Exam 1 Flashcards
gross domestic product
the market value of all final goods and services produced in a country during a period of time, typically one year
market value=
price x quantity
GDP=
total production=total income=total spending
components of GDP
consumption, investment, gov. purchases, net exports
consumption
largest portion of GDP. services, nondurable goods, durable goods
investment
spending on new homes, firm spending on new factories or equipment, NOT stocks or bonds
government purchases
federal, state, and local spending on things like highways or teacher salaries. NOT transfer payments
net exports=
exports-imports (can be negative)
GDP equation
Y=C+I+G+NX
real GDP=
- measures current prices at a base year
- current quantities x base year prices
GDP deflator=
- measures price level
- nominal GDP/real GDP x 100
adult working age population
every single person in the country 16 and above that are not instituionalized
labor force=
number of people employed + number of people unemployed
employed
people who worked at least 1 hour in the week
unemployed
someone that is not currently working but is available for work and has actively looked for a job within the past month
not in the labor force=
adult working population-labor force
discouraged worker
someone who would like to work but has given up looking for jobs
unemployment rate=
unemployed/labor force x 100
(also)- unemployed/employed + unemployed x 100
labor force participation rate=
labor force/adult working age population x 100
employment to population ratio=
employed/working age population x 100
frictional unemployment
- related to the job search
- typically short term
- can be seasonal (lifeguard)
structural unemployment
- related to mismatch in skills
- tends to be long term
cyclical unemployment
- caused by a business cycle recession
- when cyclical unemployment=0, the economy is at full employment
natural rate of unemployment
- the unemployment rate when the economy is at full employment
- the US is between 5 and 5.5%
causes of unemployment
- unemployment insurance
- minimum wage
- labor unions
- efficiency wages
Consumer Price Index (CPI)
a measure of the average change over time in prices a typical urban family of 4 pays for the goods/services they buy
CPI=
cost of basket in current year/cost of basket in base year x 100
(basket meaning the total price of everything the family has in their cart at Walmart)
Inflation rate in year 2=
CPI in year 2 - CPI in year 1/ CPI in year 1 x 100
CPI is not the inflation, but inflation is the % change in CPI
substitution bias
consumers may change their purchasing habits away from goods that have increased in price
increase in quality bias
difficult to separate improvement in quality from increase in price (smartphones)
new product bias
the basket of goods changes only every 10 years. Big delay in
including new goods like cell phones.
outlet bias
CPI uses the full retail price but people may buy from discount stores or online to get things cheaper than full price
Producer Price Index
same idea as CPI but it reflects the cost of a basket of goods purchased by producers
PPI=
cost of basket in current year (for producers) / cost of basket in base year x 100
nominal value
value measured in current year dollars
real value
value that is adjusted for inflation
real value=
nominal value/ CPI x 100
nominal interest rate
the interest rate that a bank quotes for a loan
real interest rate
the nominal interest rate adjusted for inflation
Real Interest rate=
nominal interest rate - inflation
anticipated inflation
- increased real cost of holding cash
- firms have menu costs (takes time for firms to change prices)
- investors are taxed on nominal returns rather than real returns which can result in higher tax being due
unanticipated inflation
when its hard to predict inflation, makes it hard to make good borrowing and lending decisions
real GDP per capita
- the amount of production in the economy per person adjusted for changes in price level
- measures standard of living
real GDP per capita=
real GDP/population
economic growth
the process by which rising productivity increases the average standard of living (increases in real GDP per capita)
growth rate between any 2 years=
value in year 2 - value in year 1 / value in year 1 x 100
rule of 70
approximate time to double = 70/(growth rate in percent form)
financial system
the system of financial markets and financial intermediaries through which firms acquire funds from households
risk sharing
allows investors to spread money over many different assets thereby reducing the risk for any single investor while maintaining a high expected return
liquidity
allows savers to quickly convert investments to cash
information
prices represent beliefs about future revenue stream. aggregation of info makes funds flow to the right firms
private savings
a household income that is NOT spent
Sprivate= Y +TR - C - T
public savings
whatever the government brings in but does not spend
Spublic = T -G - TR
