Business 5: Economic Measures and Indicators Flashcards
What are the four most commonly cited economic measures?
1) real GDP
2) unemployment rate
3) inflation rate
4) interest rates
What are the four most commonly cited economic measures?
1) real GDP
2) unemployment rate
3) inflation rate
4) interest rates
What accounting system is used to monitor the health and performance of the US economy?
NIPA (Nat’l Income and Product Accounting)
What accounting system is used to monitor the health and performance of the US economy?
NIPA (Nat’l Income and Product Accounting)
What are two methods of measuring GDP?
1) expenditure approach
2) income approach
True or false.
The combined economic output of the following four sectors is called GDP (consumers, businesses, gov’t foreign sector).
True
Under the expenditure approach, GDP is the sum of what four components?
GICE
GOV’T purchases of g&s
Gross private domestic INVESTMENT
Personal CONSUMPTION expenditures
net EXPORTS
Under the expenditure approach, GDP is the sum of what four components?
GICE
GOV’T purchases of g&s
Gross private domestic INVESTMENT
Personal CONSUMPTION expenditures
net EXPORTS
Under the income approach, GDP is the sum of what 8 components?
IPIRATED
1) Income of proprietors
2) Profits of corporations
3) Interest (net)
4) Rental income
5) Adj. for net foreign income and misc. items
6) Taxes (income of gov’t)
7) Employee compensation (wages)
8) Depreciation (aka capital consumption allowance)
Under the income approach, GDP is the sum of what 8 components?
IPIRATED
1) Income of proprietors
2) Profits of corporations
3) Interest (net)
4) Rental income
5) Adj. for net foreign income and misc. items
6) Taxes (income of gov’t)
7) Employee compensation (wages)
8) Depreciation (aka capital consumption allowance)
What is NDP?
- Net domestic product
= GDP - depreciation (capital consumption allowance)
What is GNP?
- Gross national product
- MV of all final g&s produced by residents of a country (even if living overseas) in a given time period
What is GNP?
- Gross national product
- MV of all final g&s produced by residents of a country (even if living overseas) in a given time period
What is NNP?
- Net national product
= GNP - economic depreciation (i.e. losses in the value of capital goods due to age and wear)
What is NI?
- National income
= NNP - indirect business taxes (e.g. sales ax)
What is PI?
- Personal income
- income received by households and noncorporate businesses
What is DI?
- Disposable income
= Personal income - personal taxes
What is DI?
- Disposable income
= Personal income - personal taxes - Amount of income households have to spend or save
What is DI?
- Disposable income
= Personal income - personal taxes - Amount of income households have to spend or save
What do you call the ratio of the #of people classified as unemployed to the total labor force?
Unemployment rate
What does the total labor force include?
All non-institutionalized individuals 16 years of age or older who are either working or are actively looking for work
How do you calculate the unemployment rate?
= # of unemployed
Divided by total labor force
Times 100
What do you call normal unemployment resulting from workers routinely changing jobs or from workers being temporarily laid off?
Frictional unemployment
What do you call normal unemployment resulting from workers routinely changing jobs or from workers being temporarily laid off?
Frictional unemployment
When does structural unemployment occur?
a. jobs available in market don’t correspond to skills of the workforce AND
b. unemployed workers don’t live where the jobs are located
When does structural unemployment occur?
a. jobs available in market don’t correspond to skills of the workforce AND
b. unemployed workers don’t live where the jobs are located
What do you call unemployment as a result of seasonal changes in the demand and supply of labor?
Seasonal unemployment
What do you call unemployment as a result of seasonal changes in the demand and supply of labor?
Seasonal unemployment
What types of unemployment are normal (not related to business cycles)?
1) Frictional u
2) Structural u
3) Seasonal u
What types of unemployment are normal (not related to business cycles)?
1) Frictional u
2) Structural u
3) Seasonal u
What type of unemployment is caused by decreases in AD or SRAS?
Cyclical unemployment
What type of unemployment is caused by decreases in AD or SRAS?
Cyclical unemployment
What type of unemployment is the 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?
Cyclical unemployment
What type of unemployment is the concern of economists?
Cyclical unemployment
What type of unemployment is the concern of economists?
Cyclical unemployment
What is the natural rate of unemployment?
Normal rate of unemployment around which unemployment rate fluctuates due to cyclical unemployment
The natural rate of unemployment is the sum of what?
= Frictional u
+ structural u
+ seasonal u
What is the employment rate that exists when the economy is at its potential output level?
Natural rate of unemployment
Define full employment.
Level of unemployment when there is no cyclical unemployment
Does full employment mean zero unemployment?
No (even when economy is operating at full employment, there is still FU, SU, SU)
Does full employment mean zero unemployment?
No (even when economy is operating at full employment, there is still FU, SU, SU)
Does full employment mean zero unemployment?
No (even when economy is operating at full employment, there is still FU, SU, SU)
What do you call the sustained increase in the general prices of goods and services?
Inflation
What do you call the sustained decrease in the general prices of g&s?
Deflation
What do you call the sustained decrease in the general prices of g&s?
Deflation
What is inflation caused by?
Increase in AD
Decrease in SRAS
What is deflation caused by?
Decrease in AD
Increase in SRAS
What is deflation caused by?
Decrease in AD
Increase in SRAS
The inflation/deflation rate is generally measured as the percentage change in what from one period to the next?
CPI (consumer price index)
The inflation/deflation rate is generally measured as the percentage change in what from one period to the next?
CPI (consumer price index)
Define CPI.
- Consumer price index
- measure of the overall cost of a fixed basket of g&s purchased by an average household
How do you compute the CPI?
= Current cost of mkt basket
Divided by base year cost of mkt basket
* 100
How do you compute the CPI?
= Current cost of mkt basket
Divided by base year cost of mkt basket
* 100
How do you calculate the inflation rate?
= (CPI this period - CPI last per.)
Divided by CPI last period
* 100
How do you calculate the inflation rate?
= (CPI this period - CPI last per.)
Divided by CPI last period
* 100
What does the PPI measure?
Overall cost of a basket of g&s typically purchased by firms
What does PPI stand for?
Producer price index
What does PPI stand for?
Producer price index
What is demand-pull inflation caused by?
Increases in AD
- increase in gov’t spending
- decrease in taxes
- increase in wealth
- increase in money supply
What is cost-push inflation caused by?
Decrease in SRAS
- increase in oil prices
- increase in nominal wages
- supply shock
What is cost-push inflation caused by?
Decrease in SRAS
- increase in oil prices
- increase in nominal wages
- supply shock
A shift left in AD (i.e. from stock market crash or large increase in taxes) will cause the aggregate price level to fall. What is this called?
Deflation
A shift right in SRAS will cause aggregate price level to fall. What is this called?
Deflation
Inflation has what type of relationship with purchasing power?
Inverse (as price level rises, value of money declines)
Inflation has what type of relationship with purchasing power?
Inverse (as price level rises, value of money declines)
Monetary assets and liabilities are fixed in dollar amounts regardless of changes in specific prices or the general price level. Give an example of a monetary asset and liability.
- Cash
- A/R
- Notes payable
What are nonmonetary assets and liabilities?
- e.g. building, land, machinery
- e.g. rent collected in advance
- value fluctuates w/ inflation and deflation
What are nonmonetary assets and liabilities?
- e.g. building, land, machinery
- e.g. rent collected in advance
- value fluctuates w/ inflation and deflation
During a period of inflation, who will be hurt due to lost purchasing power?
- Those w/ fixed amount of money or income
- Firms that loan money at fixed interest rates
During a period of inflation, who benefits?
- Debtors (pay back debt with $ worth less :D)
What is the combo of falling national output and rising price level known as?
Stagflation
Why is stagflation bad?
Unemployment rate rising and newly unemployed were facing higher prices for g&s due to inflation
What does the Phillips curve illustrate?
inverse relationship b/w inflation and unemployment when there’s demand-pull inflation
True or false.
Phillips curve. When unemployment is high, inflation tends to be low and vice versa.
True
True or false.
Phillips curve. When unemployment is high, inflation tends to be low and vice versa.
True
When does a budget deficit occur?
When a country spends more than it takes in (mostly in the form of taxes during the year)
When does a budget deficit occur?
When a country spends more than it takes in (mostly in the form of taxes during the year)
What does a government do when it is spending more money than it brings in? In other words, how does a government finance budget deficits?
1) Government borrowing (but that raises interest rates)
2) Print new money (but that causes inflation)
What is a cyclical budget deficit caused by?
Temporarily low economic activity
What type of budget deficit is caused by a structural imbalance b/w government spending and revenue?
Structural budget deficit
How do you calculate the real interest rate?
= Nominal interest rate
Less: inflation rate
How do you calculate the real interest rate?
= Nominal interest rate
Less: inflation rate
What is the real interest rate a measure of?
Purchasing power of interest earned or paid
What is the real interest rate a measure of?
Purchasing power of interest earned or paid
What is the relationship between nominal interest rates and inflation?
Nominal interest rate =
real interest rate
+ inflation
(MOVE TOGETHER)
What is the relationship between nominal interest rates and inflation?
Nominal interest rate =
real interest rate
+ inflation
(MOVE TOGETHER)
What do you call the set of liquid assets that are generally accepted in exchange for goods and services?
Money
What do you call the stock of all liquid assets available for transactions in the economy at any given point in time?
Money supply
What do you call the stock of all liquid assets available for transactions in the economy at any given point in time?
Money supply
What are the most common measures of money supply and are reported in financial publications?
M1 and M2
Define M1.
- Money that is used for purchases of g&s
What does M1 include?
- Coins, currency, checkable deposits, traveler’s checks
Does M1 include savings accounts and CDs?
NO
What does M2 include?
- M1 plus liquid assets that cannot be used as a medium of exchange but that can be easily converted into checkable deposits or other components of M1
What does M2 include?
- CDs less than $100,000
- MM deposit accounts at banks
- Mutual fund accounts
- Savings accounts
What does M3 include?
- All M2 items as well as time CDs of $100,000 or more
What does M3 include?
- All M2 items as well as time CDs of $100,000 or more
What are two ways the government can impact the economy when we have cyclical changes in our economy?
1) Fiscal policy
2) Monetary policy
What are two ways the government can impact the economy when we have cyclical changes in our economy?
1) Fiscal policy
2) Monetary policy
What is monetary policy?
Use of money supply by Fed Reserve to stabilize the economy
What is monetary policy?
Use of money supply by Fed Reserve to stabilize the economy
What are three ways by which the Federal Reserve can control the money supply?
1) OMO (open market operations)
2) Changes in discount rate
3) Changes in RRR (required reserve ratio)
What are three ways by which the Federal Reserve can control the money supply?
1) OMO (open market operations)
2) Changes in discount rate
3) Changes in RRR (required reserve ratio)
What is the most common method used by the Federal Reserve to impact monetary policy?
OMO (open market operations)
Define OMO
- open market operations
- consists of the purchase and sale of gov’t securities
How does the Fed increase the money supply?
- Fed purchases government securities
What is the result of the Fed purchasing government securities?
- MS increases
- Lower interest rates
- AD increase
What is quantitative easing?
- Fed buys financial assets (gov’t securities and other securities) from banks in order to increase the money supply
What is quantitative easing?
- Fed buys financial assets (gov’t securities and other securities) from banks in order to increase the money supply
What is the discount rate?
- Interest rate the Fed charges member banks for ST (normally overnight) loans
True or false.
Lowering the discount rate encourages borrowing by member banks and increases the money supply. This is an example of contractionary monetary policy.
False (expansionary)
True or false.
Lowering the discount rate encourages borrowing by member banks and increases the money supply. This is an example of contractionary monetary policy.
False (expansionary)
What is the RRR?
- required reserve ratio
- fraction of total deposits that banks must hold in reserve (cannot loan)
Raising the RRR has what impact on the money supply?
Decreases money supply
Raising the RRR has what impact on the money supply?
Decreases money supply
True or false.
The demand for money is inversely related to interest rates.
True (as interest rates rise, it becomes more expensive to hold money, thus reducing the demand for money)
True or false.
The demand for money is inversely related to interest rates.
True (as interest rates rise, it becomes more expensive to hold money, thus reducing the demand for money)
True or false.
The supply of money is fixed at a given point in time.
True (supply of money determined by Fed)
The intersection of what two things determine the interest rate?
Money demand curve and money supply line
The intersection of what two things determine the interest rate?
Money demand curve and money supply line
An increase in the money supply will have what impact on interest rates?
interest rates will fall
An increase in the money supply will have what impact on interest rates?
interest rates will fall
What is the impact of expansionary monetary policy?
- MS goes up, interest rates go down
- AD goes up, GDP up, unemployment down, prices up
What is the impact of contractionary monetary policy?
- MS goes down, interest rates go up
- AD goes down, GDP down, unemployment up, prices down
