Aggregate Economic Behavior

Question 1

Gross Domestic Product (GDP)

Answer 1

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well (in the United States, for example, the government releases an annualized GDP estimate for each quarter and also for an entire year). GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs, and the foreign balance of trade (exports are added, imports are subtracted). Put simply, GDP is a broad measurement of a nation’s overall economic activity – the godfather of the indicator world.

Question 2

Nominal GDP

Answer 2

Nominal Gross Domestic Product is gross domestic product (GDP) evaluated at current market prices. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Nominal differs from Real GDP in that it includes changes in prices due to inflation or a rise in the overall price level. Typically, economists use a Gross Domestic Deflator to convert Nominal GDP to Real GDP. Also known as “Current Dollar GDP” or “Chained Dollar GDP.”

Question 3

Real GDP

Answer 3

Real Gross Domestic Product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, and is often referred to as “constant-price,” “inflation-corrected” GDP or “constant dollar GDP.” Unlike Nominal GDP, Real GDP can account for changes in price level and provide a more accurate figure of economic growth.

Question 4

Economics - Two Reasons GDP Can Increase

Answer 4

Firstly, it can go up because a nation actually produced more goods and services. Secondly, it can go up simply because prices for goods and services have increased inflation.

Question 5

Consumer Price Index

Answer 5

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

Question 6

GDP Deflator

Answer 6

In economics, the GDP deflator (implicit price deflator) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.

The formula for the GDP Deflator is as follows: GDP Deflator = Nominal GDP / Real GDP. We can turn this number into an index by multiplying by 100. If this year’s GDP deflator is 1.2 and last year’s GDP deflator was 1, then that means prices rose by 20%.

The GDP Deflator is considered by economists to be the best measure of changes in the price level of a nation’s gross domestic product and more accurate than the Consumer Price Index because it doesn’t depend on a fixed basket of goods like the Consumer Price Index does.

Question 7

Unemployment

Answer 7

Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force.

Question 8

Work Force/Labor Force

Answer 8

The labor force includes the total number of people who are working or unemployed. It’s an important measurement of who is willing and able to work. Groups not included in the labor force are full-time college students and discouraged workers.

Question 9

Current Population Survey

Answer 9

The Current Population Survey (CPS) is a monthly survey of about 60,000 U.S. households conducted by the United States Census Bureau for the Bureau of Labor Statistics (BLS). The BLS uses the data to publish reports early each month called the Employment Situation. This report provides estimates of the unemployment rate and the numbers of employed and unemployed people in the United States based on the CPS. Annual estimates include employment and unemployment in large metropolitan areas. Researchers can use some CPS micro-data to investigate these or other topics. The government defines those who want to work as people who have actively looked for work within the past four weeks and determines the number of people currently unemployed through this survey.

Question 10

How the U.S. Government Determines Unemployment of Citizens.

Answer 10

People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities: Contacting an employer directly or having a job interview, a public or private employment agency, friends or relatives, or a school or university employment center; submitting resumes or filling out applications; placing or answering job advertisements; checking union or professional registers; some other means of active job search.

Question 11

Bureau of Labor Statistics

Answer 11

The Bureau of Labor Statistics (BLS) is an arm of the U.S. Department of Labor and its primary purpose is to research, assemble, and publish a range of statistical data on the labor market, prices, and productivity. The statistics produced by the BLS are some of the most influential economic indicators for the American economy: They are frequently cited by the media and used by businesses, academics, and policymakers to inform their decisionsmaking. The BLS goes to great lengths to ensure accuracy, impartiality, and accessibility of their reports.

Question 12

Unemployment As Defined By Bureau of Labor Statistics

Answer 12

The Bureau of Labor Statistics (BLS) defines a person as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Unemployment is a cost to the economy in terms of the deficiency in production. In other words, when people don’t have jobs those employees aren’t able to produce, and therefore the economy produces less.

Question 13

Labor Force Participation Rate

Answer 13

The Labor Force Participation Rate is the percentage of the population that is in the labor force. The formula is as follows: labor force participation rate = labor force / adult population.

Question 14

Unemployment Rate

Answer 14

The Unemployment Rate is the percentage of the labor force that is unemployed. The formula for calculating the Unemployment Rate is Unemployment Rate = Number of Unemployed Persons / Labor Force.

Question 15

Inflation

Answer 15

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation — and avoid deflation — in order to keep the economy running smoothly.

Question 16

Demand-Pull Inflation

Answer 16

Demand-Pull Inflation is used by Keynesian economics to describe what happens when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. Economists describe Demand-Pull Inflation as a result of too many dollars chasing too few goods.
Demand-Pull Inflation results from strong consumer demand. Many individuals purchasing the same good will cause the price to increase, and when such an event happens to a whole economy for all types of goods, it is called Demand-Pull Inflation.

Question 17

Cost-Push Inflation

Answer 17

Cost-Push Inflation is a situation in which the overall price levels go up (inflation) due to increases in the cost of wages and raw materials.
Cost-Push Inflation develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy. Since there are fewer goods being produced (supply weakens) and demand for these goods remains consistent, the prices of finished goods increase (inflation).

Question 18

General Equation for Calculating GDP

Answer 18

GDP = C + I + G + (X - M), which is equal to consumption, plus investments, plus government spending, plus exports minus imports. GDP includes just about every financial transaction in a given year but not all of them. Not included are goods produced by American companies in other countries, the sale of used goods, goods sold on the black market, and cash exchanges between governments and individuals.

Question 19

General Equation for Calculating GDP - “C” Consumption

Answer 19

GDP = C + I + G + (X - M) “C” Consumption takes into account all of the purchases of goods and services made by people in the country. It is spending for acquisition of utility as opposed to investing which is spending for acquisition of future income. This is generally the largest share of GDP, and in the United States, it often accounts for between 65% and 70% of GDP.

Question 20

General Equation for Calculating GDP - “I” Investment

Answer 20

GDP = C + I + G + (X - M) “I” In macroeconomics, investment is the amount of goods purchased or accumulated per unit time which are not consumed at the present time. The types of investment are residential investment in housing that will provide a flow of housing services over an extended time, non-residential fixed investment in things such as new machinery or factories, human capital investment in workforce education, and inventory investment (the accumulation, intentional or unintentional, of goods inventories).

Question 21

General Equation for Calculating GDP - “G” Government Spending

Answer 21

GDP = C + I + G + (X - M) “G” Government spending or expenditure includes all government consumption and investment, but not transfer payments. It includes all federal, state, and local government spending on things ranging from national defense to building roads.

Question 22

General Equation for Calculating GDP - “(X - M)” Net Exports

Answer 22

GDP = C + I + G + (X - M) “(X - M)” Net Exports literally means a country’s exports minus their imports. Exports “X” are goods or services that are produced in one country, but are bought by other countries. It is generally a positive thing for a country’s GDP. Imports “M”, on the other hand, are goods or services which are created by another country, but bought in your country and count against a country’s GDP.

Question 23

GDP - Income Approach

Answer 23

From the opposite direction of Expenditure Approach there is the Income Approach. The Income Approach to GDP tries to see a country’s real GDP by adding up the income of the entire country. The Income Approach assumes that when you or I get a paycheck, we are exchanging our labor for wages. Labor is a key part in the factors of production, which includes land, labor, capital, and entrepreneurship. By measuring the income of the country, you can gain insight into the overall productivity of the country.

Question 24

GDP - Expenditure Approach

Answer 24

From the opposite direction of Income Approach there is Expenditure Approach. Rather than looking at how much money the country collectively makes, the Expenditure Approach tries to add up how much money the country spent on goods and services. By looking at how much money each country spent, economists can gain insight on just how much was produced and whether GDP is increasing or decreasing.

Question 25

Factors Not Calculated into GDP

Answer 25

• Sales of goods that were produced outside our domestic borders.
• Sales of used goods, such as used cars.
• Illegal sales of goods and services (which we call the black market).
• Transfer payments made by the government, such as social security, welfare, and other transfer payments.
• Intermediate goods that are used to produce other final goods.

Question 26

Nominal and Real GDP Growth Rate Formula

Answer 26

(GDP in year 2 / GDP in year 1) - 1

Question 27

Identify Economic Expansion and Recession - Nominal GDP and Real GDP.

Answer 27

If Nominal GDP increased, while Real GDP decreased, the economy was in recession.

Question 28

Inflation in how it relates to Nominal and Real GDP

Answer 28

If Nominal GDP is more than Real GDP, then inflation occurred.

Question 29

Interest Rate

Answer 29

Interest rates are the cost of borrowing money, paid to the lender for the risk they take and the opportunity they give up. Interest rates are percentages, although they are often referred to as points in finance lingo. Types of interest rates: Mortgage rates, auto loan rates, and credit card rates; rates of return on savings accounts, money market accounts, investments, and bonds; benchmark rates, which are set by central banks or other bodies that financial institutions use as a baseline for setting their own rates.

Question 30

Components of Market Interest Rates

Answer 30

Most lenders want to be compensated the Opportunity Cost of lending you money, which is how the money could have been used instead of loaning the money to you; the Time Value of Money, which is the difference in inflation; they want to know if you can offer something as Collateral or not (ex: house or car) and the Loan-to-Value Ratio, which is the amount you are borrowing versus the value of whatever you are buying (a loan without Collateral is an Unsecured Loan); they want to know your Risk Premium, which is your credit profile or credit score.

Question 31

Short-Term and Long-Term Interest Rates

Answer 31

A short-term interest rate is the interest rate charged on a short-term loan. A long-term interest rate is the interest rate charged on a long-term loan. The major difference between a short-term interest rate and a long-term interest rate is the length of time it takes to pay back the loan.

Question 32

Short-Term and Long-Term Interest Rates - Reason for Difference in Rates

Answer 32

Long-term interest rates are usually higher than short-term interest rates because a lender needs to be compensated for not being able to use that money for a long period of time.

Question 33

Short-Term and Long-Term Interest Rates - Health of the Economy

Answer 33

These interest rates indicate whether the economy is working as it should or not. When the economy is working as it should, long-term interest rates are higher than short-term interest rates. When something is wrong with the economy, then you might see short-term interest rates being higher than long-term interest rates.