Economic Performance & Business Cycle Flashcards
GDP
Gross Domestic Product: Market value of final goods and services, newly-produced during a specific time period within a country’s border’s.
Measure of the total “stuff” being produced by the economy.
3 GDP Measurement Approaches
- Expenditure Approach - Sum spending on all “final” goods & services,
- Value-Added Approach - Sum “value added” at each production stage,
- Income Approach - Sum “returns” to all productive factors.
Value-added
Revenue - Costs of material inputs
Nominal GDP
GDP in current prices
Expansion
Periods of increasing real GDP
Recession
Periods of decreasing real GDP, 2 quarters of negative real GDP growth
Depression
Severe recession
GDP Deflator
Measure of the price level for the economy that tells us how much lower or higher prices are in any year compared to the base year.
(Nominal GDP / Real GDP) x 100.0
Per Capita GDP
Measure of living standards for the average citizen of a country.
PPP
Purchasing Power Parity: Real GDP converted to US dollars using market exchange rates to compare differences in living standards across countries.
Gini Index
AKA Gini Coefficient. Used to measure inequality.
0 = Perfect equality, 1 = Perfect inequality.
Inflation
Prices increasing on average. Unexpected inflation redistributes wealth (purchasing power) from workers to firms, and from creditors to borrowers.
Deflation
Prices decreasing on average. Unexpected deflation can essentially destroy an economy. Sustained declines in all prices indicate macroeconomic crisis. “Debt deflation” is the biggest problem where deflation increases the real value of debt.
Disinflation
Commonly used by the fed to describe a period of slowing inflation. Not necessarily bad.
CPI
Consumer Price Index: Weighted average of prices where the weights reflect consumer purchasing patterns. CPI calculated using prices for goods and services in “basket of goods.”
Real Interest Rate
Rate at which the real value of an asset increase over time. True real interest rate is ex ante (expected) version.
Real Interest Rate = Nominal Interest Rate + Expected Interest Rate
Fisher Effect
Positive relationship between interest rate and inflation rate.
Working Age Population
Employed, Unemployed, Not in Labor Force
EM Ratio
Employment to Population Ratio = Employment / Civilian Noninstitutional Population
Civilian Noninstitutional Population
People 16 years of age or older, not inmates of institutions, not active military.
Long Term Unemployment
Unemployed workers that include those who have been unemployed more than 27 weeks.
Marginally Attached Workers
Not in labor force but want to be and are available for a job. Searched for work sometime in the last 12 months but not past 4 weeks.
Discouraged Workers
Subset of Marginally Attached Workers. Searched for work sometime in the last 12 months. Not currently looking because they don’t believe there are jobs available for which they qualify.
U-3
Total unemployed as percent of the civilian labor force. Definition used for official unemployment rate.
Natural Rate of Unemployment
AKA “Full Employment.” Rate of unemployment when the economy is using all available resources efficiently. When economy is operating at full capacity, further attempts to stimulate real GDP will result in higher inflation, with no increase in real economic activity.
Frictional Unemployment
Search activity of firms and workers due to heterogeneity of preferences and skills, matching process takes time, includes first-time job seekers.
Structural Unemployment
Long-term and chronic unemployment that exists even when the economy is not in a recession due to mismatch of skills and skill requirements.
NAIRU
Non-Accelerating Inflation Rate of Unemployment: Rate of unemployment at which inflation remains stable. Trying to use policy to decrease unemployment below this rate will accelerate inflation, but otherwise, it will have little effect on the inflation rate.
NAIRU = (Normal Frictional + Normal Structural) / Labor Force
GDP Components
Consumption + Investment + Gov’t Spending + Net Exports
- Consumption: Durable & Non-Durable Goods, Services
- Investment: Residential & Non-residential, Changes in Private Inventories
- Gov’t Consumption: Federal, State & Local
- Net Exports: Exports - Imports
Wealth Effect
As prices increase, real value of HH wealth falls, which is why AD is downward sloping.
Consumption Smoothing
When HH wish to purchase same set of goods and services even as prices increase. HHs use savings or borrow to adjust.
Interest Rate Effect
Interest rates increase, causing investment to fall, which in turn causes GDP to fall.
Shifts in AD
Generated by changes in spending by HH, firms, gov’ts, or foreigners that are generated for any other reason besides change in the price level.
Supply Side Economics
Focuses on AS as the driver in the economy. Used to encourage growth in potential output (shifting AS to the right). This is done by:
- Removing unnecessary regulation
- Maintaining efficient legal system
- Encouraging technological progress
Stagflation
Typically business cycles are caused by fluctuations in AD, however, int he case of an expected inflation increase, there is a negative “supply shock” which shifts SRAS to the left.
LRAS
Determined by factors of production. Increase in Investment or Labor Growth Size would shift LRAS.
Phillips Curve
Dynamic version of AS/AD that emphasizes negative correlation between inflation and unemployment.
Okun’s Law
There is an empirical relationship between real GDP and unemployment. Unemployment rises, labor force falls, hours per worker declines, and labor productivity declines.
2% output reduction associated with 1% increase in unemployment rate.
Sacrifice Ratio
Percentage loss of output (real GDP) for each 1-percentage point reduction in the inflation rate.
