Unit 2 Economic indicators and the business cycle

Question 1

2.1 v1: How do households interact with the factor markets and firms?

Answer 1

Households give labor resources (labor) to firms and in turn firms give the households money.

Question 2

2.1 v1: How do firms interact with the market for goods and services and households?

Answer 2

Firms provide households with goods and services and in turn households give firms money.

Question 3

2.1 v1: What do economists do?

Answer 3

They keep track of money flow between sectors.
(These sectors are households, firms, etc)

Question 4

2.1 v1: what is the circular flow model and expanded circular flow model of money?

Answer 4

A model depicting how money flows through different sectors.

The simple circular flow contains firms households, the factor markets, and the goods and services markets.

The expanded circular flow model includes all the sectors in the simple model but also the government, the rest of the world, and financial markets.

Question 5

2.1 v2: What does GDP stand for and what does it mean?

Answer 5

It stands for “Gross Domestic Product.”
the meaning means the total market value of all final goods and services produced within a country in one year.

Question 6

2.1 v2: What is the difference between final goods and intermediate goods?

Answer 6

Final goods are products bought off the shelfs while intermediate goods are the products that go into the final goods.

Question 7

2.1 v2: How is GDP defined?

Answer 7

Product: The value of the final goods. Not the value of the intermediate goods that go into the final good , just the final good itself.

Production setting: Where and when production occurs. Production must be within the country and within the year for it to count towards GDP.

Question 8

2.1 v2: what is GDP used for?

Answer 8

GDP is used by economist to track whether an economy of a country is experiencing a growth or regression. In other words, to track the health of a countries economy.

If GPD is increasing it could mean the country is being more productive.

If GPD is decreasing it could mean the country is regressing.

Question 9

2.1 v3: What are the three ways to measure GDP

Answer 9

1. Value of production of final goods and services
2. Factor income earned by households from firms in the economy
3. Value of spending on domestically produced final goods and services (Aggregate spending model or the expenditure approach)

Question 10

2.1 v3: What is the formula of Expenditure approach for calculating GDP. Define the variables.

Answer 10

GDP = C + I + G + Xn

C = Consumer spending. I Spending is broken down into lasting and consumable goods, and services.

I = Investment spending. Spending done by firms and households.

G = Government spending. Everything the government has spent money on.

Xn = Net exports (Exports - imports). number may be negative.

Question 11

2.2 v1: What are the limitations of GDP?

Answer 11

GDP doesnot includes nonmarket transactions that contribute to happiness and quality of life. This means GDP does not correlate with higher standards of living.

Question 12

2.2 v1: GDP has been criticized as a measure of well being as it fails to take into account:

A: The distribution of income
B: The value of services
C: The value of intermediate goods
D: The value of financial transactions and sales of used items
E: the value of government services

Answer 12

A: the distribution of income

Question 13

2.2 v1: As a measure of economic welfare, GDP underestimates a country’s production of goods and services when there is an increase of:

A: The production of military goods
B: The production of antipollution devices
C: Crime prevention services
D: Household production
E: Legal services

Answer 13

D: household production

Question 14

2.3 v1: What does it mean to be employed, unemployed, and a part of the labor force?

Answer 14

To be employed means to currently be holding a job full-time or part-time

To be unemployed mean to not have a job but actively be looking for one

To be part of the labor force means to be either employed or unemployed

Question 15

2.3 v1: what is the labor force participation rate and what is the formula to calculate it?

Answer 15

The labor force participation rate is a percentage of people older than 16 that are a part of the labor force.

The formula to calculate it is:
LFPR = (Labor Force / Population 16 or older) x 100

Question 16

2.3 v1: What is the unemployment rate and the formula to calculate it?

Answer 16

The percentage of the whole amount of people that are in the labor force but unemployed.

The formula to calculate it is:
UR = (Number of unemployed workers / Labor force) x 100

Question 17

2.3 v1: Which of the following people are unemployed:

A) A fifteen year old high schooler looking for a job
B) A laid- off chef looking who has given up looking for a new job.
C) A parent working at a daycare 15 hours a week.
D) A college grad looking for her first job.
C) A mayor who has lost a election and is retired.

Answer 17

D) A college grad looking for her first job.

Question 18

An increase in labor force participation rate will:

A) Have no effect on unemployment.
B) Make it easier to reduce unemployment.
C) Make is more difficult to reduce unemployment.

Answer 18

C) Make it more difficult to reduce unemployment.

Question 19

2.3 v1:

Population 16 or older: 200k
Labor force: 100k
Part-time workers: 20k
Full-time workers: 70k

what is the labor force participation rate and unemployment rate.

Answer 19

LFPR: (100k / 200k) x 100 = 50%
Labor force divided by the Population 16 or older multiplied by 100 give a LFPR of 50%

UR: (10k / 100k) x 100 = 10%
Part-time workers + Full-time workers = 90k and there are 100k in the workforce so there are 10k people who are unemployed.

Question 20

2.3 v2: What are discouraged workers? Are they included in the labor force and the unemployment rate?

Answer 20

Non-working people who are capable of working a job but have given up finding one due to the state of the market.
Not included in the labor force meaning they are also not a part of the unemployment rate.

Question 21

2.3 v2: What are marginally attached workers? Are they included in the labor force and the unemployment rate?

Answer 21

People who would like to be employed and have looked for a job in the recent past but not currently.
Not included in the labor force meaning they are also not included in the unemployment rate.

Question 22

2.3 v2: What are underemployed workers? Are they included in the labor force and the unemployment rate?

Answer 22

Part-time workers who would like to be working a full-time job.
A part of the labor force but not unemployed so not a part of the unemployment rate.

Question 23

2.3 v2: Who measures the official unemployment rate and broader measures of labor underutilization and what are all the different measures of the unemployment rate.

Answer 23

The bureau of labor statistics calculates the official unemployment rate and broader measures of the unemployment rate
The measures of unemployment are:

U3: The official unemployment rate reported in the media.
U6: The broadest measure of unemployment because it include some workers not included in the labor force.

Question 24

2.3 v2: Why might the unemployment rate understate the true level of unemployment?

Answer 24

Marginally attached workers and discouraged workers are not included in the unemployment rate as they do not fit the criteria even though they do not have a job.

Question 25

2.3 v3: What are the three types of unemployment?

Answer 25

Frictional unemployment:
- People who have just started looking for their first job.
- Searching for a job and has desirable skills.

Structural employment:
- Happen when there are more people looking for a job when there are jobs or when their skills become obsolete.

Cyclical unemployment:
- Unemployment due to recession.

Question 26

2.3 v3: What is the natural and actual rate of unemployment and how do we calculate it?

Answer 26

The normal / average level of unemployment:

The natural rate of unemployment = Frictional unemployment + structural unemployment.

Actual rate of unemployment = Natural rate of unemployment + cyclical unemployment.

Question 27

2.4 v1: What is CPI and a market basket and what does the CPI measure?

Answer 27

CPI stands for consumer Price Index and it measures the averages change over time in the prices paid by consumers for a fixed “market basket” of goods and services. In others words is calculates inflation

A market basket is all the Goods and services the typical American family buys. The data of what the families buy come from the Consumer expenditure survey the Bureau of labor statistics conduct every few years.

Question 28

2.4 v1: What is inflation and deflation and when do they occur?

Answer 28

Inflation:
- Is an overall increase of prices.
- Decreases the value of a currency.
- Occur when CPI rises

Deflation
- Is an overall decrease in prices.
- Increases the value of currency.
- Occurs when CPI falls

Question 29

2.4 v1: Go to video 1 of 2.4 and see if you can do the practice question at 7 minutes in. What is the formula for the rate of change?

Answer 29

1. The value of market basket of year one = $800. The value of market basket of year one = $1000
2. The CPI for year one = 100. The CPI for year 2 = 125
3. The inflation rate = 25% increase

Rate of change = ((New-Old) / Old) x 100

Question 30

2.4 v2: What does it mean when a variable is “Nominal?”

Answer 30

It means the variable has not been adjusted for it inflation.

Question 31

2.4 v2: what does Nominal

• Income
• GDP
• Interest rate

mean?

Answer 31

Nominal income: Money one earns in wages or salary form.

Nominal GDP: Value of a country’s output in current dollars.

Nominal interest rate: A stated interest rate.

Question 32

2.4 v2: What does it mean when a variable is “real?”

Answer 32

It means the term has been adjusted for inflation.

Question 33

2.4 v2: What does real

• Income
• GDP
• Interest rate

mean?

Answer 33

Real income: How much goods and services you can buy with your salary or wage

Real GDP: A value of an economy’s output in inflation adjusted dollars

Real interest rate: Inflation adjusted cost of borrowed money.

Question 34

2.4 v2: What is the formula for the “real value?”

Answer 34

The real value formula = ((Nominal Value / Price index) / 100)

Question 35

2.4 v3: Why does it matter if the CPI overstates or understates the true inflation rate?

Answer 35

Many government programs use CPI to adjust for changes in the overall level of prices.
Those changes are called cost-of-living adjustments. (COLAs)
So if the CPI overstates the inflation rate then the cost of living adjustments will be higher than they need to be.

Question 36

2.4 v3: What is substitution bias?

Answer 36

A short coming associated with CPI where the market baskets does not reflect a consumers reactions to changes in relative prices.

Question 37

2.4 v3: How does the introduction of goods affect CPI?

Answer 37

The markets basket does not reflect the changes in purchasing power broughts on by the introduction of new products. Think of mp3 files and streaming services. This is one of the associated shortcomings of CPI.

Question 38

2.4 v3: How does the unmeasured quality changes of goods affect CPI

Answer 38

If quality of the goods rises or falls years to year then the value of the dollar rises or falls even if the price of the good stays the same. The CPI does not take this into account and is one of the associated short comings of it.

Question 39

2.5 v1: What happens when to purchasing power of an amount of money to be received in the future when the inflation rate is higher then expected?

Answer 39

When inflation is higher than expected then the purchasing power of the an amount of money to be received in the future will be lower than expected.

Question 40

2.5 v1: Who benefits and is hurt from unanticipated inflation

Answer 40

Anyone paying a fixed at a fixed amount will benefit from unanticipated inflation. An example is borrowers as the money they pay back is less than the money they borrowedin terms of purchasing power.

Anyone receiving a fixed amount of money will be hurt by unanticipated inflation. An example is lenders as the money they loan out is more then the money they will receive back in terms of purchasing power.

Question 41

2.5 v1: If the GDP deflator a price index that measures the aggregate price level increases unexpectedly, would the borrowers with a fixed interest rate be better or worse off? Explain

Answer 41

The borrowers with a fixed interest rate would be better off because the value of loan repayments, in terms of purchasing power, will be lower than what they have expected

Question 42

2.6 v1: What is real GDP equal to?

Answer 42

real national income.

Question 43

2.6 v1: What is the meaning and variable of Nominal GDP?

Answer 43

Nominal GDP = [Price Level (PL) * Real GDP (Y)]
Nominal GDP measures how much is spent on output in a given period.
Not adjusted for inflation

Question 44

2.6 v1: nominal GDP is the value of aggregate output (Q) in currents dollars (P) where (cy) stands for current year.

Answer 44

The value of aggregate output (Q) in currents dollars (P)
= (Pcy1 * Qcy1) + (Pcy2 * Qcy2) + (Pcy3 * Qcy3)…
or
= Real GDP (Y) * (Aggregate price level (PL) / 100)
The formula depends information given by the question and the type of question

Question 45

2.6 v1: Real GDP is the value of aggregate output (Q) in constant dollars (P).
what are the formulas and calculation for the Real GDP where (by) is base year and (cy) and current year.

Answer 45

The value of aggregate output (Q) in constant dollars (P)
= (Pby1 * Qcy1) + (Pby2 * Qcy2) + (Pby3 * Qcy3)…
or
= (Nominal GPD / Aggregate price level) * 100
The formula depends on the information given by the question and the type of question

Question 46

2.6 v1: What is the meaning and formula for real GDP

Answer 46

Real GDP = Y and is a measure of how much output is produced within a given period which is adjusted for inflation.

Question 47

2.6 v2: What is a GDP deflator? How does it covert GDPs? What is it also known as?

Answer 47

It is a price index that measures the changes in prices for all goods and services produced in a economy within a given period. This tells us the aggregate price level much like CPI.

Can convert Nominal GDP in real GDP and vice versa.
The formula for this is GDP Deflator = (nGDP / rGDP) * 100

GDP deflator is also referred to as the implicit price deflator.

Question 48

2.6 v2: How can the GDP deflator be used the calculate the inflation rate.
The terms are:
cy = current year
by = base year
GDPD = GDP deflator

Answer 48

Rate of change = ((New-Old / Old) * 100

Inflation rate = ((GDPDcy - GDPDby) / GDPDby) * 100

Question 49

2.6 v2: How is the GDP deflator different than CPI?

Answer 49

CPI measure changes in purchasing power over time while the GDP deflator measure changes in output over time.

CPI holds quality constant and evaluates changing prices while GDP holds prices constant and evaluates changing output

Question 50

2.6 v3: For is the formula for CPI, GDP deflator, real GPD, nominal GDP, CY market basket, and BY market basket

Answer 50

CPI = (CY Market basket / BY market basket) * 100

GDPD = (Nominal GDP / Real GDP) * 100

Nominal GPD and CY market basket
= (Pcy x Qcy)…
= real GDP * (GDP Deflator / 100)

Real GDP and BY Market basket
= (Pby x Qcy)…
= (Nominal GDP / GDP Deflator) * 100

Question 51

2.6 v3: If the GPD deflator increase unexpectedly would a borrower with a fixed-interest-rate be better or worse off?

Answer 51

A borrower with a fixed-interest-rate would be better off because the unexpected inflation results in less purchasing power than expected in the future payments. The borrower will be paying loans with payments that have less purchasing power than expected.

Question 52

2.7 v1: what is the business cycle model?
What are the two variables?

Answer 52

The graph that represents the relationship between output and time and how output changes over time.

Output can be
- Real GDP
- Real GDP per capita
- Nominal GDP
- Growth rate of any of the above

Time is usually expressed in quarters like three months or in years.

Question 53

2.7 v1: What are the phases of the business cycle?

Answer 53

Expansion: Output increases while employment rises over time.

Recession: Output decreases while employment falls over time.

Turning points of the business cycle: are when output goes from decreasing to increasing (trough) or increasing to decreasing (Peak)

Question 54

2.7 v1: What are troughs and peaks?

Answer 54

Peaks are the highest points before recession on the curve while troughs the lowest points before expansion on the curve.

Question 55

2.7 v1: What is the difference between actual output and potential output?

Answer 55

The difference between the two is the output gap. While potential output is a straight curve the actual output makes a wave curve intersecting with the potential output at various points.

When actual output is greater than potential output, the economy is experiencing an output gap.