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AP MACRO ECON > Unit 2- Measurement of Economic Performance > Flashcards

Unit 2- Measurement of Economic Performance Flashcards

1
Q

Macroeconomics

A

The study of the large economy as a whole

- analyze everyone and all businesses

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2
Q

Macroeconomics made to

A
  1. Measure the health of the whole economy

2. Guide government policies to fix problems

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3
Q

3 Major Economic Goals

A
  1. Promote Economic Growth
  2. Limit Unemployment
  3. Keep prices stable (limit inflation)
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4
Q

GDP- Gross Domestic Product

A

The dollar value of all final goods and services produced within a country’s borders in 1 year
- measured in dollars

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5
Q

What does GDP tell us?

A

Measures how well the US is doing financially

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6
Q

How do you use GDP?

A
  1. Compare to previous years (is there growth?)
  2. Compare to policy changed (Did a new policy work?)
  3. Compare to other countries (Are we better off?)
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7
Q

How can you measure growth from year to year

A

Change in GDP = (year 2-year 1)/year 1 X 100

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8
Q

What is not included in GDP?

A

Intermediate goods, non production transactions (old cares, used clothes)., and non-market activities (illegal drugs, etc.)

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9
Q

Expenditures Approach

A

Add up all the spending on final goods and service produced in a given year

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10
Q

Income Approach

A

Add up all the INCOME that resulted from selling all final goods and services produced in a given year

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11
Q

Expenditures Approach and Income Approach both…

A

Generate same amount since every dollar spent is a dollar of income

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12
Q

What makes up GDP?

A

Consumer spending, Investments, Gov spending, Net Exports (exports-imports)

GDP= C+I+G+Xn

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13
Q

The Problem with GDP

A

INFLATION!

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14
Q

Nominal GDP

A

GDP measured in current price, it does not account for inflation from year to year

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15
Q

Real GDP

A

Real GDP is the best measure of economic growth

- “deflates” nominal GDP by adjusting for inflation in terms of base year prices

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16
Q

Real GDP per Capita (per person)

A

Real GDP per Capita is real GDP divided by the total population it identifies on average how many products each personal make
- best measure of Standard of living

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17
Q

Why do some countries have a higher GDPs han others?- PRODUCTIVITY

A
  1. Economic System
  2. Property Rights
  3. Capital
  4. Human Capital (knowledge )
  5. Natural Resources
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18
Q

Unemployment Rate

A

The percent of people in the labor force who want a job but are not working

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19
Q

Unemployment Rate Equation

A

Unemployment Rate= (# unemployed)/(# in labor force) X 100

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20
Q

Who is in the labor force?

A
  • Above 16 years old
  • Able and willing to work
  • Not institutionalized (jails, hospitals)
  • Not in military, school full time, or retired
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21
Q

3 types of Unemployment

A
  • Frictional Unemployment
  • Structural Unemployment
  • Cyclical Unemployment
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22
Q

Frictional Unemployment

A
  • Temporarily unemployed or being in between jobs
  • individuals are qualified workers its transferable skills

Seasonal Unemploy.

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23
Q

Structural Unemployment

A
  • Changes in the structure of the labor force make some skills obsolete
  • Workers do not have transferable skills and these jobs will never come back
  • ex. VCR repairman
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24
Q

Cyclical Unemployment

A
  • results from economic downturns (recessions)

- as demand for goods and services falls, demand for labor falls and workers are fired

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25
Q

The Natural Rate of Unemployment

A

Struct. And Fric. Are unavoidable forms of unemployment, together they make up the natural rate of unemployment

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26
Q

We are at full employment when…

A

We have only the natural rate of unemployment that we SHOULS have

  • number of job vacancies = number of job seekers
  • NO cyclical unemployment
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27
Q

Natural Rate of Unemployment is about…

A

4-6%

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28
Q

Okun’s Law

A

When unemployment rises 1% above the natural rate, GDP falls by about 2%

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29
Q

What happens if there is unemployment benefits?

A

There is no incentive o begin to work hence the 8% to 10% unemployment in Germany/France

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30
Q

What is inflation?

A

Inflation is rising of general level of prices

  • reduces the “purchasing power of money”
  • when inflation occurs, each dollar of income will buy fewer goods than before
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31
Q

Is a rise in prices automatically a bad thing?

A

Not if wages go up with them

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32
Q

Real Wage Equation **

A

Wage rate/price level

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33
Q

Real Income **

A

Income/price lvl

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34
Q

Shoe Leather cost ***

A

Increased cost of transactions caused by inflation

- basic ideas of prices going up

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35
Q

Menu Costs ***

A

real cost fo changing listed prices

- reprint menus

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36
Q

Unit of Account Cost ***

A

The way inflation makes money less reliable unit of measurement

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37
Q

How is inflation measured?

A

The government tracks the prices of the same goods and services each year
- this market basket is made up of about 300 commonly purchased goods

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38
Q

Inflation Rate

A

% change in prices to a given base year (usually 1982)

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39
Q

Hyperinflation

A

monetary inflation occurring at a very high rate.

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40
Q

Real Interest Rate

A

The percentage increase in purchasing power that a borrower pays (adjusted for inflation)

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41
Q

Real interest rate equation

A

Real = nominal interest rate-expected inflation

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42
Q

Nominal Interest Rate

A

The percentage increase in MONEY that the borrower pays not adjusting for inflation

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43
Q

Nominal interest rate equation

A

Nominal= real interest rate+expected inflation

44
Q

Hurt by Inflation

A
  • Lenders people who lend money (at fixed interest reates)
  • people with fixed incomes
  • savers
45
Q

Helped by Inflation

A
  • Borrowers- people who borrow money

- a business where the price of the product increases faster than the price of resources

46
Q

Cost of Living Adjustment (COLA)

A
  • some world have salaries that mirror inflation

- thy negotiated wages that rise w/inflation

47
Q

Consumer Price Index (CPI) ***

A

The most commonly used measurement for inflation

48
Q

How CPI works

A
  • the base year is given an index of 100

- to compare, each year is given an index # as well

49
Q

Consumer Price Index Equation

A

CPI= (Price of Market Basket)/(Price of market Basket in Base Year) X 100

50
Q

Problems with Consumer Price Index

A
  1. Substitution Bias
  2. New Products
  3. Product Quality
51
Q

Substitution Bias

A

As prices increase for the fixed market basket, sonsumers buy ess of these products adn more substitutes may not be part of the market basket
- Result: CPI may b higher than what consumers are really paying

52
Q

New Product

A

The CPI market basket may not include the newest consumer products
- result: SPI measures prices but not the increase in choices

53
Q

Product Quality

A

The CPI ignores both improvements and decline in product quality
- results: CPI may suggest that prices stay the same through the economic well being has improved significantly

54
Q

CPI vs GDP Deflator

A

The GDP deflator measures the prices of all goods produced, whereas CPI ensures prices of only the goods/services bought by consumers

55
Q

GDP includes

A

Only those goods/services produced domestically, imported goods aren’t part of GDP therefore don’t show up in GDP deflator

56
Q

GDP Deflator Equation

A

GDP Deflator= (Nominal GDP)/(Real GDP) X100

57
Q

3 causes of Inflation

A
  1. The Gov Prints too much money (the quantity theory )
  2. Demand- Pull Inflation
    - demand increases but supply stays the same therefore a shortage, driving prices up
  3. Cost-Push Inflation
    - Higher Production costs increase prices
    — A negative supply shock increases the costs of production and forces producers to increase prices (Hurricane Katrina)
58
Q

The Wage-Price Spiral

A

Workers demand raises
Owners increases prices to pay for raises
Workers demand rises
Owners increases prices to pay for raises
Etc….

59
Q

Achieving the 3 goals

A

The government role is to prevent unemployment and prevent inflation at the same time
- if gov focuses too much on preventing inflation and slows down Econ we will have unemployment and vise versa

60
Q

National Income and Product Accounts (national accounts)

A

Keeps track of the spending of consumers, sales of producers, business investment spending, government purchases and a variety of other floes of money

61
Q

Circle Flow Diagram

A

Simplified representation of the macroeconomy

  • shows the flows of money, good, and services, and factors of production
  • flow of physical things and money to pay for things
  • household and firms
62
Q

Household

A

Consists of an individual or group of people who share income

63
Q

Firm

A

is an organization that produces goods/services for sale- and employs members of households

64
Q

Product Markets

A

Where goods/services are bought and sold

65
Q

Factor Markets

A

Where resources, especially capital and labor are bought and sold

66
Q

Stock

A

A safe in the ownership of a company held by a shareholder

67
Q

Bond

A

A loan in the forms of a loan that pays interest

68
Q

Government purchases of goods and services

A

Total expenditures on good and services by federal, state and local gov.

69
Q

Exports

A

Where goods are sold

70
Q

Imports

A

Goods/services bought from other countries

71
Q

Inventories

A

Are stocks of good and raw materials held to facilitate business operations

72
Q

Investment spending

A

Spending on a new productive physical capital, such as machinery and structures and on changes in inventories

73
Q

Final goods and services

A

Are goods/services sold to the final or end, user

74
Q

Intermediate goods and services

A

Goods/services bought from 1 firm by another firm to be used as inputs into the production of a final good

75
Q

Income approach

A

calculating GDP by adding up the total factor income earned by household fro firms in the economy, including vent, wages, interests, and profits

76
Q

The circular flow diagram is a simple model of the macroeconomy in which..

A

Households own the factors of production

77
Q

Which component makes up the largest % of the GDP measure by aggregate spending?

A

Consumer spending

78
Q

Aggregate output is another name for…

A

GDP- the total quantity of final goods and services produced with an economy

79
Q

Chain-linking

A

Is the method of calculating changes in the real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using late base year

80
Q

US Stats on real GDP always expressed in…

A

Chained dollars

81
Q

Real GDP doesn’t measure

A
  • how output is used
  • quality of life
  • how income is distributed
82
Q

What is true of real GDP?

A

It is adjusted for inflation and increases whenever aggregate output increases

83
Q

What is the best measure for comparing a country;s output over time?

A

Real GDP

84
Q

Job Separations

A

Terminations of employment that occurred because a worker was either fired or quit voluntarily

85
Q

Job Search

A

When workers spend time looking for employment

86
Q

Minimum Wage

A

Gov mandated floor on price of labor

87
Q

Labor Unions can often..

A

Higher wages from employers than workers who bargain individually
- knob as collective bargaining

88
Q

Efficiency Wages

A

Wages that employers set above equilibrium wage rate as an incentive for better employment performance

89
Q

Causes of change in natural rate of unemployment

A

Changes in Labor Force
Changes in Labor Market Institutions
Changes in Gov Policies

90
Q

A person took 2 months to find a new job experienced which type of unemployment?

A

Frictional

91
Q

What type of unemployment is created by a recession?

A

Cyclical

92
Q

A person who is unemployed because fo a mismatch between quantity of labor supplied and demanded is experiencing…

A

Frictional

93
Q

Inflation Rate Equation

A

Inflation Rate= Price lvl in yr 2-price level in yr 1/price level in yr 1 X 100

94
Q

Unit of Account Costs

A

Arrise from the way inflation makes money a less reliable unit of measurement

95
Q

Disinflation

A

The process of bringing inflation Rate frown

-very difficult and costly once a high rate of inflation has become well establish in the Econ

96
Q

What is true regarding prices in an Econ?

A

An increase in the price level is called inflation
The level of prices doesn’t matter
The rate of change in prices matters

97
Q

If your nominal wage doubles t the same time as prices doubles, your real wage will…

A

Not change

98
Q

If inflation causes people to frequently convert their dollars into other assets, the Econ expenses what type of cost?

A

Shoe-leather

99
Q

Because dollars are used as the basis for contracts inflation leads to which type of cost?

A

Unit of account

100
Q

Changing the listed price when inflation leads to a price increase is an example of which type of cost?

A

Menu

101
Q

Aggregate price level

A

A measure of the overall level of prices in the economy

102
Q

Price Index

A

Measures the cost of purchasing a given market basket in a given year

103
Q

What is true of the CPI?

A
  1. It’s the most common measure of the price level
  2. It measures the price of a typical market basket of goods
  3. Currently uses a base period of 1982-84
104
Q

The value of a price index in the base year is…

A

100

105
Q

If your wage doubles at the same time CPI goes from 100 to 300, your real wages…

A

Falls

106
Q

Aggregate Spending

A

total spending on domestically produced final goods and services in the economy

AP MACRO ECON (5 decks)

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