week 14 Flashcards
how is the state of the economy measured
GDP
the market value of final goods and services produced in a country in a given period
aggregate quantities of many goods and services by adding up market values
why has GDP been critised
does not accurately reflect factors such as distribution of income and the effect of economic growth on the environment
what is GDP
the market value of final goods and services produced in a country in a given time period
what is market value
convenient way to aggregate the many different goods and services produced in a modern economy
what are non-market goods included in GDP
government goods and services are not sold in the market
increase output, have known quantities but unestablished prices
are included in GDP
what are final goods and services
consumed by the ultimate user
end products in production
included in GDP
what are intermediate goods and services
used up in production of final goods
not included in GDP to avoid double counting
what is a capital good
a good that can be final and intermediate, a long lived good which is produced and produces other goods and services
eg machinary
what is value added
market value of product - cost of inputs from other firms
what are the four categories in GDP
households
firms
governments
foreign sector
how can GDP be calculated
adding up market value of all the final goods and services produced domestically
or
adding up total amount spent by each of the four groups on final goods and services and subtracting imported goods and services
what is consumption expenditure
spending by households for goods and services
what are consumer durables
long lived consumer goods
cars, furniture
what are consumer non-durables
shorter lived goods
clothing, food
what are services
largest component of consumer spending
education, haircuts
what is investment
spending by firms on final goods and services
what is business fixed investment
purchases of new capital goods
eg property
what is residential investment
construction of new homes and apartment buildings
what is inventory investment
change in unsold goods to the company’s inventory
goods that are produced but not yet sold
can be positive or negative
what is financial investment
purchases of stocks, bonds and financial assets
does not correspond to increases in production capacity in most cases (new stock issues is the exception)
what is economic investment
the increase in the capital goods used to produce other goods
value based on purchase price of capital goods not stock value
what are government purchases
final goods and services bought by national and local governments
excludes transfer payments
what are transfer payments
made by governments, but the government receives no goods or services
eg social security
how do you calculate net exports
exports - imports
what are exports
goods and services produced domestically and sold abroad
what are imports
goods and services produced abroad and purchased domestically
what is the GDP expenditures equation
Y = C + I + G + NX
Y - GDP/output
C - consumption expenditure
I - Investment
G - government purchases
NX - net exports
what is the income approach to GDP
GDP = labour income + capital income
labour income is wages, salaries and benefits
capital income is physical capital and intangibles such as profits, rent
what is real GDP
a measure of GDP in which the quantities produced are valued at the prices in a base year, rather than at current prices
measures actual physical volume of production
what is nominal GDP
a measure of GDP in which the quantities produced are valued at current-year prices
measure current money value of production
what are the observations on real and nominal GDP
nominal and real usually increase each year
nominal can go up and real go down (fewer goods and services produced and prices increase faster than output decreased)
nominal GDP will be smaller than real GDP if prices are less than in base year
real GDP could rise and nominal fall but this is rare
how does GDP effect economic wellbeing
GDP captures only those goods and services that are sold in markets
leisure is not sold in markets
GDP may understate economic wellbeing
real GDP may be flawed measure of well-being
it only values market transactions
maximising GDP will not necessarily maximise national well-being
what are nonmarket economic activities
household production and volunteer services
difficult to value these services
important in poor countries
what is the underground economy
all unreported transactions, legal and illegal
includes casual labour that is often paid in cash and services such as drug dealing and prostitution
not included in GDP
what is environmental quality
clean up activities to restore the environment to its original condition, included in GDP
gets environment back to starting point
deterioration in the quality of air and water would more than offset the gains from greater production
what is resource depletion
no adjustment is made for the decline in resource availability when mining or other harvesting is done
environmental quality and resource depletion are difficult to value
what are some intangibles GDP does not account for
crime rates
traffic congestion
civic organisations
open space
sense of community
why does GDP not capture the effects of income inequality
cannot differentiate between an unequal and an egalitarian society if they have similar economic sizes
policymakers need to account for rising inequality when making decisions
what are the limitations of GDP
does not tell us about personal wellbeing, depletion of natural resources, quality of life or ecological deficit
short term growth leads to long term damage to our health, wealth and wellbeing
what features of GDP can be used as a welfare measure
material standard of living - more goods and services
health and life expectancy - improved health measures in industrialised countries
education - literacy and school enrolment rates
what is the kuznets curve
the relationship between economic growth and inequality
initial stage of economic growth - inequality increases as investment opportunities create a wealthy class
further industrialisation - democratisation, increases in education cause inequality to decline
what is the labour force
the total number of people employed and unemployed in the economy
employed + unemployed
how do you calculate unemployment rate
unemployed / labour force
how do you calculate participation rate
labour force / population 16+
what does it mean if you are employed
you work full or part time or are on sick or vacation leave from a regular job
what does it mean if you are unemployed
not employed but are actively seeking employment
what does it mean if you are out of the labour force
you are not employed or actively seeking employment
what is unemployment rate
the percentage of the labour force classified as unemployed
what is participation rate
the percentage of the working population in the labour force
what are the three types of unemployment
frictional, structural and cyclical
what is structural unemployment
the long term and chronic rate of unemployment that exists even when the economy is producing at the normal rate
what can cause structural unemployment
lack of skills
language barriers
discrimination
economic changes can create long term mismatch between jobs and skills
what are the costs of structural unemployment
causes loss of income to workers and loss of output for firms
what is frictional unemployment
short term unemployment associated with the process of matching workers with jobs
can take time
what is cyclical unemployment
extra unemployment that occurs during recessions
occurs when the economy experiences a decline in the demand for goods and services it produces
what are the economic costs of unemployment
lost wages and production
decreased taxes and increased transfers
what are the psychological costs of unemployment
individual self esteem
family stress of decreased income and increased uncertainty
what are the social costs of unemployment
potential increases in crimes and social problems
what is an unemployment spell
the period during which an individual is continuously unemployed
what is duration of unemployment
the length of an unemployment spell
what is long term unemployment
being out of work for 6 months +
what are the outcomes of short term unemployment
finding a permanent job after searching for a few weeks
leave the labour force
get a short term job that leads to unemployment again - chronically unemployment which has similar economic costs to long term unemployment
what are discouraged workers
would like to have a job but they have not looked for work for 4 weeks+ as they believe there is no work available
what are involuntary part time workers
people who like to work full-time but cannot find a full-time job
what is capitalism
characterised by private ownership of productive assets
what is laissez-faire capitalism
great reliance on exchange as a mode of coordination
what is administrative capitalism
substantial reliance on public administration as a mode of coordination
what is socialism
system that relies more on public ownership
what is administrative socialism
state ownership predominates and activity is coordinated primarily by public adminstration
what is market socialism
state ownership predominates but economic activity is coordinated through markets
what is the welfare state
a form of economic and social organisation
a system in which the state plays a role for the protection and welfare of its citizens
combination of collectivism, capitalism, social welfare policy and democracy
what are policy debates
right argue that free markets are most efficient way to achieve economic prosperity
left argue that gov intervention to boost aggregate demand is necessary to bring economy towards full employment
what is neoliberalism
distinguished from liberalism
concerned with economic freedom
individual is solely responsible for the consequences of their own
state involvement leads to totalitarianism
individuals are rational and know their own needs better than the state
what is the neoliberal agenda
supremacy of the individual and commercial interests over that of society
includes free trade, privatisation, shrinking of the state, large tax cuts and balanced budgets
what are the benefits of neoliberalism
economic efficiency - reduce role of govs, markets weed out inefficient companies and allowing those that produce goods at a reasonable price to succeed
cheaper goods - free markets and free trade between nations, increases levels of competition and puts pressure on firms to reduce price and increase efficiency
lower taxes - reduce influence and role of government, reduces the need for high levels of taxes
higher levels of investment - incentives for businesses to improve efficiency
what are the costs of neoliberalism
deregulation, shrinking trade unions, privatisation and smaller states - linked to rising inequality
income stagnation in bottom half of distribution
inequality undermines democracy
neoliberal model also intensifies climate change, legislation seen as an attack on individual freedom
