Exam 2 Flashcards
GDP definition
Gross Domestic Product: is the market value of all final goods and services produced within a country in a given period of time
GDP Calculation
Y=C+I+G+NX
Net Exports
=exports-imports
Real GDP
To obtain a measure of the amount produced that is not affected by changes in prices, we use the real GDP, which is the production of goods and services valued at constant prices.
Nominal GDP
The production of goods and services valued at current prices
GDP deflator
Nominal/real x 100
Inflation rate
(GDP deflator in year 2 - GDP deflator in year 1)/ GDP deflator in year 1 x100
Final good
Hallmark card or a dress
Intermediate good
Paper or fabric
Expenditure approach
The GDP is calculated by summing up all of the expenditures made on final goods and services
Expenditure
An amount of money spent
Problems with GDP
- Does not allow for the health of our children, the quality of their education or the joy of their play. does not include beauty of poetry or strength of marriages. It measures everything in short except that which makes life worthwhile.
- doesn’t measure leisure.
- doesnt include volunteer work
CPI definition
Consumer price index: is a measure of the overall cost of the goods and services bought by a typical consumer.
CPI calculation
(Price of basket of goods and services in current year/price of basket in base year) x 100
Steps for CPI to be aware of
- Fix the basket: determine which price is most important to the typical consumer. If the typical consumer buys more hot dogs than hamburgers then the price of hot dogs is more important.
- Find the price: find the prices of the goods and services in the basket at each point in time.
- Compute the basket’s cost: use the data on prices to calculate the cost of the basket o the goods and services at different times.
- Choose a base year: designate one year as the base & compare other years to it.
Turning dollar figures from year T into today’s dollars
Amount in year T dollars x (price level today/price level in year T)
Nominal interest rate
The interest rate that measures the change in dollar amounts
Real interest rate
The interest rate corrected for inflation
Calculation of real interest rate
Real interest rate= nominal rate- inflation rate
Indexed
The automatic correction by law or contract of a dollar amount for the effects of inflation
Accuracy and bias of CPI
- substitution bias: when prices change from one year to the next, they do not all change proportionately: some prices rise more than others.
- introduction of new goods: when a new good is introduced, consumers have more variety from which to choose, and this in turn reduces the cost of maintaining the same level of economic well-being.
Productivity
The quantity of goods and services produced from each unit of labor input
Productivity measures
Standard of living
Physical capital
The stock of equipment and structures that are used to produce goods and services
Human capital
The knowledge and skills that workers acquire through education, training and experience
Natural resources per worker
The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
Labor force
The total number of workers, including both the employed and the unemployed
Unemployment
This category includes those who were not employed, were available for work, and had tried to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off.
Not in the labor force
Full-time students, homemakers, retirees
Labor force
Number of employed + number of unemployed
Unemployment rate
Number of unemployed / labor force x 100
Natural rate of unemployment
The normal rate of unemployment around which the unemployment rate fluctuates
Cyclical unemployment
The deviation of unemployment from its natural rate
Discouraged workers
Individuals who would like to work but have given up looking for a job
Frictional unemployment
Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
Structural unemployment
Sunemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
Efficiency wages
Above-equilibrium wages paid by firms to increase worker productivity
Technological knowledge
Society’s understanding of the best ways to produce goods and services
The Production Function
Y=AF(L,K,H,N)
Diminishing returns
The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
Catch-up effect
The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
Investment from abroad
- a capital that is owned and operated by a foreign entity is called foreign direct investment.
- an investment that is financed with foreign money but operated by domestic residents is called foreign portfolio investment.
Education
- investment in human capital
- government policy can enhance the standard of living is to provide good schools and to encourage the population to take advantage
- has an opportunity cost: when students are in school, they forgo the wages they could have earned as members of the labor force
Health and nutrition
- human capital: expenditures that lead to a healthier population.
- healthier workers are more productive
Property rights and political stability
-another way policy makers can foster economic growth is by protecting property rights and promoting political stability
Free trade
- a type of technology
Research and development
Population and growth
- a large population means more workers to produce goods and services
- higher population = more people to consume those goods and services
Actual GDP
- can exceed potential GDP only temporarily as it approaches and then recedes from a business cycle peak
- fluctuates around potential GDP
- determined by same factors as potential GDP
- expenditure
Potential GDP
-the sustainable upper limit of production because real GDP can exceed potential gdp only temporarily as it approaches then recedes from a business cycle peak.
Cost of unemployment
The output lost due to the fact the economy is not running at full employment
CPI
Is the measure of average prices paid by consumers for a fixed basket of goods and services
CPI measures the changes of the
Prices paid by consumers for a fixed market basket of consumer goods and services
CPI categories (8)
- Food and beverages (breakfast cereal, milk, coffee, wine etc)
- Housing (renter’s cost of housing, homeowner’s cost of housing, fuel oil, bedroom furniture)
- Apparel (men’s shirts and sweaters, women’s dresses, jewelry)
- Transportation (airline fares, new vehicles, car insurance)
- Medical care (prescription drugs, med supplies, physician’s services)
- Recreation (tv, pets and pet products, sports equipment, admissions)
- Education and communication (college tuition, postage, phone services, computer and software accessories)
- Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses)
Inflation rate
The % change in the price level from the previous period
Calculation the inflation rate
Change in CPI/base CPI x 100
Real wages vs. nominal wages
Real wages: wages adjusted for inflation
Nominal wages: the way you are compensated for work
Cyclical unemployment
Unemployment that rises during economic downturns and falls when the economy improves. Getting laid off due to a recession is the classic case of this.
Structural unemployment
A type of unemployment that occurs as a result of technological changes and changing patterns of demand, as well as geographical changes, and labor market rigidities
Frictional unemployment
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs
Cost of inflation
Tax, shoe-leather, confusion and uncertainty costs.
Inflation and purchasing power
Reduces the purchasing power each dollar of income will buy less than before
Redistributive effects of inflation
Fixed income groups will be hurt bc their real income suffers
savers will be hurt by the unanticipated inflation
