Unit 13 - Economic fluctuations and unemployment

Question 1

What is reverse causality?

Answer 1

Reverse causality is a two-way causal relationship in which A affects B and B also affects A.

Question 2

What is correlation?

Answer 2

Correlation is a statistical association in which knowing the value of one variable provides information on the likely value of the other, for example high values of of one variable being commonly observed along with high values of the other variable. It can be positive or negative. (negative when high values of one variable are associated with low values of another)

Question 3

What is gross domestic product?

Answer 3

Growth domestic product (gdp) is a measure of the market value of the output of the economy in a given period.

Question 4

What is a recession?

Answer 4

A recession is defined as a period in which output is declining and said period is over once the economy starts to grow again.

Question 5

What is a business cycle?

Answer 5

A business cycle is alternating periods of faster and slower (or even negative) growth rates. The economy goes from boom to recession and back to boom.

Question 6

What is Okun’s law?

Answer 6

Okun’s law is the imperial regularity that changes in the rate of growth of GDP are negatively correlated with the rate of unemployment.

Question 7

What is okun’s coefficient?

Answer 7

Okun’s coefficient is the change in unemployment rate in percentage points predicted to be associated with a 1% change in the growth rate of GDP. eg. if a 1% increase in GDP decreases the unemployment rate by 0.38 percentage points, Okun’s coefficient is -0.38

Question 8

What are the three ways to estimate GDP?

Answer 8

Spending- The total spent by households, firms, the government and residents of other countries on the home economy’s products.

Production - The total produced by the industries that operate in the home economy. Production is measured by the value added by each industry: this means that the cost of goods and services used as inputs to production is subtracted from the value of output.

Income - The sum of all incomes received, comprising wages, profits, the incomes of the self employed as well as taxes received by the government.

Question 9

What are the components of GDP from the expenditure side?

Answer 9

Consumption
Government spending
Investment
Exports
Imports

Question 10

What is consumption?

Answer 10

Consumption (C) is expenditure on consumer goods including both short-lived goods and services as well as long-lived goods

Question 11

What is investment?

Answer 11

Investment (I) is expenditure on newly produced capital goods (machinery and equipment) and buildings, including new housing.

Question 12

What is inventory?

Answer 12

Inventory is defined as goods held by a firm prior to sale or use, including raw materials, and partially-finished or finished goods intended for sale.

Question 13

What is government spending?

Answer 13

Government spending (G) is expenditure by the government to purchase goods and services. When used as a component of aggregate demand, this does not include spending on things like pensions and unemployment benefits.

Question 14

What is the trade balance?

Answer 14

Exports minus imports. also known as net exports.

Question 15

What is aggregate demand?

Answer 15

The total of the components of spending within an economy, added together to get GDP. Y= C+G +I + (X-M). It is the Total amount of demand for (total expenditure on) goods and services within the economy.

Question 16

What are some of the shortcomings of GDP as a measure.

Answer 16

GDP does not account for the increase in population size (due to factors such as immigration) and as a result can often paint a general picture of an economy that is not the case per individual (had it been measured in GDP per capita). ie, GDP could increase a lot but GDP per capita could increase only marginally.

GDP does not account for welfare and human wellbeing.

Question 17

What is a shock?

Answer 17

An exogenous change is some of the fundamental stat used within a model. It is an unexpected event.

Question 18

What types of shocks are there? provide some examples.

Answer 18

Shocks to the household such as disease hitting a family’s animals or a key member in farming being injured.

Shocks to the economy as a whole such as a pandemic or natural disaster.

Question 19

How do people shock proof themselves from shocks to the household?

Answer 19

Self-insurance. Households that encounter an unusually high income in some period will save so that if their luck reverses, they can spend their savings. saving by a household in order to be able to maintain their consumption when there is a temporary fall in income or need for greater expenditure

Co-insurance. - Households that have been fortunate during a particular period can help those that have not been as fortunate.

Question 20

What con strains a household’s ability to smooth consumption.

Answer 20

Credit constraints or credit market exclusion.

Weakness of will - the innate human characteristic of being unable to stick to a plan.

Question 21

What is weakness of will?

Answer 21

The inability to commit to a plan (such as dieting or forgoing some other present form of pleasure) that one will regret later.

Question 22

What is capacity utilisation rate?

Answer 22

Capacity utilisation rate a is a measure of the extent to which a firm, industry, or entire economy is producing as much as the stock of its capital goods and current knowledge would allow.

Question 23

What is inflation?

Answer 23

An increase in the general price level in the economy. Usually measured over a year.

Question 24

What is CPI?

Answer 24

The consumer price index. it is a measure of the general prices that consumers have to pay for goofs and services, including consumption taxes.