Chapter 9 - Business cycles, macroeconomic goals & measurement Flashcards Preview

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Flashcards in Chapter 9 - Business cycles, macroeconomic goals & measurement Deck (44)
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What is gross domestic product?

It is the total market value of all final goods and services produced in the economy during a specified period.


How is it measured?

In money terms and not in physical units. It is usually measured over a year.


What is the purpose of national accounts (to measure the economy)?

1) measure the level of production in the economy
2) explain the immediate causes of the level of performance of the economy
3) uncover underlying problems in the economy
4) plot the long-run course of the economy over time
5) provide foundations for public policies


What is the balance of payments account?

It is a statement recording all the transactions that take place between a country's residents and the residents of all foreign nations.


What are the two basic subcategories of balance of payments accounts?

The current account - reflecting current transactions
The capital and financial account - capital account reflects transactions of a non-current and non-financial nature and the financial account captures transactions including the exchange of financial assets.


Do the accounts balance?

The current account balance and the capital and financial account balances are essentially reflections of each other and tush in a sense there will always be a 'balance' in the balance of payments.


What is the external balance?

It is a level of the current account consistent with the maintenance of existing (or growing) levels of consumption, employment and national output over the long term


What is the business cycle?

the recurrent, somewhat cyclical increases and decreases in the level or rate of growth in economic activity that typify the pattern of progress of our economy's real GDP over time.


Is the long run economic growth of Australia steady?

No there have been ups and downs


What are the phases of the business cycle?

Peak - temporary maximum economic activity
Recession - decline in output and employment to a low or negative level
Trough - output bottoms out at their lowest levels
Recovery - output and employment expand toward full employment levels


What is a depression?

A severe and prolonged recession


What is full employment?

A situation of labour market balance consistent with output at the economy's potential output level. In this state cyclical unemployment is absent.


What are the types of unemployment?

Frictional unemployment
Structural unemployment
Cyclical unemploymnet


What is frictional unemployment?

Includes new entrants and workers leaving voluntarily / or being laid off due to seasonality. This is inevitable and partly desirable.


What is structural unemployment?

It is unemployment resulting from mismatches in the skills and geographic location of labour due to changes in the composition of the total demand for labour. They are not employable without additional training, education and/or geographical movement.


What is cyclical unemployment?

It is unemployment caused by the business cycle or due to insufficient aggregate demand or total spending.


Does full employment mean zero unemployment?

No, full employment is also known as the natural rate of unemployment, this equals the sum of frictional and structural unemployment but not cyclical unemployment (which is zero in the natural rate of unemployment)


What is the economy's potential output?

The real level of domestic output that is associated with the natural rate of unemployment.


Who tracks unemployment and why is it not accurate?

The ABS, and it is not accurate because:
* It is not an entire view and is just a sample
*all part time workers are included as employed people
* the person must be actively seeking work to be included.


What is not captured in the unemployment figures?

* Part time workers who want to work more hours but are unable to do so
* Discouraged workers - those who after unsuccessfully seeking employment for a time become discouraged and drop out of the labour force.


What is the participation rate?

Those in the specified labour force group expressed as the percentage of the civilian population aged 15 and over in that specified group


What is the basic economic cost of unemployment?

It is forgone output and is measured in terms of GDP Gap.


What is GDP gap?

It is the amount by which the actual level of GDP falls short of the potential level of GDP.


How is unemployment and GDP related?

They increase together


What does Okun's law show?

The quantified relationship between the unemployment rate and the GDP gap. For every 1% of unemployment above the natural rate, a GDP gap of more than 3.5% is generated.


What is inflation?

It is a continuous rise in the general price level and is measured as 'inflation rate = ((current year index - previous year index)/previous year index) x 100


What is the 70's rule?

It allows a quantitative appreciation and shows the number of years required for a doubling of the price rule. Approx Number of years required for price level to double = 70/annual rate of increase %.


What does the 70's rule show?

It allows estimation of how long it will take for GDP (or savings) to double


What are the two general causes/theories of inflation?

* Demand-pull inflation
* Cost-push or supply-side inflation.


What causes demand-pull inflation and what is it?

Caused by excess demand for output. In this case the economy attempts to spend beyond its capacity to produces (ie beyond its potential level of output)