that a 5-year old can understand it (Yes, I’m that slow, lol). However, each definitions should reflect the accurate meaning of the word. Provide a separate MS Word document for Chapter 1 and one for Chapter 2.2) Answer all the end-of-chapter questions with 100% correct and accurate answers but are written in a super-simple, easy-to-understand way. Each set of questions and answers should be in separate MS Word documents.I need the answers by Jan 28, 2016 – Thurs- 4:00 pm EST. Please do not bid if you cannot follow all my instructions exactly,intermediate_macroeconomics___chapter_1.docxintermediate_macroeconomics___chapter_2.docx
intermediate_macroeconomics___chapter_1.docx
intermediate_macroeconomics___chapter_2.docx
Unformatted Attachment Preview
Chapter 1. Measuring Economic Aggregates
Simply put, macroeconomics is the study of economic aggregates in the short run
and in the long run. The word “aggregate” means sum total; so, as you might expect,
macroeconomics deals with big variables like an economy’s gross output or national
income. Other important economic aggregates are the overall price level, its rate of
change (inflation and deflation), employment and unemployment. In macro theory
we study determinant of the levels of economic aggregates and we investigate why
many aggregates fluctuate in the short run and grow in the long run. We also study
the relationships among certain aggregates, like inflation and unemployment (the
well-known Phillips Curve).
A useful source of online macro data to know about is FRED, maintained by the St.
Louis Federal Reserve (http://research.stlouisfed.org/fred2/). With FRED, you can
easily download and graph more than 60,000 data series for the United States and
many foreign countries. Its most frequently requested US data series include: the
Consumer Price Index; gross domestic product (both current and constant dollars);
civilian unemployment rate; total nonfarm employment; interest rates (on various
assets like 10-year treasury bonds, 3-month treasury bills, 30 year mortgages and
overnight federal funds); and several measures of the nation’s money supply. Data
in this chapter are extracted from FRED and there are some suggested problems at
the end of this chapter to introduce you to working with FRED.
Traditionally, macroeconomics focuses on both the short run and the long run. In
the short run, many economic variables—most especially total production—tend to
fluctuate. Short run fluctuations are known as the business cycle, as the economy
experiences regular upswings or expansions and downturns or contractions. In the
long run, production and national income tend to grow. Long run macroeconomics
studies living standards and the rate of economic growth.
As we will see, short run and long run macroeconomics not only focus on different
kinds of questions, but employ different economic models as well. In this book, we
begin our study of macro theory with the short run (parts 2-4), before turning to the
long run (part 5). This is not because the long run is any less important, but simply
because the short run so-often demands our current attention, as we focus on dayto-day headlines about recession, unemployment, inflation, government budget
deficits and exchange rates. As the great 20th century British macroeconomist John
Maynard Keynes famously observed: “in the long run, we are all dead.”
Macroeconomics also focuses on the role of government policies to help stabilize the
economy in the short run and to grow faster in the long run. These policies include
monetary policy—setting interest rates and monetary aggregates—and fiscal
policy—setting tax rates and spending levels. In the United States, the Federal
Reserve conducts monetary policy while the Congress and President make fiscal
policy.
1
Section 1. Long Run Economic Growth and Short Run Business Cycles
Perhaps the single most important economic aggregate is one you know: the total
value of a nation’s output, or Gross Domestic Product (GDP). Figure 1 uses FRED
to graph US real GDP since 1947. The term “real” means a nominal variable (that is,
a variable expressed in current prices) has been adjusted for the effects of inflation
by measuring it at a constant set of prices (in this case, 2009 prices).
Figure 1.1 US Real Gross National Product (in 2009 Dollars) 1947 – 2012
From 1947 to 2012, production of goods and services in the US expanded nearly 8
fold, from $1,938 billion to $15,471 billion. Measured at a constant rate of growth,
the economy grew 3.25 percent per year. Given population growth, real GDP per
person (or per-capita) expanded about 2 percent per year.
But, as Figure 1.1 makes clear, economies do not grow at a constant rate. The areas
shaded in gray indicate recessions—periods of declining production—separated by
periods of growth or economic expansion. In the US, a private group of economists
at the National Bureau of Economic Research (NBER) determines the dates of
business cycles. Their website (http://www.nber.org/cycles/main.html) defines a
recession or contraction as a period of significant decline in economic activity that
spreads across the economy and lasts from a few months to more than a year.
Similarly, an expansion is a substantial rise in economic activity that spreads across
the economy, and usually lasts several years. The NBER business cycle committee
measures economic activity not only by real GDP, but also by some other indicators,
including total nonfarm employment and industrial production.
2
The NBER records a total of 33 complete business cycles dating back to 1854. Over
time, recessions have tended to be less frequent and shorter in duration. There
were 16 recessions from 1854-1919 (lasting, on average, 22 months) and just 11
recessions from 1948 to 2009 (averaging 11 months). Over the same two time
periods, the average duration of economic expansions has been getting longer,
growing from 27 to 58 months. Since the end of WWII, the shortest recession on
record lasted only 6 months (January – July 1980); the longest ran 18 months
(December 2007 – June 2009). The shortest post-war expansion lasted 12 months
(July 1980 – July 1981); the longest ran 120 months (March 1991 – March 2001).
The most recent recession of 2007-09, which many are calling the Great Recession,
shows the largest and steepest decline in output since the Great Depression of the
1930s (when GDP fell nearly 30 percent). Figure 1.2 compares three of the past four
recessions on the basis of output lost and recovery times. Real output declined 4.3
percent in the Great Recession. By contrast, in the previous recession (2001), output
showed no decline (although employment did fall). In 1981-82, unemployment rose
to more than 10 percent, but output fell less than 3 percent. The Great Recession
looks even worse measured by recovery times: it took 3.5 years for output to return
to its pre-recession level, compared with 1.75 years for the 1981-82 recession.
(Source:http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/index.cfm.)
Figure 1.2 Comparing Three Recent Recessions and Recoveries
3
Section 2. Measuring Nominal Gross Domestic Product
This section looks at how we can measure aggregate output. We begin with some
general observations about economic variables and GDP accounting. Then, we look
at recent GDP numbers compiled by the Bureau of Economic Analysis (BEA), the
agency within the Department of Commerce that publishes the official National
Income and Product Accounts of the United States. These accounts can trace their
history back to the pioneering work done by Simon Kuznets in the 1930s and 1940s.
Flows and Stocks
In general, there are two types of economic variables: flow variables and stock
variables. A flow variable is any activity that can be measured over a period of
time; say an hour, a day, a week, a month, a quarter (i.e., 3 months), or a year. As we
will see, output, income and production are flow variables. By contrast, a stock
variable is a quantity that can be measured at one point in time. (Measuring a stock
variable is like taking a picture and then counting up how much you see.) Capital,
money, assets and debts are stock variables.
Stock and flow variables are related to each other: the change over time in a stock is
often one way to measure an economic flow. Taking a bath is a useful analogy here
(and one we return to several times in this section). When you close the drain and
open the faucet, water begins to flow into the bathtub. We can measure the rate of
flow into the tub as cubic centimeters of water per minute—a flow variable. At any
point in time, we can measure the total stock of water already in the bathtub—a
stock variable. Suppose you were to measure the stock of water in the tub at exactly
10:00pm, and then measure it again at exactly 10:01pm. If you take the difference
between the two stock measurements, you get another measure of the rate of flow
per minute of water coming into the tub.
Gross Domestic Product (GDP) is a flow variable. GDP is defined as the total market
value of new final goods and services produced within one year by all the resources
(or factors of production) located within the borders of the economy.1 Resources
include labor (unskilled and skilled), land (and natural resources) and the physical
capital stock. The physical capital stock (a stock variable) consists of all buildings,
machines and equipment produced in the past and available for current production.
Capital is durable, but over time it wears down (or depreciates) and will need to be
replaced. If the total amount of capital formation in any year exceeds the rate of
depreciation, then the capital stock grows. We use the term gross investment to
mean total capital formation per year (a flow variable), consisting of replacement
By contrast, Gross National Product (GNP) is the value of output produced by a
nation’s resources located anywhere in the world. In other words, US GNP includes
the value of output produced by American workers and factories located in Mexico,
but not the value of output produced by Mexican labor and capital at work in the US.
1
4
investment plus net investment. Like our bathtub analogy, one way to measure
net investment is by the change over time in the stock of capital. In additional to
physical capital, we can think of skilled labor resources as human capital. When
students go to school or workers enter a job-training program, they are said to
invest in their human capital. In summary, in macroeconomics the term investment
simply means capital formation.
To repeat, GDP is the market value of newly-produced final goods and services.
Market value means that we restrict our attention to goods and services sold at an
observable price. The reason for this is that we solve the aggregation problem (of
how to combine apples and oranges and haircuts) by adding together the values of
goods sold. Newly-produced means we count new goods, but not the sale of used
goods. That 2006 sports car you just bought may be new to you, but there is no
reason to include it in this year’s GDP—it was already counted in 2006. Final goods
are goods sold to the ultimate purchaser. If you buy a new set of tires for your car,
they get counted in GDP; but if Ford Motor Company buys new tires for a car it is
assembling, they would not be counted, since the final sales price of its new car will
include the value added by the tires. Instead, Ford’s tire purchase is considered an
intermediate good. Any new good purchased by households is considered a final
good. Investment goods (but not intermediate goods) purchased by business firms
are considered final goods. Most new goods purchased by the government sector
are also considered final goods.
Circular Flow Diagram
Ignoring the government sector, let’s suppose households own all resources, while
all production takes place within business firms. Each year, households rent their
resources to firms (through input markets) and get income payments in return—
wages and salaries paid to labor, interest and depreciation paid to owners of capital,
rental income to land, and profits to entrepreneurs (a specialized form of labor that
is willing to take risks and manage production). Households use their income to
purchase the newly produced goods and services of the business sector—spending
we call consumption expenditures. Any residual income that is not devoted to
consumption is called personal saving. All newly-produced goods that are not sold
to households get purchased by business firms as gross investment—consisting of
physical capital formation and changes in the stock of unsold goods (inventory).
This simple economy is shown in figure 1.3, which illustrates the circular flow of
production, income and spending. If we think of the value of new production by
firms as GDP, then figure 1.3 tells us there are two ways to measure GDP: we can
measure either total income generated from production or total spending by firms
and households to buy this new production. At least in theory, the income and
expenditure approaches should provide the same value for GDP. In other words,
income and output are two sides of the same coin.
5
Financial Markets
Personal Saving
Gross Investment
Consumption Expenditures
Households
Final goods & services
Firms
Labor, Land, Capital
Income paid to Resources
Figure 1.3 The Circular Flow of Income and Expenditures in a Simple Economy
Figure 1.3 also illustrates how saving by households is related to investment by
firms. Saving represents the new loanable funds households channel into financial
markets; firms borrow these funds to finance their gross investment expenditures.
But, even without financial markets, personal saving has to equal gross investment
for the circular flow to remain in balance. To see this, think about our bathtub
analogy once again. Saving is a leakage out of the spending stream—like opening
the drain in the tub. Investment is a new injection of spending—like turning on the
faucet. For the level of water in the bathtub to remain constant, leakages out the
drain (saving) need to balances with injections from the faucet (investment).
Before we leave the simple circular flow, one final warning: Don’t confuse the word
saving—a flow variable, with the word savings—a stock variable. Savings is simply
another word for wealth or assets. Household savings consists of the value of
homes, durable goods (like automobiles) and the paper ownership claims (through
financial markets) to the physical capital located within business firms. Another
way to measure saving (besides income minus consumption) would be the change
over time in savings.
Once we add government, the circular flow diagram gets more complicated, but the
basic message remains the same: We can still measure GDP either by total spending
or total income. Federal, state and local governments compete with households and
firms to purchase new production, so total government spending has to be added
to consumption and gross investment in the spending approach. By the way, don’t
confuse government spending on goods and services with government outlays,
which include not only government spending, but also transfer payments (like
social security checks and unemployment compensation). Transfer payments are
not included in measures of total income, because they do not arise from current
production; thus, transfer payments do not get counted in total spending either. To
finance these outlays, the government levies taxes on both income and production.
6
Income taxes do not complicate GDP accounting, as long as we can measure gross
income paid to households before income taxes are withheld. Production taxes
(like sales, excise and value-added) do need to be counted separately (as we will see
in table 1.2), since spending exceeds income by the value of production taxes.
We can also add foreign trade—exports and imports. Exports are purchases of
domestic production by the rest of the world; imports are purchases of foreign
made goods. At first blush, it would appear we could simply ignore imports and
measure aggregate spending as the sum of consumption, investment, government
spending and exports. But, it turns out that imported goods are already included in
the value of consumption spending (say, when a household buys a bottle of French
wine), in investment (say, when a firm buys a new computer made in Taiwan) and
in government spending (say, when the Army buys weapons made in Germany). As
a result, imports need to be subtracted from aggregate spending to get a measure of
total spending on domestically produced goods only.
Some More Accounting Identities
As we have seen, total spending (denoted Y) is the sum of consumption (C), gross
investment (I), government purchases of goods and services (G), and net exports
(NX)—that is, exports (EX) minus imports (IM):
Y = C + I + G + NX = C + I + G + EX – IM
In this equation, Y represents total expenditures to purchase GDP, but from the logic
of the circular flow, Y is also total income generated from producing GDP. Let’s
suppose that the government levies income taxes (T) but no production taxes. We
can write:
Y = C + S + T,
In other words, total income received by households is used to finance consumption,
saving and income taxes. Since aggregate spending equals total income, we can set
these two equations equal to each other:
C + I + G + EX – IM = C + S + T
Or, dropping the C from each side and moving IM from left to right side:
I + G + EX = S + T + IM
With this equation, we are back to our bathtub analogy. On the right, saving, taxes
and imports are 3 leakages away from spending—like opening the drain. On the left,
investment, government spending and exports are 3 injections of spending—like
turning on the faucet. To maintain the accounting balance between income and
spending, total leakages have to balance with total injections.
7
Let’s rewrite the previous equation one more way:
I = S + (T – G) + (IM – EX)
To appreciate this equation, we need to introduce a bit more terminology. The
government runs a budget surplus when taxes exceed spending (T –G > 0) and a
budget deficit when spending exceeds taxes (T –G < 0).2 When the government
runs a budget surplus (spending less than its revenue), we can call this government
or public saving. When net exports are negative (IM > EX), a nation runs a trade
deficit; if net exports are positive (EX > IM), it runs a trade surplus. Usually, the
sale of exports to the rest of the world is what finances imports. But, if a nation runs
a trade deficit (buying more from abroad than it sells), its excess imports get paid
for by borrowing from abroad, sometimes called foreign saving. So, to conclude,
we can interpret the last equation above as saying: gross investment gets financed
by total saving, where total saving is the sum of personal, public and foreign saving.
Recent US GDP Data
Table 1.1 shows recent data published by the Bureau of Economic Analysis (BEA)
for nominal GDP—that is, total production at current prices. The table shows
expenditures on GDP in 2006, 2009 and 2012 expressed in billions of dollars and as
a percent of total GDP.
In the United States, like most countries, personal consumption is by far the largest
expenditure category of GDP, around 68 percent of total spending. Services account
for two-thirds of overall consumption, with the rest divided between durable goods
(like automobiles, furniture and appliances) and nondurables (like food and fuel).
Consumption is not only the largest single category, but it is also the most stable.
Gross private domestic investment (GPDI) is both tangible (physical) and intangible
(ideas) capital formation by the business sector. Over the long run GPDI in the US
has averaged about 17 percent of total spending, but it is extremely volatile: in the
boom year 2006, it was 19 percent of GDP; in the recession year 2009, it fell to 13
percent. In summer 2013 the BEA revised GPDI to include five categories: business
spending on equipment; business spending on nonresidential structures (offices and
factories); spending by businesses and individuals on residential structures (homes
and apartments); business sector spending on intellectual property (like software,
research and development and artistic creations) and change in inventories (which
can be positive or negative). In 2009, because inventory change was negative, we
can deduce that total production that year was less than total spending.
Don’t confuse the word deficit (a flow variable) with the word debt (a stock
va …
Purchase answer to see full
attachment
How it works
- Paste your instructions in the instructions box. You can also attach an instructions file
- Select the writer category, deadline, education level and review the instructions
- Make a payment for the order to be assignment to a writer
- Download the paper after the writer uploads it
Will the writer plagiarize my essay?
You will get a plagiarism-free paper and you can get an originality report upon request.
Is this service safe?
All the personal information is confidential and we have 100% safe payment methods. We also guarantee good grades