Unit 2 Flashcards
What are the 3 macroeconomic goals?
- promote economic goods
- limit unemployment
- keep prices stable (limit inflation)
GDP (definition)
dollar (US) value of all final goods and services produced within a country in 1 year.
what does GDP measure?
How well a nation is doing financially
Ways to use GDP
- compare to previous years (is there growth)
- compare policy changes (did a new policy work)
- Compare to other countries (are we better off)
what is the best tool to measure a nation’s standard of living?
GDP
reasons why countries have higher/lower GDPs
- economic system
- Rule of law
- capital stock
- human capital
- natural resources
productivity (definition)
output per unit of input
Items not included in GDP
- Intermediate goods
- nonproduction transactions
- used goods
- nonmarket/illegal goods
the three ways of calculating GDP
- expedenture approach
- income approach
- value (added approach)
all methods should generate the same number
equation for calculating GDP
C+I+G+Xn=GDP
(consumer spending, business investment, government spending, net exports)
Consumer spending includes…
- durable goods
- non-durable goods
- services
business Investment
Businesses buying capital such as machines and tools
Government spending (def)
payments made by the govt. for goods/services (NOT transfer payments)
transfer payments
when the govt. redistributes income (welfare, SS). Nothing is returned, and subsidies count as transfer payments
Unemployment
Workers are actively looking for a job, but are not currently working
What is included in the unemployment rate
people in the labor force who want a job but are not working
Frictional unemployment
temporary unemployment/being between jobs
structural unemployment
changes in labor force that make some skills obsolete (eg. technology)
cyclical unemployment
caused by a recession
Nominal GDP
not adjusted for inflation
Real GDP
adjusted for inflation
Stagflation
both unemployment and inflation are increasing
why is high inflation bad?
banks don’t loan out money and people don’t save, which decreases investment and GDP
why is deflation bad?
people hoard money and assets
how is inflation measured?
the govt. tracks market baskets
what is the inflation rate? (def)
Percent change in prices from year to year
disinflation
prices increasing at slower rates
price indices/indexes
index numbers assigned each year that demonstrate how prices have changed relative to a specific base year
how to calculate CPI (equation)
price of market basket/price of market basket in base year *100
Problems with CPI
- many substitutes are not part of the market basket
- might not include new products
- ignores improvements and declines in quality
nominal wage
wage measured by dollars rather than purchasing power
real wage
wage adjusted for inflation
menu costs
costs money to change listed prices
shoe leather costs
the cost of transactions increases
unit of account costs (def)
money doesn’t reliably measure the value of goods/services
GDP Deflator (def)
measures the prices of all goods domestically
What is the ONLY thing CPI measures?
services/goods consumers purchase
Where does in increase in goods/services bought by firms/ the govt. show up? (what tool)
GDP Delflator
Quantity Theory (inflation)
govt keeps printing money to pay debts; causes hyperinflation
Demand-Pull Inflation
Demand pulls prices up; there is the same amount of goods, but excessive spending on these goods
How do higher production costs increase prices?
It leads to a negative supply shock, resulting in producers increasing prices
quantitative theory of money equation
MV=PY
Velocity of money (definition)
average times a dollar is spent and re-spent in a year
