1 - Economic Fluctuations and Unemployment Flashcards
what does this chapter look at?
how economies fluctuate between booms and recessions as they are continuously hit by good and bad shocks
what do fluctuation in total output (GDP) affect
unemployment
how do economist measure the size of the economy?
using national accounts , track economic fluctuations and growth
how do households respond to economic shocks?
- saving
- borrowing
- sharing
to smooth their consumption of goods and services
why are the strategies by people to eliminate shocks to consumption not sufficient?
- contrains on people ability to borrow (credit )
- weakness of will
what is positively related to unemployment?
unhappiness
how do the national Burea of Economic Research define a recession?
output is declining, a recession is over once the economy begins to grow again
what is the alternative definition for a recession?
output is below normal level, even if economy is growing, nt over till output has grown enough to get back to normal
(matter of judgement as to what the normal output is)
what is the business cycle?
movement from boom to recession and back to boom
what varies over the business cycle?
unemployment
can be related to the shocks and booms
what is one way to measure the economy?
through unemployment
how can unemployed people be defined
- without work during the last four weeks
- were available to work
- were seeking work
what is the population of working age split into?
labour force
out of labour force (inactive)
what is the labour force split into?
employed and unemployed
employed + unemployed
what are a number of statistics used to evaluate the labou market performance in a country?
- participation rate
- labour force
- unemployment rate
- employment rate
what is the participation rate?
labour force / pop of working age
fraction of working age that are in the labour force
what is the unemployment rate?
unemployed / labour force
what is the employment rate?
employed / pop of working age
what is important about the denominator of employment and unemployment rate?
they are different which explains why countries with same unemployment rate can have different employment rates if particoantion rate is different
south korea = low UE and E
Norway = low UE and high E
what is okuns law?
the relationship between output and unemployment
if output is hit them unemployment decreased
fall in output growth = rise in unemployment = fall in wellbeing
what are aggregate statistics?
economist use them to desrribe the economy as a whole
what is the aggregate economy?
the economy as a whole, the sm of its parts brought together
what is aggregate output?
GDP
the output of all producers in a country, not just those of some region or in some firm or sector
what are three different ways to estimate GDP?
- spending: households, firms, gov and residents of other countries on home economies products
- Production: total produced by the industries value added by each industry (COGS subtracted from value of output)
- income: sum of all the incomes received as wages, profits and the incomes of the self employed
national accounts can be taken at any stage, if measurement accurate should be the same whichever stage (any spending is income for whoever sold it, which must have also been produced)
what is the circular flow of the economy?
money flows from the spender to the producer, from the producer to their employees and then is spent again on further output, continuing the cycle, using monetary value to contrast GDP
what is the interaction between firms and households in terms of economic flow?
households spend on firms
households provide labour
firms provide value to households, income as wages
firms provide goods and services to households
how can governments be incorporated into the circular flow model?
households pay taxes to gov
gov then use tax for schools to households
government can be considered a product like a firm, but under what assumptions ?
- that the value added is the same as its cost, this is because they are not sold in the market
- that taxes paid by each household may not correspond with the goods and services they use
house pays £15 that is £15 income to gove which is £15 worth to public sector (value)
recession is defined as negative output growth, but if spending, income and production are all the same what does this mean?
that a recession just also be a period of negative spending
if GDP (output) is declining ten people must be spending less, income declines and then production declines
recession is defined as negative output growth, but if spending, income and production are all the same what does this mean?
that a recession just also be a period of negative spending
if GDP (output) is declining ten people must be spending less, income declines and then production declines
what is aggregate demand?
the total demand for (or expenditure on) goods and services in the economy
same as GDP
what are the components for aggregate demand (GDP)?
GDP =
C+I+G+(X-M)
consumption investment government spending exports imports
net exports
what is consumption?
component for GDP
includes the goods and services purchased by households
goods are normally tangible
durable and insurable
event though spenidnig on durable goods such as cars is counted in consumption in economic terms the decision to buy these items is more like investment decision 1
what is investment?
component of GDP
spending by firms on new equipment and new commercial buildings and spending on residential structures (construction of housing)
also includes change in inventories or stocks (investment in unsold output)
represents much lower share of GDP in EDC contrasted to ones such as china
what is gov spending on goods and services?
component of GDO
represents the consumption and investment purchases by the government
consumption purchases = office equipment, cars
consumption services = wages or civil servants, armed services, police
investment spending = building of schools, defence equipment, roads
much spending is on healthcare
transfers such as pensions are not included
what are exports?
component of GDP?
goods and services purchased by households, firms and govs in other countries
what are imports?
component of GDP
goods and services purchased by households, firms and gov in the home economy that are produced in other countries
what are net exports?
component of GDP
X-M
trade balance trade surplus if positive number
what is an agrarian economy?
economy based agriculture
what is a shock?
unexpected events
what two strategies do people use with shocks that are specific to their household
- self insurance: saving money, when shock comes can spend savings, borrow depending on credit constraints
- coinsurance: helping eachorher out, paying taxes as unemployment benefits, informal coinsurance can be like giving money to a family member
(reflect 2 important aspects of household preferences: prefer smooth pattern of consumption ad households not solely selfish)
if the shock if permeant what effect foes this have on household consumption?
consumption shifts up or down to reflect the new long run level of consumption that individuals adopt
(if temp = has little or no effect on lifetime consumption plan, as only small change to lifetime income)
what limits a households consumption smoothing?
many individuals and household are not abe to make longer term consumption plans, making plans can be difficult due to lack of info or even with info cant use it to predict future with confidence
e.g is it temp or permanent
what are there things that limit the ways in which households can smooth their consumption when faced with income shocks?
- credit constraints
temp change in income affects consumption of credit constrained households more than it does unstrained - weakness of will, unable to carry out plans
- limited co insurance, those with a fall in income cannot expect much support in sustaining their incomes
what is the difference between consumption expenditure and investment?
investment can be postponed
why do investments by firms occur in waves?
firms using ew technologies can produce at a lower cost and high quality, firms that fail to follow may be forced out of business, unable to make profit
new technologies means there is an invesemte boom,
what is lower capitalism utilisation?
measure of the extent to which a firm, industry or entire economy is producing as much as the stock of its capital goods and current knwoldeg would allow
how does investment affect unemployment?
if two companies invest and hire at the same time, would employ more workers, who would spend more, increasing the demand for the products at both firms
what is business confidence?
developing optimistic beliefs about what other businesses will do , has a major role in the fluctuations in the economy as a whole
what is the difference between investment and gv spending?
gv spending does not respond to innovation or fluctuate with business confidence
less volatile
what is inflation?
increase in the general price level in the economy, usually measured over a year
can be linked to GDP, more
what is the consumer price index?
measures the general level of prices that consumers have to pay for good and services including consumption tax
based on what consumers actually buy
includes exports
change in CPI is commonly used as a measure of inflation
what is the GDP deflator?
price index such as the CPI
tracks the change in prices of all domestically produced final goods and services, tracks price of the components of GDP
