CH 7+8+9 Flashcards
GDP (definition)
total value of all final goods+services produced in an economy, during a given period, usually a year
real GDP (definition)
total value of all final G+S produced in economy during given year, calculated using prices of a specific base year
national accounts
keep track of flows of money between different sectors of economy:
- spending of consumers
- sales of producers
- business investment spending
- government purchases
and more
–> reliable indicator of country’s state of economic development: the more reliable the accounts, the more economically advanced the country
flows of money into markets for goods+services comes from 4 distinctive markets:
- government–> purchases of goods and services (education, defence etc)
- households–> consumer spending
- firms–> imvestment spending
- rest of the world–> exports(-imports)
consumer spending (definition)
spending on goods+services through markets of goods and services from firms/imports rest world
investment spending
firm spending on productive physical capital–> like machinery, constructions of buildings AND inventory–> firm buys this from other firms
GDP formula aggregate
C+I+G + (X –imports)
final goods+services
goods+services sold to the final/end user–> example: consumers buying a car
intermediate goods+services
bought from one firm by another firm–> inputs for production of final goods+services
3 ways to calculate GDP
- sum of value added
- aggregate spending
- total payment to factors (from firms to households)
value added (formula)
value of final sale– purchase of intermediate goods+services
What does count in GDP
- investment spending
- capital spending
- domestically produced final goods+services
What doesn’t count in GDP
- spending on intermediate goods+services
- used goods
- financial assets–> bonds, stocks
- import spending
net exports (formula)
value of exports – value of imports
aggregate output
total quantity of final G+S economy produces
nominal GDP
value of final G+S produced in economy during given year during given year, calculated using prices current year in which output is produced
chain dollars
method of calculating changes in real GDP using the average between growth rate calculated using an early base year and the growth rate calculated using a late base year
GDP per capita Formula
GDP : size of population
aggregate price level (definition)
level of mesure of the overall price levels in the economy
consumption bundle
typical basket of G+S purchase dbefore price changes
market basket
hypothetical consumption bundle, used to measure changes in overall price level
price index (definition)
measures the cost of purchasing a given selected market basket in a given year, where that cost is normalised so its equal to 100 in selected base year
price Index Formula
cost marketbasket in a given year : cost market basket in base year X100
inflation rate (definition)
annual percent change in an official price index
inflation rate (formula)
price index year 2– price index year 1 X100
consumer price index (definition)
measures of cost of market basket of a typical family
–> intends to show how cost of all purchases by typical urban family has changed overtime
producer price index (definition)
measures changes in prices of goods/services purchased by producers
–> often early warning sign of changes in inflation rate (tends to fluctuate most!!)
GDP deflator (definition)
gives inndication aggregate price level went up or down
GDP deflator Formula
(nominal GDP ÷ Real GDP) X100
monetary policy
decisions about the quantity of money and key interest rates
employment
number of people currently employed in the economy, either full time or part time
unemployed
number of people actively looking for work (last 4 weeks) but aren’t employed
labour force formula
employment+unemployment
labour force participation rate (definition)
percentage of population 16+ that is in the workforce
labour force participation rate formula
labour force ÷ population 16 and older X 100
unemployment rate (definition)
percentage of total number of people in labour force who are unemployed
unemployment rate Formula
number of unemployed workers ÷ labour force X100
unemployment rate can:
- overstate true level of unemployment–> unemployment rate never 0 because also count people with high chance of getting job but still not decided if want to accept
- understate true level of unemployment–> if haven’t been looking in last 4 weeks not counted
–> also if underemployed also not counted
discouraged workers
non working people capable of working but have given up looking forjob given state of job market
marginally attached workers
would like to be employed and have looked for job in recent past but currently not looking
underemployed
number of people who work part time becase they can’t find full-time jobs
jobless recovery (growth recession)
period in which real GDP growth rate is positive but unemployment is still rising
frictional unemployment
unemployment due to the time workers spend in job search–> don’t want job that doesn’t meet their standards/education/preferred work field
structural unemployment
more people seeking job in particular sector than jobs available at current wage rate, even when economy at peak of business cycle
minimum wage
government mandated floor on wage rate
unions
organisation of workers that bargain collectively with employers to raise wages and improve working conditions
efficiency wages
that employers set above equilibriym wage rates as an incentive for better employee performance
natural rate of unemployment (definition)
unemployment rate that arises from the effects of frictional+structural unemployment
cyclical unemployment
the deviation of teh actual rate of unemployment from the natural rate due to downturns in the business cycle
natural unemployment formula
frictional unemployment+structural unemployment
actual unemployment formula
natural unemployment+cyclical unemployment
real wage formula
wage rate ÷ price level
real income formula
income ÷ price level
shoe leather costs
increased costs of transaction caused by inflation–> name from wear+tear of running around people trying to avoid holding onto money
hyperinflation
occurs when prices rise by 50% or more per month–> making annual inflation rate around 13k%
menu costs
the real cost of changing a listed price
unit of account costs (of inflation)
costs arising from the way inflation makes money a less reliable unit of measurement
interest rate
the price, calculated as a percentage of the amount borrowed, that lenders charge borrowers for the use of their savings for one year
nominal interest rate (definition)
interest rate expressed in dollar (a currency) terms–> the rate you see on a loan contract
real interest rate
nominal interest rate–the rate of inflation
long-run economic growth
gradual process, real GDP per capita grows max few % per year
rule of 70
the time it atkes a variable that grows gradually over time to double is approx 70÷by annual growth rate of that variable
–> example: if growth rate 2%–> takes 35 years to double
CAN ONLY BE APPLIED TO A POSITIVE GROWTH RATE !!!!!
change in level
real GDP changed at certain point in time
rate of change
statements about economic growth over a period of years
(labour)productivity (definition)
output per worker, or sometimes per hour
labour productivity (formula)
real GDP:number of people working
3 sources of productivity growth:
1., physical capital
2. human capital
3. technological progress
physical capital (definition)
human-made resources like buildings and machines–> makes workers more productive
human capital (definition)
the improvement in labour created by education+knowledge embodied in the workforce
technological progress
an advance in the technical means of the production of goods+services
aggregate production function (definition)
a hypothetical function that shows how productivity (real capital per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology
diminishing returns to physical capital (definition)
when holding the amount of human capital per worker and the state of technology fixed, each succesive increase in the amount of physical capital per worker leads to a smaller increase in productivity
growth accounting
estimates contribution of each major factor in the aggregate production function to economic growth
–> allows us to calculate the effects of greater physical+human capital on economic growth
total factor productivity
amount of output that can be achieved with a given amount of factor inputs
–> when total factor productivity increases, the economy can produce more output with the same quantity of physical capital, human capital and labour
–> increases in total factor productivity are central to a country’s economic growth–> economists believe technological progress drives increases in total factory productivity
3 reasons for differences in growth rates between countries
- rapidly add to their physical capital through high savings+investment spending
- increase their human capital by imporving educational institutions
- make fast technological progress through research and development
6 ways government policies can increase economy’s growth rate:
- government subsidies to infrastructure
- government subsidies to education
- government subsidies to R&D
- maintaining a well-functioning financial system
- protection of property rights
- political stability and good governance
convergence hypothesis
international differences in real GDP per capita tend to narrow over time–> because countries that start with lower GDP per capita tend to have higher growth rates
sustainable long-run economic growth
long-run growth that can continye in the face of limited supply of natural resources and with less negative impact on thhe environment
–> some sceptics have expressed doubts about whether possible
local environment degradation (definition)
affects a geographically limited area–> can be greatly reduced when sufficient political will+resources devoted to finding a solution
why does the unemployment rate never fall to zero?
because even when people are just waiting ti sign their contract, they’re counted as unemployed
why can efficiency wages also result in a higher rate of structural unemployment?
because efficiency wages are higher, there’s more incentive for people to start working there. Which can cause more supply than demand resultingin a shortage of jobs, aka a higher structural unemployment
why can Goverment policies increase structural unemployment?
the benefits for laid-off workers can reduce the incentives to quickly look for a new job
source of long-term economic growth:
- (labour)productivity
how do you decrease inflation rate? (2ways)
- quantative tightening
- increasing interest rates
