1 - Economic Fluctuations and Unemployment

Question 1

what does this chapter look at?

Answer 1

how economies fluctuate between booms and recessions as they are continuously hit by good and bad shocks

Question 2

what do fluctuation in total output (GDP) affect

Answer 2

unemployment

Question 3

how do economist measure the size of the economy?

Answer 3

using national accounts , track economic fluctuations and growth

Question 4

how do households respond to economic shocks?

Answer 4

• saving
• borrowing
• sharing
  to smooth their consumption of goods and services

Question 5

why are the strategies by people to eliminate shocks to consumption not sufficient?

Answer 5

• contrains on people ability to borrow (credit )

- weakness of will

Question 6

what is positively related to unemployment?

Answer 6

unhappiness

Question 7

how do the national Burea of Economic Research define a recession?

Answer 7

output is declining, a recession is over once the economy begins to grow again

Question 8

what is the alternative definition for a recession?

Answer 8

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)

Question 9

what is the business cycle?

Answer 9

movement from boom to recession and back to boom

Question 10

what varies over the business cycle?

Answer 10

unemployment

can be related to the shocks and booms

Question 11

what is one way to measure the economy?

Answer 11

through unemployment

Question 12

how can unemployed people be defined

Answer 12

• without work during the last four weeks
• were available to work
• were seeking work

Question 13

what is the population of working age split into?

Answer 13

labour force

out of labour force (inactive)

Question 14

what is the labour force split into?

Answer 14

employed and unemployed

employed + unemployed

Question 15

what are a number of statistics used to evaluate the labou market performance in a country?

Answer 15

• participation rate
• labour force
• unemployment rate
• employment rate

Question 16

what is the participation rate?

Answer 16

labour force / pop of working age

fraction of working age that are in the labour force

Question 17

what is the unemployment rate?

Answer 17

unemployed / labour force

Question 18

what is the employment rate?

Answer 18

employed / pop of working age

Question 19

what is important about the denominator of employment and unemployment rate?

Answer 19

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

Question 20

what is okuns law?

Answer 20

the relationship between output and unemployment

if output is hit them unemployment decreased

fall in output growth = rise in unemployment = fall in wellbeing

Question 21

what are aggregate statistics?

Answer 21

economist use them to desrribe the economy as a whole

Question 22

what is the aggregate economy?

Answer 22

the economy as a whole, the sm of its parts brought together

Question 23

what is aggregate output?

Answer 23

GDP

the output of all producers in a country, not just those of some region or in some firm or sector

Question 24

what are three different ways to estimate GDP?

Answer 24

• 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)

Question 25

what is the circular flow of the economy?

Answer 25

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

Question 26

what is the interaction between firms and households in terms of economic flow?

Answer 26

households spend on firms households provide labour firms provide value to households, income as wages firms provide goods and services to households

Question 27

how can governments be incorporated into the circular flow model?

Answer 27

households pay taxes to gov | gov then use tax for schools to households

Question 28

government can be considered a product like a firm, but under what assumptions ?

Answer 28

- 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)

Question 29

recession is defined as negative output growth, but if spending, income and production are all the same what does this mean?

Answer 29

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

Question 30

recession is defined as negative output growth, but if spending, income and production are all the same what does this mean?

Answer 30

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

Question 31

what is aggregate demand?

Answer 31

the total demand for (or expenditure on) goods and services in the economy same as GDP

Question 32

what are the components for aggregate demand (GDP)?

Answer 32

GDP = C+I+G+(X-M) ``` consumption investment government spending exports imports ``` net exports

Question 33

what is consumption? component for GDP

Answer 33

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

Question 34

what is investment? component of GDP

Answer 34

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

Question 35

what is gov spending on goods and services? component of GDO

Answer 35

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

Question 36

what are exports? component of GDP?

Answer 36

goods and services purchased by households, firms and govs in other countries

Question 37

what are imports? component of GDP

Answer 37

goods and services purchased by households, firms and gov in the home economy that are produced in other countries

Question 38

what are net exports? component of GDP

Answer 38

X-M trade balance trade surplus if positive number

Question 39

what is an agrarian economy?

Answer 39

economy based agriculture

Question 40

what is a shock?

Answer 40

unexpected events

Question 41

what two strategies do people use with shocks that are specific to their household

Answer 41

- 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)

Question 42

if the shock if permeant what effect foes this have on household consumption?

Answer 42

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)

Question 43

what limits a households consumption smoothing?

Answer 43

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

Question 44

what are there things that limit the ways in which households can smooth their consumption when faced with income shocks?

Answer 44

- 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

Question 45

what is the difference between consumption expenditure and investment?

Answer 45

investment can be postponed

Question 46

why do investments by firms occur in waves?

Answer 46

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,

Question 47

what is lower capitalism utilisation?

Answer 47

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

Question 48

how does investment affect unemployment?

Answer 48

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

Question 49

what is business confidence?

Answer 49

developing optimistic beliefs about what other businesses will do , has a major role in the fluctuations in the economy as a whole

Question 50

what is the difference between investment and gv spending?

Answer 50

gv spending does not respond to innovation or fluctuate with business confidence less volatile

Question 51

what is inflation?

Answer 51

increase in the general price level in the economy, usually measured over a year can be linked to GDP, more

Question 52

what is the consumer price index?

Answer 52

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

Question 53

what is the GDP deflator?

Answer 53

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