Unit #2 Concepts

Question 1

3 primary indicators of economics

Answer 1

GDP, unemployment, and inflation rate

Question 2

Circular flow diagram

Answer 2

Total income = total expenditure - relationship between households and businesses and goods and services

Question 3

GDP definition

Answer 3

Gross domestic product is the total monetary value of all FINAL goods and services produced within a country in a specific time period (1 year usually)

Question 4

What counts in GDP?

Answer 4

Consumption, investment, government spending, exports, imports

Question 5

Not counted in GDP

Answer 5

Used goods, financial transactions (bonds and stocks), non-market transactions (household work/ volunteer), intermediate goods (goods used to produce final goods ex. flour sold to make bread which = final good), transfer payments (social security and unemployment benefits), imports (subtracted from expenditure approach)

Question 6

Measure of standard living

Answer 6

GDP per capita

Question 7

Limitations of GDP

Answer 7

Doesn’t count income inequality, non-market transactions, environmental problems, or love

Question 8

Nominal vs real GDP

Answer 8

Nominal measures prices and output of goods and services while real only counts output of goods and services

Question 9

Unemployed definition

Answer 9

Individuals actively seeking work but not currently employed

Question 10

Not in labor force

Answer 10

Individuals not seeking jobs ex. students, retirees, or discouraged workers

Question 11

Issues with unemployment rate

Answer 11

Doesn’t include discouraged workers (people who gave up on finding work) and doesn’t account for underemployment (part-time jobs/ jobs below skill level)

Question 12

3 types of unemployment

Answer 12

Frictional: Short-term (moving jobs, just joining workforce, getting laid off)
Structural: Mismatch between skills and job requirements (replaced by tech)
Cyclical: Economy downfall causing people to lose jobs (recession)

Question 13

Natural rate of unemployment

Answer 13

Structural and frictional is part of a healthy economy. The U.S. is 4%

Question 14

Inflation

Answer 14

General increase in price overtime

Question 15

Deflation

Answer 15

Decrease in prices

Question 16

Disinflation

Answer 16

Rate of inflation slowing down

Question 17

Impact of inflation

Answer 17

Purchasing power of a dollar decreases which benefits borrowers (gets the loan) and hurts lenders (giver of loan). Fixed income is not favorable. Fixed rent is favorable.

Question 18

Inflation impact

Answer 18

Decreased consumer spending which leads to economic slowdown.

Question 19

CPI

Answer 19

Consumer price index is the average change over time in the prices paid by consumers for a market basket of goods and services

Question 20

Cost of market basket

Answer 20

Sum of prices of selected goods and services in a basket

Question 21

Why CPI can overstate inflation

Answer 21

Does not reflect substitution or changes in quality which leads to an inaccurate measure

Question 22

Article question: How are industrial policy and government subsidies helping to offset some of the negative impacts of free trade?

Answer 22

Industrial policy and government subsidies are increasingly used to offset the negative impacts of free trade by promoting growth in high-tech and strategically important industries within areas hit hardest by global competition. The article highlights that, as free trade brought cheaper imports and caused factory closures, regions like North Carolina saw their traditional industries - textiles, furniture, and tobacco processing - decline significantly. In response, government-led initiatives, like the CHIPS Act and various clean energy investments, have channeled billions of dollars into manufacturing sectors such as computer chips and electric vehicles. These subsidies not only attract companies to build factories in economically struggling areas but also create middle-class jobs and stimulate local economies. For instance, Chatham County is seeing new employment opportunities and community revitalization through investments from companies like Wolfspeed and Toyota, spurred by federal grants and infrastructure support. By directly investing in these forward-looking sectors, the government helps communities pivot from outdated manufacturing to advanced industries, enabling them to retain their production expertise while reducing the vulnerabilities of free trade.

Question 23

recession

Answer 23

decline in real GDP. 6 month+ decline usually.

Question 24

expansion

Answer 24

increase in real GDP

Question 25

peak

Answer 25

when real GDP reaches a high point

Question 26

trough

Answer 26

when real GDP reaches a low point

Question 27

output gap

Answer 27

difference between real and potential GDP
(could be thought of as real - potential)

Question 28

what happens if actual rGDP = potential GDP

Answer 28

• natural unemployment rate = actual unemployment rate
• intersection of real GDP (wavy line) and potential GDP (straight line) on graph

Question 29

what happens if actual rGDP > potential GDP

Answer 29

• positive output gap
• actual unemployment rate < natural unemployment rate
• inflation is a risk

Question 30

what happens if actual rGDP < potential GDP

Answer 30

• negative output gap
• actual unemployment rate > natural unemployment rate

Question 31

how do households and firms act in the product market and factor market? (think supplier vs demander)

Answer 31

Households act as demanders in the product market (buying goods and services) and suppliers in the factor market (providing labor, land, and capital to firms).

Firms are suppliers in the product market (providing goods and services to households) and demanders in the factor market (hiring resources from households).