Macro Measurements/Economic Indicators Flashcards
Four Components that measure GDP
Consumption (C) -
spending on goods/services by households
Investment (I) -
spending by businesses to produce goods and services. (Capital goods and Inventory)
Government (G) -
spending by government
Trade (Net Exports)
What is not accounted in GDP?
INTERMEDIATE GOODS - a good bought to make a final good
TRANSFER PAYMENTS - government paying individuals does not represent production
NON MARKET ACTIVITIES -
it is not
USED GOODS - when the goods were produced, was the year the goods were accounted for GDP
ILLEGAL GOODS - it is impossible to
**
GDP acronym?
Gross Domestic Product
Define GDP
measures the value of all goods and services produced within a country in a year
How is GDP calculated
measuring all the quantities of goods and services produced and multiplying by prices **
expenditures approach to GDP
1 of 3 ways to calculate GDP:
adding all the spending of final goods and services in an economy
Y = C + I + G + X - M
income approach to GDP
2 of 3 ways to calculate GDP:
adding all the incomes earned within a country in a given year
Y = w + i + r +p
wages
interest
rent
profits
value-added approach to GDP
3 of 3 way to calculate GDP:
adding up all of the added at the various stages of production.
(raw ingredients or resources and capita)
final goods and services
bought in their FINAL form for their intended final use
intermediate goods
goods used in production of a Final Product.
Transfer Payment
any payment from a government to a household NOT in exchange for good/service
Exports
goods produced in a country to be sold to another country
Imports
goods that are produced in a different country and now purchased in the other country.
A foreign country builds a plant in Alanta Georgia. Would this be accounted for GDP>
Yes. The firm is a purchase within the US and it is counted for investment
What describes new capital?
Net investment
Net Investment
additional capital that is added to the capital stock
Gross Investment
all newly created capital. (Repaired replaced capital and Brand new capital)
Stock of Capital
All the capital from all time. new capital and old (no deprication)
Depreciation
existing capital wears out (subtracted out)
Relationship between households and firms in the Circular Flow Model
Households supply factors of production to Firms for MONEY
Firms supply goods/services to households in exchange for MONEY
quality of life
the standard of health, happiness, security of people
real GDP per Capita
per person, total GDP divided by poplulation
Limitations of GDP
- excludes non market transactions
- fails to represent degree of income in society
- fails to indicate the nations rate of growth in sustainability
- treating replaced depreciated capital as new capital
The Human Development Index (HDI)
The Genuine Progress Indicator (GPI)
The Happy Planet Index (HPI)
are examples of…
indicators that help measure the quality of life
unemployment
people who are not working, but are looking for a job
unemployment rate
the percentage of the labor force that is unemployed
labor force (equation)
the number in a population who are employed or unemployed
LF = unemployed + employed
eligible population
likely to be in the labor force (16 years old or older, not in prison/military)
labor force participation rate
the percentage of the eligible population to who is in the labor force
discouraged workers
people who do not have a job, but will take a job.
- GAVE UP LOOKING FOR A JOB
- NOT COUNTED IN LABOR FORCE
underemployed
people who work part-time, but really want to work full time
full employment output
the amount of output that is produced in an economy when that economy is using all of its resources efficiently
natural rate of unemployment
the unemployment rate that exists when economy is producing full employment output
natural rate of unemployment in recession…
the current unemployment rate is higher than the natural rate
natural rate of unemployment in expansion…
the current unemployment rate is less than the natural rate
frictional unemployment
natural rate of unemployment is happening because job search is in process
structural unemployment
unemployment that happens because of change in economy
- new technology or industry
cyclical unemployment
unemployment because of EXPANSIONS or RECESSIONS
- positive or negative value
- current unemployment rate will depend on both natural rate of unemployment and the amount of cyclical unemployment at the time **
Labor Force Participation Rate Equation
(Labor Force / Eligible Population) X 100%
The unemployment rate equation
(Unemployed/labor force) X %100
When Cyclical unemployment is a negative percent that means…
the economy is making more than full employment output
When Cyclical unemployment is a percent greater than 0 that means…
the economy is making less than full employment output
how does the officially unemployment rate UNDERESTIMATE the actual unemployment situation?
discouraged workers are not in the labor force; they want jobs but have given up.
How is Price level measured?
measured by constructing a hypothetical basket of goods and services and calculating the TOTAL cost of buying that basket of goods and the relationship over time
How is the Rate of Inflation measured?
is measured as the percentage change between price levels over time
index number
a unit free number derived from the price level over a number of years that makes understanding inflation easier
Inflation
A sustained increase in the overall price level in the economy.
- the purchasing power of the dollar DECREASES
Difference between price level and the rate of inflation?
**
Consumer Price Index
CPI is a measure of inflation calculated by the gov based on
price level from fixed basket of goods/services that represents the PURCHASES OF THE AVERAGE CONSUMER
Core inflation index
is a measure of inflation typically calculated by taking the CPI and excluding volatile ** economic variables (food and energy prices)
Why does substitution bias arise if the inflation rate is calculated based on fixed basket of goods?
**
Why does the quality/new goods bias arise if the inflation rate is calculated based on fixed basket of goods?
**
The annual inflation rate in the US economy is roughly…
2%-4%
Highest inflation in the United States in the 20th century
occurred during the years after World Wars I and II in 1970s
Deflation
negative inflation; overall price level in the economy are DECREASING
hyperinflation
outburst high inflation; when economies shift from a controlled economy to market-oriented economy
Unexpected inflation hurts who?
people who received money (wage/interest payments)
Their money is not worth as much
Inflation benefits who?
Inflation can help those who owe money
Money paid back is less valuable than it was before
inflation rate
the pace at which the overall price level is increasing: this is the percentage increase in the price level from one period to next
Disinflation
A slowing rate of inflation, there is still inflation but prices are rising slow
Aggregate price level
single number summarizing all prices in economy **
Price Index
a measure that calculates the changing cost of purchasing a particular market basket each year
EX: consumer price index and produce price index
Market Basket
combination of goods that are used to calculate a price index: consistent from year to year
Base year
a reference year to which variables are compared
real variables
variables that ARE ADJUSTED for the rate of inflation that represent the TRUE value
nominal variables
variables such as wages and incomes or interest that have NOT BEEN ADJUSTED TO the rate of inflation
Purchasing Power
what can actually be bought with money
Real interest rate
the interest rate that reflects the actual purchasing power of that interest
How to calculate CPI
(price of basket we want CPI for) / (base year price of basket) X 100
How to calculate the rate of inflation
inflation rate
(CPI2 - CPI1) / CPI1 x 100%
How to calculate rate of change
(new value - old value) / old value **
What does CPI measure
the cost of living
Substitution Bias
CPI does not account for if the good’s price increases a consumer can purchase more of a substitute
GDP deflator
a price index used to adjust nominal GDP to find real GDP
Unanticipated inflation
the price level increases at a faster pace than anticipated
Unanticipated disinflation
the price level increases at a slower pace than anticipated
Unanticipated deflation
when price level decreases when it was expected to increase
wealth redistribution
when the real value of wealth is transferred from one agent to another
lender
a agent (usually a bank) or person who makes money available to another agent
they agree to be repaid (usually with interest)
saver
an agent that is not spending some of their income
saved in saving account, bond or purchasing other financial assets
borrower
an agent who received money from another agent with
the agreement that the money will be repaid (usually with interest)
bond
an asset that is a promise to pay a fixed amount at some point in the future.
nominal value
any economic statistic is measured in terms of actual prices
real value
refers to the same statistic after it has been adjusted for inflation
nominal GDP
the market value of the final production of goods/services in THAT year
real GDP
nominal GDP adjusted for changes in price level, using prices from base year instead of THAT year (current)
How to calculate real GDP?
(Nominal GDP) / GDP deflator (hundredths)
How to calculate Nominal GDP?
Real GDP x GDP deflator (hundredths)
If the production of all items remain the same and the prices increased from year 1 to year 2, what can we conclude from nominal and real GDP?
nominal GDP increased as the prices of the goods increased
real GDP stayed the same because the production of goods is the same.
The amount of output doesn’t change in an economy, but CPI increases
what happens to nominal gross product (GDP) and real GDP
nominal GDP increases
real GDP doesn’t change
business cycle
relatively short term movement of the economy in and out of recession
Recession
a significant decline in national output
Depression
A lengthy decline or a long recession
The highest output before a recession is…
peak
The lowest point of output during a recession is called…
a trough
Output gap equation
current output - potential output
what does graphical business model show
short run fluctuations in GDP but long run increase in GDP over time
natural rate of unemployment equation
sum of frictional and structural unemployment
