Chapter 4 | Overview of Economics Flashcards
__________ generally applies to individual markets of goods and services. It looks at how businesses decide what to produce and who to produce it for, and how individuals and households decide what to buy.
Microeconomics generally applies to individual markets of goods and services. It looks at how businesses decide what to produce and who to produce it for, and how individuals and households decide what to buy.
_________ focuses on broader issues such as employment levels, interest rates, inflation, recessions, government spending, and the overall health of the economy. It also deals with economic interactions between countries in our increasingly connected global economy.
Macroeconomics focuses on broader issues such as employment levels, interest rates, inflation, recessions, government spending, and the overall health of the economy. It also deals with economic interactions between countries in our increasingly connected global economy.
The three broad groups that interact in the economy include _____, ____, and ________.
The three broad groups that interact in the economy include consumers, businesses, and governments
Which field of economics addresses the questions found below?
Why have the number of jobs fallen in the last year?
Will lower interest rates stimulate growth in the economy?
How can a nation improve its standard of living?
ANSWER: Macro Economics
FILL IN THE BLANK: ________ set out to maximize their satisfaction and well-being within the limits of their available resources, which might include income from employment, investments, or other sources.
ANSWER: CONSUMERS set out to maximize their satisfaction and well-being within the limits of their available resources, which might include income from employment, investments, or other sources.
A ________ is any arrangement that allows buyers and sellers to conduct business with one another.
ANSWER: A MARKET is any arrangement that allows buyers and sellers to conduct business with one another.
The price paid for any product is largely determined by the ________ for and _______ of that product in the marketplace.
ANSWER: The price paid for any product is largely determined by the demand for and supply of that product in the marketplace.
The quantity supplied of a good or service is _ _ _ _ _
ANSWER:
The quantity supplied of a good or service is the total amount that producers are willing to supply at a particular price during a given time period.
At this price, the number of buyers and sellers are in balance. Anyone who wants to buy the product can do so, and anyone who wants to sell the product can do so.
ANSWER: EQUILIBRIUM PRICE
_______________ is the total market value of all the final goods and services produced in a country over a given period.
ANSWER: Gross Domestic Product (GDP)
NOTE ONLY: A final good is something purchased by the ultimate end user. Goods that are used in the manufacture of final goods are intermediate goods.
For example, a Dell computer is a final good, whereas the Intel Pentium chip inside it is an intermediate good, because it is a part of the computer.
Only the market value of the Dell computer, the final good, is included in GDP. If the market value of all the Pentium chips were added together with the market value of all the Dell computers, GDP would be overstated.
NOTE ONLY: A final good is something purchased by the ultimate end user. Goods that are used in the manufacture of final goods are intermediate goods.
For example, a Dell computer is a final good, whereas the Intel Pentium chip inside it is an intermediate good, because it is a part of the computer.
Only the market value of the Dell computer, the final good, is included in GDP. If the market value of all the Pentium chips were added together with the market value of all the Dell computers, GDP would be overstated.
Name the two generally accepted ways of measuring GDP.
ANSWER: the expenditure approach and the income approach.
This approach to measuring GDP starts from the idea that total spending on goods and services should equal the total income generated by producing all of those goods and services. GDP using the income approach adds up all of the income generated by this economic activity.
ANSWER: Income approach
This type of unemployment is closely tied to changes in technology, international competition, and government policy. It typically lasts longer than frictional unemployment because workers must retrain or possibly relocate to find a job.
ANSWER: STRUCTURAL UNEMPLOYMENT
The more common way of calculating GDP is to add up everything that consumers, businesses, and governments spend money on during a certain period. Included in the calculation are business investments and all of the exports and imports that flow through the economy.
ANSWER: Expenditure approach
_________ is the dollar value of all goods and services produced in a given year at prices that prevailed in that same year.
ANSWER: Nominal gross domestic product (nominal GDP) is the dollar value of all goods and services produced in a given year at prices that prevailed in that same year.
TRUE OR FALSE: Changes in nominal GDP from year to year can be misleading because they reflect not only changes in output but also changes in the prices of goods and services.
ANSWER: TRUE
An increase in nominal GDP can occur in the current year compared to the previous year for either, or both, of two reasons:
Outline 2 reasons for GDP growth?
ANSWER:
An increase in nominal GDP can occur in the current year compared to the previous year for either, or both, of two reasons:
- The economy expanded, and more goods and services were produced in the current year than in the previous year; thus, the nation was more productive.
- Prices increased, and consumers had to pay more for goods and services in the current year than they did in the previous year; thus, the nation experienced inflation.
To measure a nation’s true productivity in a year, we need to look at _______________. This measure removes the changes in output that are attributable to inflation and allows us to see how much GDP has grown, based solely on productivity.
To measure a nation’s true productivity in a year, we need to look at real gross domestic product (real GDP).
This measure removes the changes in output that are attributable to inflation and allows us to see how much GDP has grown, based solely on productivity.
Growth in GDP results from a variety of factors, but a few key factors contribute to gains in productivity:
List 3
Growth in GDP results from a variety of factors, but a few key factors contribute to gains in productivity:
• Technological advances
• Population growth
• Improvements in training, education, and skills
These factors contribute to growth in GDP and make nations wealthier.
What phase of the business cycle is characterised by:
- Inflation, and therefore the prices of goods and services, is stable.
- Businesses adjust inventories and invest in new capacity to meet increased demand and avoid shortages.
- Corporate profits rise.
ANSWER: EXPANSION
An expansion is a period of significant economic growth and business activity during which GDP expands until it reaches a peak.
The ________ is the top of the cycle between the end of an expansion and start of a contraction.
The peak of the business cycle is the top of the cycle between the end of an expansion and start of a contraction.
This is the price where the demand for a product or a service is equal to the supply of the product or service. Both consumers and producers are satisfied, thereby keeping the price of the product or the service stable.
ANSWER: Equilibrium Price
This phase of the business cycle is characterized by:
- Demand begins to outstrip the capacity of the economy to supply it.
- Labour and product shortages cause wage and price increases, and inflation rises accordingly.
- Interest rates rise and bond prices fall, which dampens business investment and reduces sales of houses and other big-ticket consumer goods.
ANSWER: THE PEAK
NOTE ONLY
CONTRACTION
A contraction is a decline in economic activity. The financial press might refer to this phase as negative GDP. If the contraction lasts at least two consecutive quarters, the economy is considered to be in recession.
NOTE ONLY
CONTRACTION
A contraction is a decline in economic activity. The financial press might refer to this phase as negative GDP. If the contraction lasts at least two consecutive quarters, the economy is considered to be in recession.
What are the characteristics of the TROUGH phase of the business cycle?
A trough is characterized by the following activities:
- Interest rates fall, triggering a bond rally.
- Inflation falls.
- Consumers who postponed purchases during the contraction are spurred by lower interest rates and begin to spend.
- Stock prices rally.
During this phase of the business cycle GDP returns to its previous peak.
ANSWER: RECOVERY
What are the characteristics of a recovery?
A recovery is characterized by the following activities:
Firms that reduced inventories during the contraction must increase production to meet new demand.
They are typically still too cautious to hire back significant numbers of workers, but the period of widespread layoffs is over.
Firms are not yet ready to make significant new investment.
Unemployment remains high, wage pressures are restrained, and inflation may decline further.
_________________ provide information on business conditions and current economic activity. They can help to show whether the economy is expanding or contracting.
Economic indicators provide information on business conditions and current economic activity. They can help to show whether the economy is expanding or contracting.
Economic indicators are classified as _____, ______, or _______.
Economic indicators are classified as leading, coincident, or lagging
_______ indicators tend to peak and trough before the overall economy. They anticipate emerging trends in economic activity by indicating what businesses and consumers have actually begun to produce and spend.
Leading indicators tend to peak and trough before the overall economy. They anticipate emerging trends in economic activity by indicating what businesses and consumers have actually begun to produce and spend.
________ indicators change at approximately the same time and in the same direction as the whole economy, thereby providing information about the current state of the economy.
COINCIDENT indicators change at approximately the same time and in the same direction as the whole economy, thereby providing information about the current state of the economy.
_______ indicators change after the economy as a whole changes. These indicators are important because they can confirm that a business cycle pattern is occurring.
LAGGING indicators change after the economy as a whole changes. These indicators are important because they can confirm that a business cycle pattern is occurring.
LIST 4 Leading indicators?
Housing starts
Manufacturers’ new orders
Commodity prices
Stock prices
The money supply
Average hours worked per week
List 4 Coincident Indicators
ANSWER:
4 Coincident Indicators:
Personal Income
GDP
Industrial Production
Retail Sales
List 4 lagging indicators?
ANSWER: 4 lagging indicators
Unemployment
Inflation rate
Labour costs
Private sector plant and equipment spending
Business loans and interest on such borrowing
Statistics Canada judges a recession by the _____, _______, and _______ of the decline in business activity.
Statistics Canada judges a recession by the depth, duration, and diffusion of the decline in business activity.
Statistics Canada defines the working age population as people over age 15. It further divides this population into three groups:
LIST 3 GROUPS
Statistics Canada defines the working age population as people over age 15. It further divides this population into three groups:
• Those who are unable to work
• Those who are not working by choice
• The labour force
Examples of those not working by choice?
ANSWER:
Not working by choice
Full-time students
Homemakers
Retirees
Discouraged workers
Define the labour force?
The labour force
- People who are working
- People who are not working but are actively looking for work
There are two key indicators that describe activity in the labour market: the ___________ rate and the ___________ rate.
There are two key indicators that describe activity in the labour market: the PARTICIPATION RATE and the UNEMPLOYMENT RATE.
Define the participation rate?
The participation rate represents the share of the working-age population that is in the labour force.
This rate is an important indicator because it shows the willingness of people to enter the work force and take jobs.
Define the unemployment rate?
The unemployment rate represents the share of the labour force that is unemployed and actively looking for work.
This rate may rise when the number of people that are employed falls or when the number of people looking for work rises (or when both occur at once).
What phase of the business cycle is characterized by:
- Economic activity begins to decline, and real GDP decreases.
- Faced with unwanted inventories and declining profits, firms reduce production, postpone investment, curtail hiring, and may lay off employees.
- Business failures outnumber start-ups.
ANSWER: CONTRACTION
What phase of the business cycle is characterized by:
- Interest rates rise and bond prices fall, which dampens business investment and reduces sales of houses and other big-ticket consumer goods.
- Business sales decline, resulting in accumulation of unwanted inventory and reduced profits.
- Stock prices generally begin to fall along with falling profits, and stock market activity declines.
ANSWER: THE PEAK
This phase of the business cycle is characterized by:
- New business start-ups outnumber bankruptcies.
- Stock market activity is strong and the markets typically rise.
- Job creation is steady and the unemployment rate is steady or falling.
ANSWER: Expansion Phase
IDENTIFYING RECESSIONS
Statistics Canada judges a recession by the depth, duration, and diffusion of the decline in business activity. Its judgment is based on the following criteria:
Depth The decline must be of substantial depth. For example, marginal declines in output can be merely statistical errors.
Duration The decline must last more than a couple of months. For example, bad weather alone can cause a temporary decline in output.
Diffusion The decline must be a feature of the whole economy. For example, a strike in a major industry can cause GDP to decline, but that lone incident does not constitute a recession for the whole country.
IDENTIFYING RECESSIONS
Statistics Canada judges a recession by the depth, duration, and diffusion of the decline in business activity. Its judgment is based on the following criteria:
Depth The decline must be of substantial depth. For example, marginal declines in output can be merely statistical errors.
Duration The decline must last more than a couple of months. For example, bad weather alone can cause a temporary decline in output.
Diffusion The decline must be a feature of the whole economy. For example, a strike in a major industry can cause GDP to decline, but that lone incident does not constitute a recession for the whole country.
What is the main difference between the expenditure approach and the income approach in calculating GDP?
ANSWER: The main difference between the expenditure approach and the income approach is their starting point.
The expenditure approach begins with the money spent on goods and services.
Conversely, the income approach starts with the income earned from the production of goods and services (wages, rents, interest, profits).
What is the Participation Rate?
The labor force participation rate aims to get a better picture of the rate of people actively engaged in the workforce. It only measures those above the age of 16 and eliminates retirees and others who choose not to work. The formula for the labor force participation rate is LFPR = LF / P. Put simply, it’s the total labor force divided by the entire population.
Define Labour Force
- Labour Force
- People who are working
- People who are not working but are actively looking for work
How is the unemployment rate calculated?
Unemployment Rate = (Not Working But Actively Looking / Labour Force) x 100
Assume that a country has 25 million people of working age. Of those 25 million, 19 million are working and 1 million are not working but are actively looking for work. The remaining 5 million people are not working and not actively looking for work. Some people in this group are students, some are retired, and some are discouraged and have stopped looking for work.
How large is the labour force?
ANSWER:
Labour Force = 19M + 1M = 20M
Assume that a country has 25 million people of working age. Of those 25 million, 19 million are working and 1 million are not working but are actively looking for work. The remaining 5 million people are not working and not actively looking for work. Some people in this group are students, some are retired, and some are discouraged and have stopped looking for work.
What is the Participation Rate?
ANSWER:
PARTICIPATION RATE:
(20M / 25M) X 100% = 80%
Assume that a country has 25 million people of working age. Of those 25 million, 19 million are working and 1 million are not working but are actively looking for work. The remaining 5 million people are not working and not actively looking for work. Some people in this group are students, some are retired, and some are discouraged and have stopped looking for work.
What is the unemployment rate?
ANSWER:
1M/20M X 100 = 5%
NOTE ONLY / PARTICIPATION RATE
In Canada, the participation rate has increased since the 1960s, primarily because of the increased participation of women in the work force. The current participation rate is about 66%, compared to 55% in the early 1960s. The participation rate is a key measure of the productivity of a society. A society where only 50% of the working-age population is willing to work is not as productive as a society where 70% of the working-age population is willing to work.
NOTE ONLY / PARTICIPATION RATE
In Canada, the participation rate has increased since the 1960s, primarily because of the increased participation of women in the work force. The current participation rate is about 66%, compared to 55% in the early 1960s. The participation rate is a key measure of the productivity of a society. A society where only 50% of the working-age population is willing to work is not as productive as a society where 70% of the working-age population is willing to work.
_______ unemployment is tied directly to fluctuations in the business cycle. It rises when the economy weakens and workers are laid off in response to lower sales; it drops when the economy strengthens again.
Cyclical unemployment is tied directly to fluctuations in the business cycle. It rises when the economy weakens and workers are laid off in response to lower sales; it drops when the economy strengthens again.
_________ unemployment consists of the normal labour turnover that occurs when people enter and leave the work force, and during ongoing creation and destruction of jobs. Even in the best of economic times, people can be out of work for various reasons, including having recently finished school, having quit a job, or having been laid off from work.
FRICTIONAL unemployment consists of the normal labour turnover that occurs when people enter and leave the work force, and during ongoing creation and destruction of jobs. Even in the best of economic times, people can be out of work for various reasons, including having recently finished school, having quit a job, or having been laid off from work.
Structural unemployment reflects a mismatch between jobs and potential workers. It occurs when workers are unable to find work or fill available jobs because they lack the necessary skills, do not live where jobs are available, or decide not to work at the wage rate offered by the market.
STRUCTURAL UNEMPLOYMENT reflects a mismatch between jobs and potential workers. It occurs when workers are unable to find work or fill available jobs because they lack the necessary skills, do not live where jobs are available, or decide not to work at the wage rate offered by the market.
TRUE OR FALSE?
Frictional and structural factors in the economy will always exist. Therefore, the unemployment rate can never fall to zero, not even in times of healthy economic growth.
ANSWER: TRUE
NOTE ONLY
Frictional and structural factors in the economy will always exist. Therefore, the unemployment rate can never fall to zero, not even in times of healthy economic growth. The minimal level, below which unemployment does not drop, is called the natural unemployment rate.
At this level of unemployment, the economy is thought to be operating at close to its full potential. At that level, all resources, including labour, are fully employed.
Further employment growth is achieved either through increased wages to attract people into the labour force, which fuels inflation, or by more fundamental changes to the labour market that remove impediments to job creation.
NOTE ONLY
Frictional and structural factors in the economy will always exist. Therefore, the unemployment rate can never fall to zero, not even in times of healthy economic growth. The minimal level, below which unemployment does not drop, is called the natural unemployment rate.
At this level of unemployment, the economy is thought to be operating at close to its full potential. At that level, all resources, including labour, are fully employed.
Further employment growth is achieved either through increased wages to attract people into the labour force, which fuels inflation, or by more fundamental changes to the labour market that remove impediments to job creation.
