Unit 02: Economic Indicators and the Business Cycle Flashcards
02.01 Circular Flow
What are the 4 components of the Circular Flow Diagram?
Government: any lawmaking body (collect taxes and provides services)
Households: individuals in a house
Businesses: company earns income from the sale of goods and services
Rest of the World: interaction of three groups in foreign market
02.01 Circular Flow
What are the 3 markets in the Circular Flow Diagram?
Product Market: buying and selling of finished goods and serives
Factor Market: exchange of factors of production resources necessary create good service (land, labor, capital)
Financial Market: stock market and banking services
Draw the Circular Flow Diagrams?
02.02 Gross Domestic Product
Define GDP:
GDP: total dollar value of all final goods and servies produced in a nation during a period
Add up all expenditure (consumption, investment, government spending, and net exports) = GDP
“Final”
goods sold to consumers (not producers)
goods sold to businesses → intermediate goods
All goods in economy (foreign and domestic)
02.02 Gross Domestic Product
Define Gross Nation Product (GNP):
Gross Nation Product (GNP): all final goods produced nation’s citizens no matter their country
02.02 Gross Domestic Product
How does GDP relate to inflation?
GDP: not adjusted for inflation and reflect final value of all groups in current year prices
02.02 Gross Domestic Product
How is GDP per capita determined?
Real GPD ÷ number of people living in nation
used compare the wealth of nations & standard of living
02.02 Gross Domestic Product
What is the difference between real and nominal?
Real is adjusted for inflation.
Nominal is stated in current prices.
Real = nominal - inflation
02.02 Gross Domestic Product
What are the 4 categories of GPD?
- Consumer Spending (C)
- Investment Spending (I or Ig)
- Government Spending (G)
- Net Exports (X-M)
02.02 Gross Domestic Product
What is Consumer Spending?
(Largest) consumer spending
- cars, college education, gas
02.02 Gross Domestic Product
What is Investment Spending?
Spending to increase productivity or output
- market value products are built but not sold (Business inventories)
(1) Products sold: GPD ± Inventory Value + selling price)
If:
- total output exceeds sales → investment spending builds up
- produces more than sell → unsold inventories increase GDP
predece decrease in producion (cut back production until inventories sold)
- sell more than produce in a time period → inventories drawn back down and GDP decreases
(2) Degree of Excess Capacit
refers to how much existing factory space is available
- Increase: more empty factory space & decrease investment spending
- Decrease: less empty factor & increase investmen spending
Financial investments are not real capital and thus do not help GDP grow.
02.02 Gross Domestic Product
What is Government Spending?
Spending by government
infrastructure and national defense
02.02 Gross Domestic Product
What is Net Exports?
Exports (X) - Imports (M)
- export: sells to another country
- import: buy from another country
02.02 Gross Domestic Product
How can the Expenditure Approach be used to Calculate GDP?
tabulate GDP using all expenditure
(C + Ig + G + (X-M) )
02.02 Gross Domestic Product
How can the Income Approach be used to Calculate GDP?
tabulate GDP from earnings and incomes (rent, profit, wages, rent)
recieved through economy and adjusting for bussiness deduction and foreign incomes
- indirect business taxes: non-profit based taxes paid by corporations
National Income: (W + P + I + R + depreciation + indirect business taxes ─ subsidies + net income of foreigners
Personal Income: money household makes before subtraction od income tax
Disposable Income: money households acutally makes after taxes
02.02 Gross Domestic Product
How can the value-added approach be used to calculate GDP?
Sums up individual dollar-value added from each stage of production
02.02 Gross Domestic Product
What are the 7 items not calculated in the GDP?
[1] Purely financial transactions
- stock purchases
- Public transfer payments
- Private transfer payments
- FInancial gains from sales of assets that are purely financial (selling house and making a profit)
[2] Intermediate goods used in production process and counted when final goods are sold
[3] Secondhand sales
[4] Nonmarket & other household production activities
- stay at home mother
- fix own car
[5] Leisure Activities
[6] Underground economy
[7] Costs of pollution
02.02 Gross Domestic Product
What are the 5 other ways (excluding GDP) to determine National Income?
Gross National Product (GNP):
- value of all goups produced by nation’s citizens (in and out country)
National Income (NI):
- all money payments (wages, profit interst, rent) earned by households
- Should be equivalent to GDP
Net Domestic Product (NDP):
- GDP - consumption of fixed captial (depreciation)
- must account for depreciations
Personal Income (PI):
- directly and indirectly earned by households
- not count Social Security and corporate tax
- count unemployment and welfare
Disposable Personal Income (DI):
- what households have to spend
- PI - personal income tax
What are the 7 indicators of Standard of Living?
- GDP per capita
- Rate of inflation
- Rate of population growth
- Change in the distribution of income
- Change in leisure time enjoyed by the typical worker
- Change in the impact of externalities not included in the GDP calculation
- Change in product quality
02.03 The Business Cycle Inflation and price Indices
What is a business cycle?
- portrays highs and lows of economy (as people buy and cell goods)
- may be several years or weeks
- average growth rate: 2.5-3.5% per year → secular growth trend
- small changes: “random fluctuations”
02.03 The Business Cycle Inflation and price Indices
What does the beginning of the cycle represent?
“happy medium”
- not too rapid growth or too slow
- economy stable
02.03 The Business Cycle Inflation and price Indices
hat does the expanding economy represent? How can that lead to a decrease?
Expanding = some inflation (generally 3-5%)
Rises too quickly: followed by decreased in planned inventories (businesses sel current inventories)
Expansion Period characteristics:
- consumer spending
- unemployment
Peak: economy reached maximum growth
Reduction:
- prices are too high → less spenditure
- unplanned inventories increase too much: slow down production and redundancies
02.03 The Business Cycle Inflation and price Indices
What does the contraction (ressession) mean?
Real GPD decreases
Worsens: people do not have jobs, no purchases
Trought: bottom of cycle
Reason Grow Again:
- renewed consumer confidence
- outside invtervention
What are the 4 types of Inflation?
- Cost Push
price rise, since cost of production increased
- Wage Push
prices increase, workers receive more wages for same amount of work
- Demand Pull
prices go up, increase in consumer demand for goods
- increased income
- growing population
- changes preferences
- Profit Push
owners of business raises prices → want more profit
Define Stagflation?
- economy suffer high infation and high unemployment same time
(greater 5%)
Caused:
- supply moves left
- prices rise and employers lay off workers (decrease quantity demanded)
How can inflation be helpful?
Inflation: value of money decrease
Help: Buy more than able to buy in the future
How does GDP relate to inflation?
Inflation can be defined as a sustained increase in the price level over time.
- Whenever actual GDP is greater than potential GDP, inflation exists in the economy.
- This is sometimes called an inflationary GDP gap.
What measurement method is used to measure inflation?
The Index!
02.04 Infation and Price Indices
What are the three ways to measure inflation?
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- GDP Deflator
02.04 Infation and Price Indices
What is the Consumer Price Index (CPI)?
Measures change in prices of goods and services
compares cost standard basket of goods from year to year
02.04 Infation and Price Indices
Define Producer Price Index (PPI):
- Measures the change in price of producing goods year to year*
- leading indicator → as producers pay more, consumers will as well
02.04 Infation and Price Indices
What is the GDP Deflator?
Good indicator of inflation: looks change in average price level for all groups and services (not include imports)
- indicate inflation changes in consumer spending or introduction of new goods and services automatically reflected
GPD: RGDP = Nominal GDP ÷ GDP Deflator * 100
02.04 Infation and Price Indices
What is a basket of goods?
Explain how the changing prices of goods pay out in the final inflation figure
02.04 Infation and Price Indices
How do economists calculate the value of a basket of goods?
- one years chosen as baseline for price index = 100
- new basket: divide old base by new base * 100
The index is then calculated by dividing the price of the basket of goods and services in a given year (t) by the price of the same basket in the base year (b). This ratio is then multiplied by 100, which results in the Consumer Price Index.
02.04 Infation and Price Indices
How does nominal and real income relate to inflation?
Nominal Income: amount of income you have in current dollars
Inflation decreases the value of nominal income
Real Income: adjusted for inflation
use CPI to adjust nominal income
02.04 Infation and Price Indices
If you received a raise in your nominal income from $20,000 to $25,000 and the CPI rose from 100 to 125, your real income (and therefore purchasing power) did not change. How do we know your real income did not change?
Nominal Income / (CPI/100) = Real Income
$20,000 / (100/100) = $20,000 / 1.00 = $20,000
$25,000 / (125/100) = $25,000 / 1.25 = $20,000
02.04 Infation and Price Indices
Formula to determine the New CPI?
{ CPI Later Year / CPI Earlier Year } x 100
02.04 Infation and Price Indices
Wwhat is the formula for how much inflation has increased?
[ { CPI Later Year - CPI Earlier Year}
÷
CPI Earlier Year ]
x 100
02.04 Infation and Price Indices
Formula for Real Income
real = nominal - inflation.
02.04 Infation and Price Indices
Formula to find the difference between real measures and nominal measures:
Real Measure =
Nominal Measure
÷
[Price Index/100]
02.04 Infation and Price Indices
What are cost of living adjustments?
Receive money government/employer = cost of living adjustments (COLA)
- based on CPI
- relfect goods and services purchased by average consumer
- limited size - not keep up with inflation
02.04 Infation and Price Indices
What is Doubling Prices?
Economists determine how long it will take for prices to double:
Rule of 70
divide 70 by interest rate = determine years
Who are helped by unanticipated inflation: lenders or borrowers?
Borrowers: since the value of money decrease, they can pay back debts at a lower value than they lended it at.
02.05 Unemployment
When in the business cycle is unemployment prevelent?
Economy is in contraction phase
opperating inside PPF
02.05 Unemployment
What constitutes and the work force?
Work Force:
- 16+ (working and searching)
- part-time workers
02.05 Unemployment
Why is the unemployment reate not accurate?
dishonest people claim to be searching for work and claiming unemployment benefits
02.05 Unemployment
Formula for Unemployment:
Number of unemployed people
÷
number people in the labor force
02.05 Unemployment
What are the 4 types of unemployment?
- Frictional Unemployment (voluntary)
- Seasonal Unempoyment (voluntary)
- Structural Unemployment (Involuntary)
- Cyclical Unemployed (Involuntary)
02.05 Unemployment
What is Frictional Unemployment?
(Voluntary) people voluntarily moving one job to another
- unhappy current job or seeking better
- entering workforce for the first time
- duration: usually short
02.05 Unemployment
Define Seasonal Unemployment:
(Voluntary)
People find work that is only available during certain times of year
- lifeguard
- ski instructor
02.05 Unemployment
Define structural unemployment:
(Involuntary)
Loss of industry jobs that may cause the following:
- technology replace workers
- international trade and import competition
- out-sourcing or relocation
- changing minimum wage or union wage
- government policy
02.05 Unemployment
What is Cyclical Unemployment?
(Involuntary)
Caused by a decrease in total spending in economy
Producers and businesses do not need as much workers because there is a slowdown in economy
- Increase: contractionary phase
- Decrease: expansionary phase
02.05 Unemployment
What do different levels of unemployment indicate? when is it healthy and when does it indicate that there is a recesion?
Natural Rate: 3-5% in US
- generally frictional or structural
x > 5%: recession
How can a GDP gap be created from unemployment?
Created unemployment is greater thanthe natural rate of unemployment
- Actual GPD < Potential GPD
02.06 Module Two Exam
Samir decided to work an extra week at Physics R Us where he earns $20 per hour rather than go with his family on a Caribbean cruise. The opportunity cost of his decision was
- the wage he earned at work during that week
- the time he might have spent cruising the Caribbean.
- the wage less the value of the time he might have spent cruising the Caribbean.
- the wage plus the value of the time he might have spent cruising the Caribbean.
- his job at Physics R Us.
2. the time he might have spent cruising the Caribbean
02.06 Module Two Exam
In the circular flow diagram
- households provide consumer spending to the financial markets.
- firms provide savings to the financial markets.
- firms provide investment spending in the financial markets.
- governments borrow money from financial markets.
- governments spend money in the financial markets.
4. governments borrow money from financial markets
02.06 Module Two Exam
Which of the following is true of the factor market?
I. Households are buyers.
II. Households are sellers.
III. Firms are buyers.
IV. Firms are sellers.
- I only.
- II only.
- III only.
- I and IV only.
- II and III only.
5. II and III only
02.06 Module Two Exam
GDP would include all of the following except
- income earned for engineering services.
- income earned by an airline pilot.
- tips earned but not reported by a waitress at an upscale restaurant.
- the purchase of a new automobile by a school.
- the purchase of a new home by a retired couple.
3. tips earned but not reported by a waitress at an upscale restaurant
02.06 Module Two Exam
The income that households have after taxes is called
- national income.
- profitable income.
- retained earnings.
- rental income.
- disposable income.
5. disposable income
02.06 Module Two Exam
If an American woman purchases a pair of shoes in a local shoe store made by an American owned company located in Italy, what would happen to Consumption and GDP as a result?
- Consumption / GDP
- No change / Increase
- Increase / No Change
- Increase / Increase
- Decrease / No change
- No change / Decrease
- Increase / Increase
02.06 Module Two Exam
Which of the following is true regarding nominal and real GDP?
I. Real GDP is stated in current prices.
II. Nominal GDP is stated in current prices.
III. Real GDP is adjusted for inflation.
- I only.
- II only.
- I and III only.
- II and III only.
- I, II, and III.
4. II and III only
02.06 Module Two Exam
GDP underestimates a nation’s production of goods and services when you
- change the oil in your car.
- buy the oil for your car.
- pay a mechanic to change your oil.
- have a mechanic rotate the tires on your car.
- order tires from an Internet site.
1. change the oil in your car
02.06 Module Two Exam
As opposed to GDP, GNP is a measure of all
- goods and services produced in an economy.
- final goods and services produced in an economy.
- goods and services produced by a nation’s citizens.
- final goods and services produced by a nation’s citizens living abroad.
- final goods and services produced by a nation’s citizens.
5. final goods and services produced by a nation’s citizens
02.06 Module Two Exam
Assume that business production aimed at consumers increased by $22 billion last year while sales for those same businesses increased by $18 billion. As a result of these changes, GDP would
- increase by $4 billion while business inventories increased by $18 billion.
- increase by $18 billion while business inventories increased by $18 billion.
- increase by $18 billion while business inventories increased by $4 billion.
- increase by $22 billion and business inventories increased by $18 billion.
- increase by $22 billion and business inventories increased by $4 billion.
5. increase by $22 billion and business inventories increased by $4 billion
02.06 Module Two Exam
If nominal GDP was $2,000 billion in 2010 and the CPI was 250, then real GDP would have been approximately
- $8 billion.
- $80 billion.
- $800 billion.
- $5,000 billion.
- $500 trillion.
3. $800 billion
02.06 Module Two Exam
If real GDP was $900 billion and the CPI was 150, then nominal GDP was approximately
- 1350.
- 600.
- 60.
- 6.
- 1.67.
1. 1350
02.06 Module Two Exam
The real interest rate can be found by
- adding the nominal interest rate and the inflation rate.
- subtracting the inflation rate from the nominal interest rate.
- multiplying the nominal interest rate times the inflation rate.
- dividing the nominal interest rate by the inflation rate.
- subtracting the nominal interest rate from the inflation rate and then dividing by the nominal interest rate.
2. subtracting the inflation rate from the nominal interest rate.
02.06 Module Two Exam
If the CPI equals 110 in 2009 and 105 in 2010, then
- the rate of inflation is exactly 5%.
- the average quality of goods and services has increased.
- the average quality of goods and services has decreased.
- the average price of goods and services has increased.
- the average price of goods and services has decreased.
5. the average price of goods and services has decreased
02.06 Module Two Exam
If the market basket of goods cost the average consumer $1,200 in 2000 and it cost them $1,560 in 2005, then the price index increased by approximately
- 10%.
- 23%.
- 30%.
- 40%.
- 77%.
3. 30%.
02.06 Module Two Exam
Price Comparisons of Products
2009/2010
Limousine: $180/ $216
Prom Dress: $270/ $324
Assume that the CPI for 2009 was 100 and the CPI for 2010 was 120. According to the table above, all of the following are true except
- the nominal price of a limousine rental rose from 2009 to 2010.
- the nominal price of a prom dress rose from 2009 to 2010.
- the real price of a limousine rose from 2009-2010.
- the real price of a prom dress did not change.
- the real price of a limousine rental did not change.
3. the real price of a limousine rose from 2009-2010
02.06 Module Two Exam
CPI Data
Year→Index
2006→100
2007→110
2008→120
2009→125
2010→140
According to the table above, if a movie cost $8 in 2006, how much did it cost in 2010?
- $8.80
- $9.60
- $10.00
- $11.20
- $15.60
4. $11.20
02.06 Module Two Exam
CPI Data
Year→Index
2006→100
2007→110
2008→120
2009→125
2010→140
According to the table above, what was the inflation rate between 2007 and 2008?
- 8%
- 9%
- 10%
- 11%
- 20%
2. 9%
02.06 Module Two Exam
The unemployment rate published by the government is the percentage of the
- population that is not working.
- population that is collecting unemployment.
- population that is unemployed.
- labor force with part-time jobs.
- labor force that is unemployed.
5. labor force that is unemployed
02.06 Module Two Exam
If the working age population was 280 million of the 350 million people living in the United States and the labor force was 250 million with an unemployment rate of 6%, the number of employed workers would be
- 15 million workers.
- 16.8 million workers.
- 233.2 million workers.
- 235 million workers.
- 263.2 million workers.
4. 235 million workers
02.06 Module Two Exam
When inflation is increasing in the economy, what phase of the business cycle is active?
- Trough
- Expansion
- Contraction
- Peak
- Slump
2. Expansion
02.06 Module Two Exam
Judy lost her job at the Worldwide Cable Company because customers switched to Skynet Satellite and Judy is not skilled in working with satellite television services. This is an example of
- a discouraged worker.
- frictional unemployment.
- structural unemployment.
- cyclical unemployment.
- an employed individual.
3. structural unemployment
02.06 Module Two Exam
Chris quit his job at Furniture Country because he felt he could find a better paying job at Wood World. This is an example of
- frictional unemployment.
- structural unemployment.
- cyclical unemployment.
- a discouraged worker.
- an employed individual.
1. frictional unemployment
02.06 Module Two Exam
Carl is unemployed because he was laid off from his construction job when the housing market crashed. This is an example of
- frictional unemployment.
- structural unemployment.
- cyclical unemployment.
- an individual who is not unemployed.
- an employed individual.
3. cyclical unemployment
02.06 Module Two Exam
The type of unemployment most often associated with a recession is
- the natural rate of unemployment.
- frictional unemployment.
- structural unemployment.
- cyclical unemployment.
- none of the above; inflation is associated with a recession.
4. cyclical unemployment
Latisha likes apple juice and orange juice equally well, however she normally drinks orange juice with her breakfast each day. Apple juice is packaged in bottles and orange juice is packaged in cartons. There is a freeze that destroys half of the orange crop this season.
Explain the impact of the freeze on the markets for orange juice, apple juice, bottles, and cartons. For each market, make sure you include the following in your answer:
- Supply or Demand Shift
- Equilibrium Price and Quantity Change
- The reason for the change
The market for Orange Juices:
- Supply or Demand Shift: One of the shifters of supply is resource cost and availability. Since the supply curve for oranges moves to the left and oranges are a resource in the production of orange juice, the supply curve for orange juice will also move to the left as well.
- Equilibrium Price and Quantity Change: Since Latisha’s demand for orange juice did not change, but the supply did move left, the equilibrium will move to the left as well. The equilibrium of the market has less orange juice on the market and a price increase. Since the price increased, and the Law of Demand states an inverse relationship between quantity demanded and price, the quantity demanded of orange juice will decrease.
- Reason for change: One of the (if not the main) products in orange juice is oranges, meaning that when the supply decreased by half due to the freeze, the supply for oranges moved left. The shift leftwards meant fewer oranges available, and those available are more expensive; therefore, the supply curve for orange juice will move leftwards correspondingly.
The market for Apple Juice:
- Supply or Demand Shift: The demand curve for apple juice will shift to the right whilst the supply remains the same.
- Equilibrium Price and Quantity Change: Since the demand curve shifted to the right, the equilibrium will move to the right as well. The quantity supplied on the market will increase, which corresponds to an increase in price as well.
- The reason for the change: There is no indication that the freeze affected the production or distribution of apples; hence, the supply curve does not move. However, since apple and orange juices are substitutes and orange juice became more expensive (since its supply curve moved left), the demand curve for apple juice will move right.
The market for Bottles:
- Supply or Demand Shift: The bottles’ demand curve will shift to the right, corresponding with the rightwards shift of the demand curve for the apple juice.
- Equilibrium Price and Quantity Change: Since the demand graph shifted rightwards (or outwards), the quantity and the price of the bottles on the market will increase.
- The reason for the change: Since bottles are parts of the production of apple juice, the bottles are complements to the apple juice, because the demand for apple juice increased, the amount of apple juice produced also increased, which means that the producers require more containers to hold the apple juice; hence, the demand curve for bottles shifts to the right.
The market for Cartons:
- Supply or Demand Shift: The demand curve for cartons will shift to the left, corresponding with the decrease in orange juice production.
- Equilibrium Price and Quantity Change: The demand curve shifted inwards, resulting in a decrease in the number of cartons on the market and a decrease in cartons’ price.
- The reason for the change: Even though the carton market was not directly affected by the freeze, since one of their main buyers was affected by the freeze, the demand will shift to the left. The decrease in oranges on the market resulted in a reduced output of orange juice. Since the juice was stored in cartons, the cartons’ demand from the orange juice company will decrease, corresponding to the lower output levels.
