Test 2 Flashcards
GDP
Total dollar value of all final goods and services produced in the economy in a one year period
Current dollars
Nominal GDP, because it uses current prices in that year
Constant Dollars
Real GDP, because real GDP puts prices on each years Q’s, using base year prices
Intermediate goods
Goods that are like a car radio or leather seats. Not included in GDP
Non productive transactions
Are excluded from GDP. There are three…financial transactions involving bonds, second hand sales, and transfer payments
Expenditure Approach
Add up all expenditures on the final goods/services produced
Income Approach
Add up all of the income generated by the production of the goods/services
-Factors of expenditure approach
f
Personal Consumption expenditures
All expenditures by household of all goods/services
Government Purchases of goods/services
Includes expenditures of all levels of government on goods/services
Gross Private Domestic investment
When goods are produced tho year but not consumed till later
Net exports
Dollar value of the goods we export minus dollar value of goods we import
C+I+G+(X-M)
Formula
Economic Growth
An increase in real per capita GDP
“Catch-up effect”
Underdeveloped countries have a higher growth rate than developed industrial nations
New Growth Theory
Focuses on technology, research and innovation
Property Rights
Encourages economic growth
“Industrial Policy”
Government should support industries and technology of the future using taxes + subsidies
-Increase in technology creates more jobs in the long run
s
Real balance effect
As price level rises, purchasing power of money declines
Interest Rate Effect
As price level rises, interest rates tend to rise
The open economy effect
As price level in U.S. rises, U.S. goods are more expensive then foreign goods
AD factors to shift curve
Households become more optimistic and spend more. (increases) Businesses become more pessimistic and spend less on tools (decreases). Fed. gov. increases spending on real goods (increases)
-Change in input prices causes a SRAS shift
s
Natural Rate of unemployment
Includes everything but cyclical. In long run, forces eliminate cyclical.
Factors to shift LRAS
Improvement in Tech, inrease in resources
Aggregate Demand curve shock
Whenever AD shifts
Expansionary Gap
Points in-between GDPf and GDP2
Recessionary Gap
Where GDP decreases.
Demand Pull inflation
An increase in the AD
Cost push inflation
Inflation resulted from a reduction in the SRAS
Stagflation
Real GDP is declining, while price is increasing
Classical Model
Assumes product + Input prices are flexible in SR
Keynesian Model
Assumes product + input prices are fixed in SR
Modern Keynesian Model
Assumes products prices are flexible and input prices are fixed in SR
Says law
Supply creates its own demand.
Argument against says law
If there is saving, says law is false
Classical View
Wage flexibility brings economy to full employment fast and will stay there. As wage rate falls, unemployment eliminates. AS determines level of employment
Keynesian View
Didn’t believe in Says Law, higher income=higher saving, in real world wage rates don’t fall. AD determines level of employment
