Lecture 2A and 2B Flashcards
What is a recession?
It is defined as two quarters of successive quarter to quarter negative growth, or six continuos months of delcine
What is Unemployment?
The inability of labor force participants to find a job
What is Inflation?
The positive growth in the average price level
What is deflation?
The negative growth of the average price level
What is Stagflation?
This is the concurrent occurrence of unemployment and inflation.
What is Consumer Price Index? (CPI)
CPI is Consumer Price index. It is the cost of a standard basket of goods and services in a given year.
How do you calculate the GDP Deflator?
Nominal GDP/Real GDP
What is one important BIAS in CPI
It does measure price changes but not quality changes
Presence of Substitution Bias
How do you calculate rate of inflation?
(Current CPI - CPI one year ago) / (CPI one year ago)
What are the 2 types of inflation?
i) Demand Pull inflation: inflation due to excess of total spending beyond economy’s capacity to produce.
ii) Cost-Push Inflation: Inflation due to rising production costs (E.g. Labour and energy costs)
What is the difference between nominal & real quantity?
A nominal quantity is measured in terms of its current dollar value.
A real quantity is measured in physical trms
What is Indexing?
Increasing a nominal quantity each period by the % increase in a specified price index.
Prevents purchasing power of the nominal quantity from being eroded by inflation
What are the downside of Indexing?
i) Makes it harder for the economy to adjust to shocks whenever changes in relative prices are needed
ii) Adding another layer of calculation
iii) Weaken political will to fight inflation. Lead to further inflation and make economy worse off
iv) Lead to inflation spiral. Firm pass the cost increases on as higher prices of final goods. Workers ask for higher further rise in wage rate
How do you calculate Labour Force, unemployment rate and participation rate?
Labor Force = Employed + Unemployed
Unemployment rate = unemployed/ labor force
Participation rate = labor force/ population 16+
What are the 3 categories of Unemployment?
Frictional
Structural
Cyclical
What is Cyclical unemployment?
The increase in unemployment during economic slow-downs
- Short duration
- Economic cost
What is Frictional Unemployment?
Process of matching workers with Jobs
i) Workers quit to find better jobs
ii) Employers Fire workers and look for better ones to replace them
iii) Consumers change the goods they buy, thereby reducing jobs previously available in producing the goods they no longer want but increasing jobs elsewhere
iv) Technological progress makes the skills of some workers obsolete
What is structural employment?
Arises from the lack of skill or a mismatch of skills with available jobs
i) Lack of skills, language or discrimination
ii) Sectoral shifts in the economy, new industries grow and old industries die off
iii) Structural change in labour markets
- Minimum wage laws
- Lethargic information system, slow dissemination of information about job vacancies and manpower requirement to potential job seekers
Is a worker unemployed for longer than 6 months under structural or Frictional unemployment?
-Structural unemployment
He is chronically unemployed.
What does Okun’s law state?
Every 2% real GDP is below potential full employment, unemployment will rise by 1%
What is AD?
Aggregate Demand is the total output that is demanded in an economy at a given price level. Total amount of goods people want to buy
AD shows the amount of output consumers, firms, government, and customers abrod want to purchase at each price level
It is downward sloping, because an increase in price means eroded purchasing power, thus reducing affordability and lower demand.
What is AS?
AS shows the total output produced in an economy at a given price level.
Why is AD downward sloping?
Decreases in prices caused C and I to rise ( thus purchasing power increase)
Decrease in prices causes net exports to increase
Decrease in prices causes real wealth to increase leading to higher consumption and investment
Decreases in prices - decreases demand of money - lower interest rate - encourage investment, consumption and spending
Why is the AS curve upward sloping?
-Higher prices with higher output gives higher profit especially when inputs prices relatively sticky?
