Unit 2- Measurement of Economic Performance Flashcards
Macroeconomics
The study of the large economy as a whole
- analyze everyone and all businesses
Macroeconomics made to
- Measure the health of the whole economy
2. Guide government policies to fix problems
3 Major Economic Goals
- Promote Economic Growth
- Limit Unemployment
- Keep prices stable (limit inflation)
GDP- Gross Domestic Product
The dollar value of all final goods and services produced within a country’s borders in 1 year
- measured in dollars
What does GDP tell us?
Measures how well the US is doing financially
How do you use GDP?
- Compare to previous years (is there growth?)
- Compare to policy changed (Did a new policy work?)
- Compare to other countries (Are we better off?)
How can you measure growth from year to year
Change in GDP = (year 2-year 1)/year 1 X 100
What is not included in GDP?
Intermediate goods, non production transactions (old cares, used clothes)., and non-market activities (illegal drugs, etc.)
Expenditures Approach
Add up all the spending on final goods and service produced in a given year
Income Approach
Add up all the INCOME that resulted from selling all final goods and services produced in a given year
Expenditures Approach and Income Approach both…
Generate same amount since every dollar spent is a dollar of income
What makes up GDP?
Consumer spending, Investments, Gov spending, Net Exports (exports-imports)
GDP= C+I+G+Xn
The Problem with GDP
INFLATION!
Nominal GDP
GDP measured in current price, it does not account for inflation from year to year
Real GDP
Real GDP is the best measure of economic growth
- “deflates” nominal GDP by adjusting for inflation in terms of base year prices
Real GDP per Capita (per person)
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
Why do some countries have a higher GDPs han others?- PRODUCTIVITY
- Economic System
- Property Rights
- Capital
- Human Capital (knowledge )
- Natural Resources
Unemployment Rate
The percent of people in the labor force who want a job but are not working
Unemployment Rate Equation
Unemployment Rate= (# unemployed)/(# in labor force) X 100
Who is in the labor force?
- Above 16 years old
- Able and willing to work
- Not institutionalized (jails, hospitals)
- Not in military, school full time, or retired
3 types of Unemployment
- Frictional Unemployment
- Structural Unemployment
- Cyclical Unemployment
Frictional Unemployment
- Temporarily unemployed or being in between jobs
- individuals are qualified workers its transferable skills
Seasonal Unemploy.
Structural Unemployment
- 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
Cyclical Unemployment
- results from economic downturns (recessions)
- as demand for goods and services falls, demand for labor falls and workers are fired
The Natural Rate of Unemployment
Struct. And Fric. Are unavoidable forms of unemployment, together they make up the natural rate of unemployment
We are at full employment when…
We have only the natural rate of unemployment that we SHOULS have
- number of job vacancies = number of job seekers
- NO cyclical unemployment
Natural Rate of Unemployment is about…
4-6%
Okun’s Law
When unemployment rises 1% above the natural rate, GDP falls by about 2%
What happens if there is unemployment benefits?
There is no incentive o begin to work hence the 8% to 10% unemployment in Germany/France
What is inflation?
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
Is a rise in prices automatically a bad thing?
Not if wages go up with them
Real Wage Equation **
Wage rate/price level
Real Income **
Income/price lvl
Shoe Leather cost ***
Increased cost of transactions caused by inflation
- basic ideas of prices going up
Menu Costs ***
real cost fo changing listed prices
- reprint menus
Unit of Account Cost ***
The way inflation makes money less reliable unit of measurement
How is inflation measured?
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
Inflation Rate
% change in prices to a given base year (usually 1982)
Hyperinflation
monetary inflation occurring at a very high rate.
Real Interest Rate
The percentage increase in purchasing power that a borrower pays (adjusted for inflation)
Real interest rate equation
Real = nominal interest rate-expected inflation
Nominal Interest Rate
The percentage increase in MONEY that the borrower pays not adjusting for inflation
Nominal interest rate equation
Nominal= real interest rate+expected inflation
Hurt by Inflation
- Lenders people who lend money (at fixed interest reates)
- people with fixed incomes
- savers
Helped by Inflation
- Borrowers- people who borrow money
- a business where the price of the product increases faster than the price of resources
Cost of Living Adjustment (COLA)
- some world have salaries that mirror inflation
- thy negotiated wages that rise w/inflation
Consumer Price Index (CPI) ***
The most commonly used measurement for inflation
How CPI works
- the base year is given an index of 100
- to compare, each year is given an index # as well
Consumer Price Index Equation
CPI= (Price of Market Basket)/(Price of market Basket in Base Year) X 100
Problems with Consumer Price Index
- Substitution Bias
- New Products
- Product Quality
Substitution Bias
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
New Product
The CPI market basket may not include the newest consumer products
- result: SPI measures prices but not the increase in choices
Product Quality
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
CPI vs GDP Deflator
The GDP deflator measures the prices of all goods produced, whereas CPI ensures prices of only the goods/services bought by consumers
GDP includes
Only those goods/services produced domestically, imported goods aren’t part of GDP therefore don’t show up in GDP deflator
GDP Deflator Equation
GDP Deflator= (Nominal GDP)/(Real GDP) X100
3 causes of Inflation
- The Gov Prints too much money (the quantity theory )
- Demand- Pull Inflation
- demand increases but supply stays the same therefore a shortage, driving prices up - 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)
The Wage-Price Spiral
Workers demand raises
Owners increases prices to pay for raises
Workers demand rises
Owners increases prices to pay for raises
Etc….
Achieving the 3 goals
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
National Income and Product Accounts (national accounts)
Keeps track of the spending of consumers, sales of producers, business investment spending, government purchases and a variety of other floes of money
Circle Flow Diagram
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
Household
Consists of an individual or group of people who share income
Firm
is an organization that produces goods/services for sale- and employs members of households
Product Markets
Where goods/services are bought and sold
Factor Markets
Where resources, especially capital and labor are bought and sold
Stock
A safe in the ownership of a company held by a shareholder
Bond
A loan in the forms of a loan that pays interest
Government purchases of goods and services
Total expenditures on good and services by federal, state and local gov.
Exports
Where goods are sold
Imports
Goods/services bought from other countries
Inventories
Are stocks of good and raw materials held to facilitate business operations
Investment spending
Spending on a new productive physical capital, such as machinery and structures and on changes in inventories
Final goods and services
Are goods/services sold to the final or end, user
Intermediate goods and services
Goods/services bought from 1 firm by another firm to be used as inputs into the production of a final good
Income approach
calculating GDP by adding up the total factor income earned by household fro firms in the economy, including vent, wages, interests, and profits
The circular flow diagram is a simple model of the macroeconomy in which..
Households own the factors of production
Which component makes up the largest % of the GDP measure by aggregate spending?
Consumer spending
Aggregate output is another name for…
GDP- the total quantity of final goods and services produced with an economy
Chain-linking
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
US Stats on real GDP always expressed in…
Chained dollars
Real GDP doesn’t measure
- how output is used
- quality of life
- how income is distributed
What is true of real GDP?
It is adjusted for inflation and increases whenever aggregate output increases
What is the best measure for comparing a country;s output over time?
Real GDP
Job Separations
Terminations of employment that occurred because a worker was either fired or quit voluntarily
Job Search
When workers spend time looking for employment
Minimum Wage
Gov mandated floor on price of labor
Labor Unions can often..
Higher wages from employers than workers who bargain individually
- knob as collective bargaining
Efficiency Wages
Wages that employers set above equilibrium wage rate as an incentive for better employment performance
Causes of change in natural rate of unemployment
Changes in Labor Force
Changes in Labor Market Institutions
Changes in Gov Policies
A person took 2 months to find a new job experienced which type of unemployment?
Frictional
What type of unemployment is created by a recession?
Cyclical
A person who is unemployed because fo a mismatch between quantity of labor supplied and demanded is experiencing…
Frictional
Inflation Rate Equation
Inflation Rate= Price lvl in yr 2-price level in yr 1/price level in yr 1 X 100
Unit of Account Costs
Arrise from the way inflation makes money a less reliable unit of measurement
Disinflation
The process of bringing inflation Rate frown
-very difficult and costly once a high rate of inflation has become well establish in the Econ
What is true regarding prices in an Econ?
An increase in the price level is called inflation
The level of prices doesn’t matter
The rate of change in prices matters
If your nominal wage doubles t the same time as prices doubles, your real wage will…
Not change
If inflation causes people to frequently convert their dollars into other assets, the Econ expenses what type of cost?
Shoe-leather
Because dollars are used as the basis for contracts inflation leads to which type of cost?
Unit of account
Changing the listed price when inflation leads to a price increase is an example of which type of cost?
Menu
Aggregate price level
A measure of the overall level of prices in the economy
Price Index
Measures the cost of purchasing a given market basket in a given year
What is true of the CPI?
- It’s the most common measure of the price level
- It measures the price of a typical market basket of goods
- Currently uses a base period of 1982-84
The value of a price index in the base year is…
100
If your wage doubles at the same time CPI goes from 100 to 300, your real wages…
Falls
Aggregate Spending
total spending on domestically produced final goods and services in the economy
