Economics Flashcards
gross domestic product (GDP)
the market value of the final production of goods and services within the geographic borders of a country in a given period
expenditures approach to GDP
one of the three approaches to calculating GDP that involves adding up all spending on final goods and services in an economy; the expenditures approach categories this spending into five categories: consumption, investment, government spending, exports, and imports:
transfer payment
any payment by a government to a household that is not in exchange for a good or service; for example, if the government hires a contractor they are buying a service that is included in GDP, but if they send a retired person a pension check they are not buying a good or service and it is not counted in GDP.
structural unemployment
unemployment that occurs as a result of a structural change in the economy, such as the development of a new technology or industry; this is a part of the natural rate of unemployment. For example, Negan finds a cure for all dental diseases, and as a result, Rosita loses her job as a dentist and is now structurally unemployed.
natural rate of unemployment
the unemployment rate that exists when an economy is producing the full employment output; when an economy is in a recession, the current unemployment rate is higher than the natural rate. During expansions, the current unemployment rate is less than the natural rate.
frictional unemployment
the component of the natural rate of unemployment that occurs because the job search process is not instantaneous; for example, after Rosita graduated from dental school, it took her a few weeks to find a job as a dentist. During this period she will be frictionally unemployed.
cyclical unemployment
the unemployment associated with the recessions and expansions; this can have a positive or negative value. The current unemployment rate will depend on both the natural rate of unemployment and the amount of cyclical unemployment at the time.
basket of goods and services
meant to represent a typical set of consumer purchases—and calculating how the total cost of buying that basket of goods increases over time. Used to calculate inflation
The Consumer Price Index, or CPI
is a measure of inflation calculated by US government statisticians based on the price level from a fixed basket of goods and services that represents the purchases of the average consumer.
The core inflation index and persistent trend in long-term prices.
is a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying
The quality/new goods bias
The causes inflation calculated using a fixed basket of goods over time to overstate the true rise in cost of living because improvements in the quality of existing goods and the invention of new goods are not taken into account.
The substitution bias
causes an inflation rate calculated using a fixed basket of goods over time to overstate the true rise in the cost of living because it does not take into account that people can substitute away from goods whose prices rise disproportionately.
Who benefits from unexpected inflation?
Borrowers (lenders do not benefit)
Because the money they pay back has less purchasing power than what they paid originally
What is real GDP?
a measure of GDP that has been adjusted for the price level. In this way, real GDP is a truer measure of output in an economy. There are two approaches to adjusting nominal GDP to get real GDP: 1) using the same prices every year or 2) using the GDP deflator.
fiscal policy
the use of taxes, government spending, or government transfers to affect real GDP
monetary policy
the use of the money supply to impact interest rates, which in turn affects real GDP
change in autonomous spending
hanges in spending that happen in response to something besides an increase in income; for example, if the government decides to spend money on building a new bridge because they want to build a bridge (not because they have extra income lying around) or one firm decides to build a $10$10dollar sign, 10 million fidget spinner factory. The key thing that makes a change autonomous is that it is not happening in response to an increase in income,
marginal propensity to consume (MPCMPCM, P, C)
the proportion of any additional income that is spent; for example, if your MPCMPCM, P, C is 0.750.750, point, 75 that means for every $1$1dollar sign, 1 more income you get, you will save 252525 cents and spend 757575 cents.
marginal propensity to save (MPS)
the proportion of any additional income that is saved; note that MPC+MPS=1
expenditure multiplier
the magnitude of how much real GDP will change in response to an autonomous change in aggregate spending; for example, if the expenditure multiplier is 555, then $100$100dollar sign, 100 in government spending results in a total increase in real GDP of $500$500dollar sign, 500. This means that if a country has an output gap of $500$500dollar sign, 500, it doesn’t have to increase government spending by $500$500dollar sign, 500 to close that gap.
tax multiplier
the ratio of the total change in real GDP caused by a change in taxes; for example, if the tax multiplier is -4−4minus, 4, then a $100 tax increase will decrease real GDP by $400dollar sign For example, if the government has an output gap of $400 million and the tax multiplier is -4 then the government can close that gap by decreasing taxes by only $100 million.
What happens if Aggregate demand shifts to the right?
the equilibrium quantity of output and the price level will rise.
What happens if aggregate demand shifts to the left?
then the equilibrium quantity of output and the price level will fall.
