B5-Economic Measures and Indicators Flashcards
Economic Measures and Indicators
National Income Accounting System
The National Income and Product Accounting system (NIPA)
Expenditure Approach (GICE)
GDP is the sum of the following four components:
- Gov’t Spending
- Gross private domestic Investment (nonresidential fixed investment, residential fixed investment, and change in business inventories)-think of this as business income
- Personal Consumption expenditures
- Net Exports (exports minus imports)
Economic Measures and Indicators
National Income Accounting System
The National Income and Product Accounting system (NIPA)
Income Approach (IPIRATED)
- Income of Proprietors
- Profits of corps
- Interest (net)
- Rental Income
- Adjustments of net foreing income and misc items
- Taxes (indirect business taxes)
- Employee compensation (wages)
- Depreciation (aka captial consumption allowance)
Economic Measures and Indicators
Other Measures of National Income
- Net Domestic Product (NDP)-GDP minus depreciation
- Gross National Product (GNP)-defined as the market value of final good and services produced by residents of a country. GNP differs from GDP b/c GNP includes goods and services that are produced overseas by U.S. firms and excludes goods and services that are produced domestically by foreign firms.
- Net National Product (NNP)-GNP minus economic depreciation
- National Income (NI)-NNP less indirect business taxes
- Personal Income (PI)- income received by households and noncorporate businesses.
- Disposable Income (DI)-personal income less personal taxes.
Economic Measures and Indicators
The Unemployment Rate
Ratio of the number of people classified as unemloyed to the total labor force. The total labor force includes all non-institutionalized individuals 16 years of age or older who either are working or are actively looking for work. Note that to be counted as unemployed you must be actively looking for work.
= (# of unemployed / total labor force) x 100
Economic Measures and Indicators
Types of unemployment
- Frictional Unemployment*-normal unemployment (as it always exists) resulting from workers changing jobs, looking for a new job, or being temporarily laid off.
- Structural Unemployment*-occurs when jobs available in market do not correspond to the skills of the workforce and unemployed workers do not live where the jobs are located.
- Seasonal Unemployment*-seasonal changes in demand and supply of labor.
*These first three unemployment types are not related to business cycles
Cyclical Unemployment-amount of unemployment resulting from declines in real GDP during periods of contraction or recession or in any period when the economy fails to operate at its potential-caused by dec in AD or SRAS.
Unemployment
Natural Rate of Unemployment
Full Employment
Natural Rate of Unemployment
Natural rate of Unemployment is the sum of frictional, structural, and seasonal unemployment.
Full Employment
Level of unemployment when there is no cyclical unemployment. Does not mean zero unemployment. There is still frictional, structural, and seasonal unemployment.
Economic Measures and Indicators
Price Level and Inflation
- Inflation*
- Deflation*
- Inflation*-sustained increase in the general prices of goods and services. It occurs when prices on average are increasing over time.
- Deflation*-sustained decrease in the general prices of goods and services. It occurs when prices on average are falling over time.
Most economists believe that deflation is a much bigger problem than inflation. Due to consumers believing prices will continue to fall and will hold off purchases.
Economic Measures and Indicators
Price Level and Inflation
Inflation/Deflation Rate
Consumer Price Index
CPI measure as overall cost of a fixed basket of good and services purchased by an average household.
CPI= (current cost of mkt basket / base year cost) x 100
Economic Measures and Indicators
Price Level and Inflation
Inflation Rate formula
Inflation Rate=
(CPIthis period - CPIlast period) / CPIlast period x 100
Economic Measures and Indicators
Price Level and Inflation
Causes of Inflation and Deflation
- Demand-Pull Inflation*
- Cost-Push Inflation*
-
Demand-Pull inflation-increases in agg demand.
- inc gov’t spending
- dec in taxes
- inc in wealth
- inc in money supply
-
Cost-Push Inflation-reductions in SRAS
- inc in oil prices
- inc in nominal wages
Economic Measures and Indicators
Price Level and Inflation
Inflation and the Value of Money
Inflation has an inverse relationship with purchasing power.
Economic Measures and Indicators
Price Level and Inflation
Inflation and the Value of Money
- Monetary Assets and Liabilities*
- Nonmonetary Assets and Liabilities*
Monetary
Fixed in dollar amounts regardless of changes in specific prices or the general price level. (cash, AR, notes payable, etc)
Nonmonetary
Fluctuate with inflation and deflation (building, land, machinery, etc).
Economic Measures and Indicators
Price Level and Inflation
Inflation and the Value of Money
Holding Monetary Assets vs Liabilities during period of inflation
Holding Monetary Assets during inflation
Lost purchasing power during period of inflation.
Holding Monetary Liabilities during inflation
Pay back debt with $ worth less (good)
Holding monetary liabilities is beneficial to debtor.
Economic Measures and Indicators
Inflation Rates
Nominal And Real Interest Rates
- Nominal Int Rate*-not adjusted for inflation
- Real Int Rate*-adjusted for inflation. Measure of the purchasing power of the interest earned or paid.
Real Int. Rate= Nominal Int Rate - Inflation Rate
Economic Measures and Indicators
Money Supply
The money supply is defined as the sotck of all liquid assets available for transactions in the economy at any given point of time.
Economic Measures and Indicators
Money Supply
- M1*
- M2*
- M3*
- M1*-money that is used for purchases of goods and services. Typically includes coins, currency, checkable deposits, and travelers checks.
- M2*-M1 plus liquid assets that can’t be used as a medium of exchange but that can be converted easily into checkable deposits or other components of M1. Include certificates of deposit less than $100,000, money market deposit accounts at banks, mutual fund accounts, and savings accounts.
- M3-*includes all items in M2 as well as time certificates of deposit of $100,000 or more.
Economic Measures and Indicators
Monetary Policy and Money Supply
Monetary Policy
Monetary Policy is the use of the money supply to stabilize the economy. The Fed Reserve uses monetary policy to increase or decrease the money supply in an effort to promote price stability and full employment.
Economic Measures and Indicators
Monetary Policy and Money Supply
Three main forms of Monetary Policy
-
Open Market Operations (OMO)-purchase and sale of gov’t securities in the open mkt by the Fed Reserve as a means to expand or contract the existing money supply. Most common method. Quantitative Easing(-when Fed buys financial assets(gov’t securities and other securities) from banks in order to increase money supply-done during a recession
- Increase in Money Supply-when Fed Reserve purchases gov’t securities, it increases the money supply. MS inc, IR dec, AD inc
- Decrease in Money Supply-Fed sells gov’t securities, it decreases the money supply. MS dec, IR inc, AD dec
-
Changes in Discount Rates-int rate the Fed Reserve charges member banks for short term (normally overnight) loans.
- member banks may borrow from Fed to cover liquidity needs, increase reserves, or make investments
- Raising the discount rate discourages borowing by member banks and decreases the money supply-MS dec, IR inc, AD dec
- Lowering the discount rate encourages borrowing by member banks and increases the money supply-MS inc, IR dec, AD inc
- Changes in the Required Reserve Ratio (RRR)-ratio of desposits that banks can’t loan to consumers. It is the fraction of total deposits banks must hold in reserve (can’t loan to consumers).
- Raising the reserve requirement decreases in the money supply
- Lowering-increases the money supply
Economic Measures and Indicators
Monetary Policy and Money Supply
Interest Rates and the Demand for and Supply of Money
Demand for Money is Inversely Related to Interest Rates
The demand for money is inversely related to the interest rate-as interest rates rise, it becomes more expensive to hold money (b/c holding money rather than saving or investing means you do not earn interest), thus reducing the demand for money.
Economic Measures and Indicators
Monetary Policy and Money Supply
Interest Rates and the Demand for and Supply of Money
Supply of money is Fixed at a Given Point in Time
Supply of money is determined by Fed reserve and is therefor fixed at any given poinot in time.
- Increase in money supply will cause interest rates to fall-MS inc, IR dec, Quanity demand Inc
- A decrease in the money supply will cause interest rates to rise
Economic Measures and Indicators
Monetary Policy and its Effects on Interest Rates, The Price Level, Output (Real GDP, and Unemployment
Expansionary Monetary Policy
Expansionary Monetary Policy (inc in money supply)MS inc
- inc in money supply causes interest rates to fall. IR dec
- Falling int rates reduce the cost of capital and hence stimulate the desired levels of firm investment and household consumption. AD incr
- Increases in desired investment and consumption cause an increase in aggregate demand.
- GDP increase, unemployment decreases, and prices increases.
Note that this is used when economy is in a recession.
Economic Measures and Indicators
Monetary Policy and its Effects on Interest Rates, The Price Level, Output (Real GDP, and Unemployment
Contractionary Monetary Policy
Decrese in Money Supply. MS dec
- A decrease in the money supply causes int rates to rise. IR inc
- Rising int rates reduce the desired levels of firm investment and household consumption. AD dec
- Decreases in desired investment and consumption cause a dec in agg demand.
- Aggregate demand shifts to the left, causing real GDP to fall, the unemployment rate to rise, and the price level to fall.
Note that this method is used when the econmy is overheaded.
