Unit 2

Question 1

define GDP

Answer 1

Gross Domestic Product: value of goods and services in a country, regardless of nationality

Question 2

define GNP

Answer 2

Gross National Product: value of goods and services produced by a nationality, regardless of location

Question 3

GDP: C+I+G(X-M)

Answer 3

Spending: 
Consumption/Consumer
Investment- business inventory, capital
Government (no transfer payments)
eXports - iMports = net exports

Question 4

GDP exclusions

Answer 4

Used, intermediate, home use goods
Transfer payments & Transfer of ownership of an investment
Unreported transactions

Question 5

Nominal vs. Real GDP

Answer 5

Nominal: actual amount spent (inflation+GDP growth)
Real: nominal, but without inflation (Nominal/GDP deflator)

Question 6

Types of GDP

Answer 6

GDP Per-Capital (per-person)
Potential GDP (prediction) - when actual GDP is less, there is unemployment. When actual GDP is more, resources are overutilized and it will go down.

Question 7

Civilian Non-institutionalized Population

Answer 7

People 16+ who aren’t working.

Question 8

define Unemployed

Answer 8

People 16+ who have been actively looking for work. Doesn’t include discouraged workers.

Question 9

Labor Force & Labor Force Participation Rate

Answer 9

Employed + Unemployed.

Participation rate: people in labor force/civilian non-institutionalized population

Question 10

Natural Rate of Unemployment

Answer 10

Economy with frictional (short-term) unemployment.

Question 11

Structural Unemployment

Answer 11

Workers look for jobs, but lack the skills to get one (problematic).

Question 12

Cyclical Unemployment

Answer 12

Actual minus natural rate of unemployment due to a reduction of jobs. The only type of unemployment not included in natural unemployment.

Question 13

Long-term Unemployment

Answer 13

Happens in a recession, and causes structural and cyclical unemployment.

Question 14

define Inflation vs. Deflation

Answer 14

Inflation: prices of all goods and services rise.
Deflation: opposite of inflation- producers have to sell for less.

Question 15

Types of Inflation

Answer 15

Demand Pull: consumer demand = price increase. Demand shifts out.
Cost Push: production cost increase = price increase. Supply shifts in.
Built-in: inflation predictions- workers want higher wages, driving up costs and prices.

Question 16

define & calculate CPI

Answer 16

Consumer Price Index: comparing cost change of a good due to inflation over time.
Calculation: Cost at a given year/Cost at base year * 100
At base year, CPI=100. If price has increased, CPI > 100 and vice versa.

Question 17

Inflation rate

Answer 17

Percent change in CPI

Question 18

CPI vs. other price indices

Answer 18

Although it’s calculated frequently for a consistent type of goods, it thinks 1. consumers can’t substitute goods, 2. good development doesn’t happen (flip-phone to cell phone), 3. new products don’t exist, 4. consumers don’t switch purchasing locations/methods. This makes inflation look bigger than it actually is.

Question 19

Core CPI

Answer 19

Leaves out food and fuel from CPI, since their prices fluctuate a lot.

Question 20

Nominal vs. Real GDP & calculate

Answer 20

Nominal: GDP at current price level.
Real: Nominal GDP, but adjusted for inflation.
Calculate: Real GDP = Nominal/GDP deflator *100
Real Wages = Nominal Wages/CPI *100

Question 21

Fixed vs. Variable Interest Rates - groups affected & solutions

Answer 21

Lenders and people getting fixed incomes are hurt by fixed interest rates. Lenders can, however, adjust their interest rate over time to match with inflation (variable interest rate). Same can be done for people using COLA (cost of living adjustment).
Government and borrowers gain.
TL;DR Some long-term contracts can be adjusted.