Macro Unit 2 Flashcards
GDP (Gross Domestic Product)
The total dollar value of all final goods and services produced within a country’s borders in a given year.
GDP= C + I + G + Xn
What are the four components of GDP (according to the expenditures approach)?
Consumer spending, Investment spending, Government spending, and Net eXports
Nominal GDP
is GDP measured in current prices. Does not account for inflation from year to year.
Real GDP
GDP is expressed in constant or unchanging dollars. Real GDP is preferred by economists because it adjusts for inflation, making it more accurate.
Three things not included in GDP
- Intermediate goods (goods that go into the production of final goods)
- non-product transactions (ex. buying stocks/bonds)
- non-market transactions (Illegal activities the government can’t track)
the purchasing of used goods are also not included in GDP, as the price of that good was counted towards the GDP when the item was new, so counting it again would be double counting and would therefore be inaccurate
GDP per capita
per capita=per person
- Used to measure standard of living
- To find GDP per capita, take the GDP of a given country and divide it by that country’s population
Business Cycle Graph
The national economy goes up and down like a roller coaster, and generally trends upward. This is represented by an upward squiggly line on the business cycle graph.
points on the graph:
- The high points on the graph are the peaks
- The low points on the graph are troughs
- from peak to trough (downward trend) is a contraction/ recession
- from trough to peak (upward trend) is an expansion
PCTE
Recession
When real GDP falls for two straight quarters (six months)
Unemployment
workers that are actively looking for a job but are not working
Labor force qualifications
Must be:
- above the age of 16
- able, willing, and looking for work
- not institutionalized (jail/hospital)
- not in military
- not in school
- not retired
The unemployment rate
The percent of people in the labor force who want a job but aren’t working
Three main types of unemployment
Frictional unemployment
Structural unemployment
Cyclical unemployment
Frictional Unemployment
People temporarily unemployed or between jobs; they have the right skills, just aren’t working (seasonal unemployment)
Structural Unemployment
Changes in the economy make some skills obsolete; these jobs will never come back
Cyclical unemployment
Unemployment caused from a recession; as people buy less, businesses earn less and therefore have to fire workers in order to maintain profits
Unemployment Rate Equation
Unemployment Rate= # unemployed/# in labor force x 100
Natural Rate of unemployment (NRU)
Frictional unemployment plus structural unemployment; unemployment that exists when the economy is healthy and growing (full employment)
Four Criticisms of the Unemployment Rate
Discouraged workers
Labor force participation rate
Underemployed workers
Race/Age inequalities
Inflation
A rise in the general level of prices; as prices go up, the “purchasing power” of money decreases
CPI (Consumer Price Index)
A market basket of products with index numbers assigned to each year that show how prices have changed in relation to a specific base year; Only analyzes prices of consumer goods.
CPI Equation
CPI= price of market basket / price of market basket in base year x 100
GDP Deflator
An index number that measures ALL prices and is used to convert nominal GDP to real GDP (analyzed the same way as CPI)
GDP Deflator Equation
GDP Deflator= Nominal GDP / Real GDP x 100
Deflation
Decrease in prices or a negative inflation rate
Disinflation
Prices increasing at slower rates
Velocity of Money
The number of times a dollar is spent and respent in a year
Who is helped and hurt by inflation?
Helped: Borrowers, Businesses (when product price increases faster than the price of resources)
Hurt: Lenders, people with Fixed Incomes, and Savers
Three Causes of Inflation
Quantity theory
Demand-pull theory
Cost-push inflation
Quantity Theory
The government prints too much money, causing prices to rise and real GDP to fall (also known as hyperinflation)
Quantity Theory of Money Equation
M x V = P x Y
M= Money supply P= Price level
V=velocity Y=quantity of output
If (M)oney supply goes up, (P)rice also has to increase in order for the equation to be balanced.
Demand-Pull Theory
When demand exceeds the supply causing prices to rise
Cost-Push Inflation
Higher production costs increase prices.
Problems with the CPI
Substitution Bias (as prices increase for a fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket)
New products (the CPI market basket may not include the newest consumer products)
Product Quality (the CPI ignores both improvements and declines in product quality)
