Exam 2 Flashcards
Brian got fired from teaching at KU about 10 months ago and he looked for work for a few days but gave looking completely because he believes there are no jobs to be found. In a normal calculation of U3, as measured by the BLS, Brian would be…
A. Included in the denominator only
B. Included in the numerator only
C. Included in both the numerator and denominator
D. Not included in either the numerator or denominator
D
Brian got fired from teaching at KU about 10 months ago and he looked for work for a few days but gave looking completely because he believes there are no jobs to be found. In a normal calculation of U6, as measured by the BLS, Brian would be…
A. Included in the denominator only
B. Included in the numerator only
C. Included in both the numerator and denominator
D. Not included in either the numerator or denominator
c
In the country of Brianlandia there are 20 million people currently working. There are 4 million people who are not working but have looked for a job in the past 4 weeks. There are 12 million people who are 16 years or older, are not working, have not looked in the past four weeks, are not in the hospital or prison, and are not in the military. These 3 numbers represent all the people in Brianlandia. If Brianlandia calculated the labor force participation rate exactly as the BLS does what is the labor force participation rate in Brianlandia.
A. Approximately 52%
B. Approximately 63%
C. Approximately 57%
D. Approximately 66%
D
Brian quit his job as a college professor back in October. For the first month he looked for a job, but since November he has not even bothered to look for a job. The BLS would consider Brian to be …
A. part of the labor force
B. unemployed
C. marginally attached
D. both A and B but not C
c
Based on current numbers discussed in class, which is larger (as of February 2017)?
A. The number of people in the US considered marginally attached to the work force
B. The number of people in the US considered unemployed
C. The number of people in the US working part time for economic reasons
D. The number of people in the US considered to be discouraged workers
b
Richard S. has lost his job as an accountant at the shirt factory, but not because there was no demand for shirts. Rather, the factory required that Richard keep the books by spreadsheet and he only can keep books in a ledger using a pencil. Richard's unemployment would be considered ... A. Cyclical B. Structural C. Frictional D. Seasonal
b
Current unemployment rate
4.8%
Targeted rate of unemployment (Natural rate of unemployment) (full employment)
5%
4 Different Types of Unemployment
Seasonal
Structural
Cyclical
Frictional
Seasonal
Certain professions demand for labor is seasonal
–Example: Agricultural and construction
Frictional
At any point in time in a fluid labor market some people are looking for jobs and some firms are looking for people
Structural
The mismatch between workers and the skills/requirements of the job
- -As economy changes we produce different goods and services
- -People who were employed in the now-outdated industries lose their jobs
Cyclical
Caused by recession
- -Too few jobs available
- -Insufficient demand for goods and services creates insufficient demand for labor
Who calculates unemployment?
BLS (bureau of labor statistics)
Not in the labor force
- People under 16
- People in hospitals or prison
- US military
- -Retired, housewife, doing odd jobs for cash, not looking
How many people not in the labor force?
94 million
How many people employed?
152.1 million
How many people unemployed?
7.6 million
How many marginally attached workers?
1.75 million
Discouraged workers
- A subcategory of marginally attached
- Gave up looking because they believe there are no jobs
How many people are working part time for economic reasons? Are they considered to be employed, unemployed, or marginally attached?
5.8 million; employed
5 Differences between GDP deflator and CPI
- CPI is done by BLS not BEA
- CPI is released every month, not quarterly
- Quantities don’t matter in CPI, just take one of each thing
- Current base year for CPI is 1983
- CPI measures consumer goods only (GDP measures a bunch of other stuff)
Calculate U3
(Unemployed) / (Labor Force)
Calculate U6
(Unemployed + Marginally Attached + Part Time) / (Labor Force + Marginally Attached)
Calculate Labor Force Participation Rate
(Labor Force) / (Working Age)
Income approach to GDP
- Wages: income earned by workers
- Profits: income earned by firms
- Rent: income earned by owners of land/buildings
- Interest: income earned by lender
- Taxes and other discrepancies
GNP
the value of all final goods and services produced by residents of the US even if production takes place outside of the boarders
What is left out of GDP?
- Value of leisure
- Does not reflect social problems (crime)
- Does not reflect negative effects of production (pollution)
- It measures the size of the pie but not how it is split up
GPI
Genuine Progress Indicator
- Looks at growth and whether or not it is boosting your well being
- Cost of depletion
- Cost of crime
- Cost of pollution
- Loss of habitat
Define labor force
people who are working or looking for work (have looked within the past four weeks)
Why does unemployment exist? (4)
- Efficiency Wages
- Labor Unions
- Minimum Wage
- Unemployment Insurance
Efficiency wages
- Wages paid to exceed the market wage in order to keep workers happy, productive, and efficient
- Employees have more to lose if they lose their jobs
- -improves attendance
- -improves productivity
- -reduces shirking
- -increases firm’s profitability
Labor unions
-If you are a part of a union, they work to get you higher wages
Minimum wage
- If the company didn’t have to pay minimum wage then they would hire more workers
- If minimum wage is lower than the market wage, then it does nothing: it isn’t causing unemployment
Unemployment insurance
Our unemployment would drop a little if we stopped government intervention because there are some who abuse it, but not very much.
The household survey
- Monthly
- Conducted by BLS
- AKA the current population survey
- Is done in order to collect the data needed to calculate the unemployment rate
The establishment survey
- Conducted MONTHLY by the BLS
- AKA the payroll survey
- Is used to measure total unemployment in the economy
- Samples about 300,000 business establishments
Market for Loanable Funds Shifters
- Increase/Decrease in the governments budget deficit
- Increase/Decrease in the desire of households to consume today
- Increase/Decrease in tax benefits for saving
- Increase/Decrease in expected future profits
- Increase/Decrease in corporate taxes
Decrease in the government’s budget deficit
Supply shift right; real interest rate decreases; investment increases
Increase in the government’s budget deficit
Supply shift left; real interest rate increase; investment decreases
Increase in the desire of households to consume today
supply shift left; real interest rate increases; investment decreases
Decrease in the desire of households to consume today
supply shift right; real interest rate decreases; investment increases
Increase in tax benefits for saving, such as 401K retirement accounts which increase incentive to save
supply shift right; real interest rate decreases; investment increases
Decrease in tax benefits for saving, such as 401K retirement accounts which increase incentive to save
supply shift left; real interest rate increases; investment decreases
Increase in expected future profits
demand shift right; real interest rate increases; level of investment increases
Decrease in expected future profits
demand shift left; real interest rate decreases; level of investment decreases
Increase in corporate taxes
demand shift left; real interest rate decreases; level of investment decreases
Decrease in corporate taxes
demand shift right; real interest rate increases; level of investment increases
Four drawbacks to establishment survey
- The survey does not provide information on the number of self-employed persons because they are not on company payroll
- They may fail to count some persons employed to newly opened firms that are not included in the survey
- The survey provides no info on unemployment
- The values for employment that the BLS initially announces can be significantly revised as data from additional establishments become available
What will inflation do?
As labor market tightens, there is upward pressure on wages
–This leads to upward pressure on prices
Deflation
Continual fall in the overall price level
Inflation
Continual rise in the overall price level
3 ways the CPI might get it wrong
- Quality bias
- Substitution bias
- New product bias
Quality bias
- McDonalds burger got smaller, but they called it the same item even though the quality decreased (Understate inflation)
- Quality increases but it were called the same product (Overstate inflation)
New Product bias
When a company comes out with a new product, it will start off high and then decline
- -they don’t catch this drop
- -They overstate the impact on consumers
Substitution bias
Fixed market basket of goods doesn’t include all products
- -If coke goes up, we will buy pepsi instead
- -CPI can overstate the impact of price changes to consumers
PPI
(Producer Price Index)
- Calculated by BLS
- Measures the prices that firms pay for inputs to production
- Separate intermediate goods from raw materials
- used to predict the CPI
BPP
(Billion Prices Project)
- Tracks 5 mil online prices daily (CPI leaves out online sales)
- BPP reported deflation 56 days before CPI did in 2009
If the interest rate you pay increases, the interest rate you get …
increases
Nominal interest rate
the stated rate of interest on a loan or financial asset
Real interest rate
(nominal rate) - (inflation rate)
If nominal interest rate = 5.75%
and inflation = 3%
What is the real interest rate?
2.75%
Nominal wage
what you get paid
Real wage
adjusted for inflation
When does hyperinflation occur?
When inflation is > 100%
What causes hyperinflation and why will the US never have it?
A massive increase in the amount of printed money in circulation that is not supported by the growth in the output of goods and services
- -When you print more $ you get hyperinflation
- -The US does not print more money when we need more money, we borrow money
When is inflation a “good” thing? When is it not so “good?”
If you borrow money and your payments are fixed, inflation helps because you’re paying it back with “cheaper money.”
If you lend money its bad or if you live on a fixed income, it is bad.
What leads to GDP/Economic growth?
- Natural resources
- Labor supply
- Labor productivity
- Access to capital
The business cycle stages in order
Expansion, peak, contraction/recession, trough
We are currently in what stage of the business cycle?
expansion and have been for approx. 7 years
Who calls the recession (when it starts and when its over)?
National Bureau of Economic Research (NBER)
GDP depends on …
Labor and capital
Y = f (K,L)
Unemployment is a ______ indicator.
lagging
3 Economic facts about the business cycle
- During the business cycle, unemployment will increase during the recession and continue to increase into expansion
- During the business cycle, durable goods are much more affected than non-durable goods (in both directions)
- –McDonald’s did very well during recession - During the recession portion of the business cycle, the inflation rate will decline but that is not the same thing as prices declining
What causes the business cycle?
sunspots
Define sunspots
shocks to the system/to the key input of production
- -Ex. when OPEC raised the price of oil sharply and quickly
- -Ex. the housing bubble
What is the name of Brian’s professor who won the Nobel Prize in economics for his work on institutions?
Douglass North of Washington University
Consider the per worker production function. What is depicted on the horizontal axis of this graph?
A. Number of workers (“quantity of labor”)
B. Equipment per hour worked (“capital” per hour worked”)
C. Output (“real GDP”) per hour worked
D. None of these
b
Which of the following could cause a shift up on the per worker production function?
A. A change in technology
B. A change in the amount of equipment used
C. A change in the level of competition
D. A change in the quantity of workers hired
A
Which of the following is not a part of the concept of “diminishing marginal returns” as discussed in Chapter 11?
A. One type of input, either capital or labor, is fixed
B. One input, either capital or labor, is increased in order to produce more output
C. As we increase one input, output actually decreases
D. As we increase one input, output will initially increase but those increases will get smaller and smaller
C
What was the term for the prediction that the level of GDP per capita in poor countries will grow faster than in rich countries?
Catch-up
Current CPI
243
CPI base year
1983
Current GDP
112.2
Calc GDP
(Nominal / Real) * 100
Switch from GNP to GDP in what year?
1991
Economic Growth is ….
The US is lucky
Not automatic
Not inevitable
New Growth Theory
- Paul Romer (NYU)
- Technology change leads to economic growth is influenced by economic incentives
- Education and human capital = knowledge capital (which makes technology grow)
Ways to encourage the accumulation of knowledge capital
- Protecting intellectual property with patents and copy rights
- Supporting research and development
- Subsidizing education
Why isn’t everybody rich?
- Corruption: failure to enforce the right of law
- Political Instability: War and revolutions
- Poor public education and health
- Low rates of savings and investment
Is economic growth good or bad?
It increases the standard of living uptight to a point
–At some point economic growth doesn’t determine happiness/it isn’t the only factor
Current U6
9.4%
What is the term for the rules and arrangements (norms) (both formal and informal) that direct our behavior?
Institutions
Which component of GDP is most affected by market for loanable funds?
I (investing)
The market basket: how the items are weighted
Housing: 42%
Transportation: 15%
Food and Beverage: 15%
Medical Care: 8%
