Unit 2 Flashcards
GDP
All final goods and services produced in a given year. It includes all goods and services (citizens or foreign) supplied in the USA.
Limits of GDP
Doesn’t measure quality of life, leisure time, crime and economic variables.
National production
Opened by US companies
Domestic Production
In the US even if foreign owned.
Gross-total
Before adjustments
GDP per capita
GDP per person. It identifies on a average how many products each person makes.
Best measurement of standard of living of a nation.
Real GDP/Population
What is not included in GDP?
1) Intermediate Goods
2) Nonproduction Transactions
3) Non market and Illegal activities
Intermediate goods
Goods inside the final goods don’t count.
Ex) price of finished car, not the stock of tires
Nonproduction Transactions
Stocks, bonds, real estate
Used goods
Non market activities
Items made at home- household production.
Factor payments
Labor earns wages land earns rent, etc.
Leakages
Use of household income not used for consumption in the GDP
Taxes, savings, Imports (incomes created by one economy to purchase output from another)
Fluctuations in GDP
Injections ($ in economy) expenditures by either govt, business or foreign sectors on domestic goods and services.
Not considered unemployed (6)
Retired, Disabled, In hospital or jail, stay at home parents, high school and college students, armed forces.
Discouraged workers
Want work, look for it, gives up
Marginally attached workers
In and out of work force
Labor force
Above 16, able and willing to work, sum of employed and unemployed
Frictional unemployment
Temporary unemployment (can’t control)
Structural unemployment
When jobs disappear because the economy changes
Ex) blockbuster
Normal but if it changes too quickly it creates an economic and political problem.
Seasonal unemployment
Lose the jobs during the winter
Ex) lifeguards
Technically part of frictional
Cyclical unemployment
Unemployment caused by a recession in the business cycle called “demand deficient unemployment”
Ex) great depression
Natural rate of unemployment (nru)
Frictional + structural unemployment = the amount of unemployment when economy is healthy.
Actual employment
Natural employment + cyclical unemployment
Full employment
Economy is doing great with only frictional and structural unemployment.
Typically 4-5% in US
NO CYCLICAL
Criticisms of the unemployment rate
Can misdiagnose the actual unemployment rate
1) Discouraged works not included so rate falls but they are still not working
2) underemployed workers want more hours but can’t get them. U6 rate does count them but is not used by politicians.
Consumer Price index
CPI
measures prices of a fixed market basket of 300 goods and services
CPI is always 100 in base year
Market basket updated every 2 years
CPI TENDS TO OVERSTATE INFLATION DUE TO BIAS
Substitution Bias (CPI)
Price increase in 1 item leads to the substitution of a lower priced product
Quality Bias
Over time technological advances increase the life and usefulness of products
Ex) quality of tires
New product bias(CPI)
New products are not introduced into the index until they have become common, so dramatic price decrease with new tech is not reflected
Problems with hyper focus
Focuses too much on preventing inflation and slows down the economy
Focuses too much on unemployment and inflates the economy
Deflation
Decrease in general prices or a negative inflation
Disintlation
When prices are increasing but inflation is down. (PL rising at a slow rate) still have inflation just slow
Costs of Inflation
1) shoe-leather cost: people buy more
2) menu cost: changing prices in stores
3) unit of account: makes $ a less reliable source of currency
Anticipated Inflation
Is the % increase in the level of prices over a given period that is expected in an economy GOOD THING (country needs prep)
Anticipated Inflation Effects
Banks can charge premium raise interest rates (better for banks)
May he able to avoid or lessen the effects of inflation on real income
Fixed Interest Rate
Interest rate that DOESNT change
Variable Interest Rate
If market interest rates are high or low the interest rate will adjust with inflation (be careful)
Unanticipated inflation hurts…
Creditor, saver, fixed income receiver
Unanticipated inflation helps…
Borrower, flexible income earner, payer of fixed amounts (bank loans)
Nominal wages
Wages measure by $ instead of purchasing power
FIXED INCOME
Real wage
Wage adjusted for inflation (prices fall your richer and vice verca)
Real Interest rate
Nominal interest rate adjusted for inflation
Nominal interest rates
Normal interest rate lenders charge on your statements
Demand Pull Inflation
An overheated economy with excessive spending but same amount of goods (easy to control)
Cost push inflation
A negative supply shock increase the costs of production and forced prices to up prices
Supply curve shifts left
Hard to control
