Unit 2 Flashcards
Circular Flow
Transactions between households, firms, government in product & factor markets
Total expenditures = total income
GDP Expenditure calculation
Consumption + Investment + Gov spending + eXports - iMports
GDP Income Calculation
Rent + Wages + Interest + Profit
Nominal GDP
Value of all final goods & services produced in a nation in a time period
Limitations of GDP
Raised by inflation
Things don’t count: used goods, transfer payments, stocks/bonds, free / foreign-produced / underground / home-produced goods and services
Unemployment rate
% of workforce which is unemployed
Excludes ineligible, eligible but unavailable
(Unemployed / labor force) * 100
GDP Gap
Socioeconomic costs (of unemployment)
Gap between current GDP and possible GDP
Discouraged worker effect
People give up looking for work, are no longer considered part of workforce
(Eligible but unavailable)
Labor force participation rate
(Labor force / total eligible) * 100
Eligible: >16, not institutionalized, out of labor force by choice
Seasonal Unemployment
Unemployment due to season
Not counted (?)
Ex. Construction workers out of work during the winter
Cyclical Unemployment
Unemployment due to changes in business cycle (recession)
Counted in actual unemployment
Structural Unemployment
Unemployment due to permanent changes in economy
Mismatch between worker skills and available jobs
Counted in natural, actual unemployment
Frictional Unemployment
Unemployment by choice of worker, “between jobs”
Counted in natural, actual unemployment
Limitations of unemployment rate
Discouraged workers
Marginally-attached workers (want work and looked recently, but not currently)
Underemployed (part-timers who want full-time)
Inflation
Sustained price increase of most goods and services
Weakens purchasing power at a given income
Normal, but problematic when unanticipated
Deflation
Overall decrease in prices
Strengthens purchasing power at a given income
Scarier than inflation, can stop economy
Disinflation
Decrease in inflation rate
NOT deflation
Inflation rate calculation
(Change in price level / beginning price level) * 100
Could be price or CPI used
Price Index
(Current market basket price / base market basket price) * 100
NO UNITS
Non-base MB uses current prices
Real GDP (Y) calculations
(Nominal GDP / Aggregate Price Level) * 100
P(BY1) * Q(CY1) + P(BY2) * Q(CY2) + …
Adjust for inflation, measure of output
CPI
Consumer Price Index
Summary, contains ~400 market basket goods
Gov uses it for COLAs
Uses fixed weights, overstates COLA changes, doesn’t account for substitution, ONLY consumer goods
PPI
Producer Price Index
Measures price changes by domestic producers, inputs
Commodities, fuels, chemicals, etc
GDP Deflator
Index of average AGGREGATE price levels for ALL goods/services in economy
Base of 1996
NO fixed weights, ALL goods/services, NO import prices, accounts for substitution
Demand pull theory
Inflation cause
Demand increase causes price increase
Fault of consumers
Cost push theory
Inflation cause
Rising input costs cause greater costs for goods/services
Ex. Wages increase, businesses charge more
Too much money in circulation
Cause of inflation
Gives some groups more purchasing power; demand increases
“Too much money, too few goods”
Shortcomings of CPI
Substitution bias (fixed basket doesn’t account for substitution)
Introduction of new goods (greater variety of goods increases purchasing power for consumers)
Unmeasured quality changes
Some MB item prices vary more than others
Who inflation helps/hurts
Helps Borrowers (people paying fixed amt)
Hurts lenders, ppl w/ fixed incomes, social security recipients
Nominal GDP Calculations
Price Level (PL)/100 * Real GDP (Y)
P(CY1) * Q(CY1) + P(CY2) * Q(CY2) + …
DO NOT adjust for inflation
GDP Deflator Calculations
= Price index = market basket total
= (Nominal GDP / Real GDP) * 100
Business Cycle
Time on x axis (years/quarters)
Output on y axis (gdp, gdp growth rate)
Mostly increasing over time, can decrease
Expansion
Positive slope in a business cycle
Increasing output
Employment rising
Recession/Contraction
Negative slope in business cycle
Output decreasing
Employment falling
Peak
Local max of a business cycle
Increasing to decreasing output
Inflationary gap
Trough
Local min in business cycle graph
Decreasing to increasing slope
GDP/Output gap
Output Gap
Actual Output - Potential Output
Potential = full-time employment output (unemployment is just natural rate)
