chapter seven: economic performance and challenges

Question 1

gross domestic product (GDP)

Answer 1

• the total market value of all final goods and services produced within a countrys borders during a12-month period -> tells us how well the economy is performing
• includes new: goods and services provided in a 12-month period

Question 2

current GDP vs. real GDP

Answer 2

• current gdp is measured in current prices adjusted for inflation –appears to increase whenever prices go up
• real gdp: after adjustments for inflation -> measured with a set of constant base year prices (better for accurate comparisons)

Question 3

GDP does not…

Answer 3

-compositions of output: the types of products being produced
- quality of life impacts: the impact of production may have a negative impact on the quality of life or negatively impact the environment
- nonmarket activities: bc GDP does not count work around the home that a spouse or homemaker may provide,GDP states the total amount of productive activity in the economy

Question 4

measures of national income

Answer 4

-GDP,
-Net National Product,
- Personal Income
- disposable personal income

Question 5

GDP

Answer 5

the value of goods and services produced and supplied by US residents –> measure of total national income

Question 6

Net National Income

Answer 6

GNP minus deprication charges for wear and tear on equipment

Question 7

personal income

Answer 7

the total amount of income going to consumers before individual income taxes are subtracted

Question 8

disposable personal income

Answer 8

the total income after personal income taxes –> this is the total amount of money consumers are able to spend

Question 9

economic sectors and circular flows

Answer 9

-consumer sector,
- investment sector
- govt sector
- net foreign sector

Question 10

consumer sector

Answer 10

consists of all the people who occupy a house, apartment, or separate living quarters: group of 2plus people who are either related or unrelated: they have disposable personal income

Question 11

investment sector

Answer 11

made up of proprietorships, partnerships, and corporations–> responsible for producing the nations output

Question 12

govt sector

Answer 12

includes all local, state, and federal levels of govt–> recieves income from taxes

Question 13

net foreign sector

Answer 13

includes all consumers and producers outside the US–> buys many US goods and services that make up our GDP; Net exports of goods and services (foreign purchases)

Question 14

Business cycle

Answer 14

Expansion, peak, contraction, and trough

Question 15

phases of business cycle: recession

Answer 15

a period during which real GDP declines for at least 2 quarters in a row, or 6 consecutive months. Begins when the economy reaches a peak. It ends in a trough

Question 16

phases of business cycle: expansion

Answer 16

a period of recovery from a recession that involves increased real GDP, industrial production, real income, and employment lasting several years or more

Question 17

phases of business cycle: causes of the BC

Answer 17

• external stocks, changes in investment spendings,changes in monetary policy, fiscal policy shocks, speculation and bubbles

Question 18

population in the US

Answer 18

the constitution of the US requires the govt. to periodically take a census (an official count of all people living in the US)

Question 19

consequences of growth

Answer 19

• if a national pop grows faster than its output, the country could end up w more mouths to feed
• if a pop grows too slowly, there may not be enough workers to sustain economic growth
• a growing pop shifts toward certain areas, it puts diff pressures on existing resources

Question 20

measuring unemployment

Answer 20

civilian labor forces: the total amount of all people aged 16+ who are either 1) employed or 2) unemployed/actively seeking employment
unemployment persons: those who dont have a job
unemployment rate: the # of unemployed divided by the total # of people in the civilian labor force

Question 21

sources of unemployment

Answer 21

• frictional unemployment: where workers are in between jobs
• structural unemployment: caused by fundamental change in the economy
• technological unemplyment: occurs when workers are replaced by machines
  -cyclinal unemployment: directly related to swings in the business cycle-> goes up during economic downturns, goes down when the economy improves
• seasonal unemployment: resulting from seasonal changes in weather

Question 22

measuring prices and inflation: inflation

Answer 22

• inflation: when the general level of prices increase
• base year: year that serves as the basis of comparison for all other years

Question 23

Causes of inflation

Answer 23

• demand pull: everyone in the economy can produce (shortages-> increased prices)
• cost-push: rising input costs (costs to make a good / service) drive up the cost of products for mamufacturers and can cause inflation
• wage price spiral- a self perpetuating spiral of wages and prices becomes difficult to stop ( when you ask for higher wages, producers will recover that cost by increasing prices on goods/ services
• excessive monetary growth- when the money supply grows faster than real GDP (any extra $ will increase purchasing power –> when this extra is spent, it will cause a demand - pull effect

Question 24

consequences of inflation

Answer 24

• reduced purchasing power- the dollar buys less whenever prices rise and loses values over time –> this can be hard on retired people or those on fixed incomes bc their money buys less each month
• distorted spending patterns: inflation has a tendency to make people change their spending habits (if things cost more, you are less likely to buy)
• encouraged speculation_ inflation tempts some people to speculate in an attempt to take advantage of rising prices (buying a house before interest increases and it will later be worth more)
• distorted distribution of income- during long inflationory periods, creditors (lending $) generally hurt more than debtors (borrowing $) bc earlier loans are repaid later w dollars that buy less

Question 25

poverty

Answer 25

- poverty is the relative measure that depends on prices, the standard of living, and the incomes that others earns --> what may seem like poverty to one person may seem like richees to another - the poverty threshold- benchmark used to evaluate the incomee that people recieve --> if incomes are below the threshold, they are in poverty - distribution of income- economists are interested in finding out how income is distributed among households

Question 26

reasons for income inequality

Answer 26

- education- how much they have, less edu, less pay - wealth- some have more - tax law changes- marginal tax rates on high incomes have been lowered more than those on lower incomes - declines of unions- as heavy manufacturing declines in the US, union memberships fell, especially among less-skilled workers --> no longer many high paying jobs - more service jobs- industry converted from goods production to service production --> wages on typically lower in service industries such as restaurants and movie theaters - monopoly power- some white collar workers have a degree of monopoly power if they can affect the # of worker in their industry (doctors must have a medical school degree --> increased the income of doctors_ discrimination- women and men and executive jobs --> go to men - changing family structure- the shift from a two parent household to one... etc - mobility between quintiles: someone starting out in life may find themselves in the lowest quintities

Question 27

anti - poverty programs

Answer 27

- income assistance- programs that provide direct cash - gen assistance- programs that assist, but do not provide direct cash assistance - social service programs- child abuse prevention, foster care, family planning, job training, child welfare, and day care - tax credits- EITC provides federal tax credits and even cash to low income - enterprise zones- areas where companies can locate free of some local, state, and federal tax laws and other operating restrictions - workforce programs- a program in which welfare reciepients work for their benefits - negative income tax- a proposed type of tax that would make cash payments to certain groups below the poverty line (not in use today)