GDP and unemployment and Inflation Flashcards
(30 cards)
What does GDP measure and why is it used in macroeconomics?
Gross Domestic Product (GDP) measures the total market value of all final goods and services produced within a country’s borders in a given time period. It is a key indicator of economic health, used to compare economic productivity and living standards across time and countries.
Explain the difference between final and intermediate goods in GDP.
Final goods are purchased by the end user and included in GDP to avoid double-counting. Intermediate goods are used to produce final goods and are not separately counted. E.g., flour sold to a bakery is intermediate; bread sold to a consumer is final.
How does the expenditure approach calculate GDP?
By summing consumption (C), investment (I), government spending (G), and net exports (NX). Formula: GDP = C + I + G + (X - M). This shows total spending on a nation’s goods and services.
Why is investment important in GDP calculations?
Investment includes spending on capital goods that help future production (e.g., machinery, buildings). It reflects how much the economy is expanding its productive capacity.
What are the limitations of GDP as a measure of economic well-being?
GDP ignores inequality, non-market activity (e.g., unpaid work), environmental degradation, leisure, and quality of life. It may rise even if living standards fall for many people.
What is the GDP deflator and how does it compare to CPI?
The GDP deflator measures the level of prices of all new, domestically produced goods and services. Unlike CPI, it adjusts automatically to changes in the economy’s composition and doesn’t use a fixed basket of goods.
What are the three approaches to calculating GDP?
1) Expenditure approach (spending), 2) Income approach (earnings from production), and 3) Production/value-added approach (total output minus intermediate inputs). All should yield the same GDP value.
What is the difference between nominal GDP and real GDP?
Nominal GDP values output using current prices. Real GDP uses constant base-year prices to remove the effect of inflation, allowing better comparisons over time.
Why is real GDP a better indicator of economic performance than nominal GDP?
Because it accounts for inflation. An economy might seem to grow based on nominal GDP, but real GDP reveals if the growth is due to increased output rather than rising prices.
Define the unemployment rate and how it is calculated.
The unemployment rate is the percentage of the labor force that is jobless and actively looking for work. Formula: Unemployment Rate = (Unemployed / Labor Force) × 100.
What are the three main types of unemployment?
Frictional (short-term, between jobs), structural (mismatch of skills and jobs), and cyclical (caused by economic downturns). These help diagnose labour market issues.
What is the natural rate of unemployment?
The unemployment rate when the economy is at full capacity. Includes frictional and structural unemployment but not cyclical. It reflects healthy job turnover.
What are the social and economic costs of unemployment?
Economic: Lost output and tax revenue. Social: Increased crime, mental health issues, and inequality. Prolonged unemployment can reduce long-term employability.
How do discouraged workers affect the unemployment rate?
They are not counted as unemployed because they have stopped looking for work. This can understate the true level of labor underutilization.
What is inflation and how is it measured?
Inflation is the rate at which the general level of prices rises. Measured using indices like the CPI (Consumer Price Index), which compares the cost of a fixed basket of goods over time.
Explain cost-push inflation with an example.
Occurs when production costs rise (e.g., wage increases, oil price hikes), leading firms to raise prices. Example: 1970s oil shocks raised energy prices, increasing overall inflation.
Explain demand-pull inflation with an example.
Caused by excessive demand in the economy. When aggregate demand outpaces supply, prices rise. Example: Stimulus-fueled demand post-COVID led to price surges in housing and goods.
What are shoe-leather costs of inflation?
Costs associated with minimizing cash holdings during inflation (e.g., more frequent trips to the bank). Analogy: Wearing out your shoes from running back and forth to protect your money’s value.
What are menu costs of inflation?
The costs of changing prices frequently (e.g., reprinting menus, updating systems). Particularly burdensome during high inflation.
What is hyperinflation?
An extremely high and typically accelerating inflation, often above 50% per month. Example: 1920s Germany, 2018 Venezuela—prices skyrocketed, currency value collapsed.
What is indexing and how does it mitigate the impact of inflation?
Indexing adjusts wages, pensions, and contracts to maintain purchasing power as prices rise. Prevents ‘bracket creep’ and maintains real incomes.
Explain the difference between nominal and real interest rates.
Nominal interest rate is the stated rate. Real interest rate = nominal rate - inflation. Real rate reflects true gain in purchasing power. Fisher Equation: r = i - π.
How does unexpected inflation redistribute wealth?
It harms lenders (they are repaid with money worth less) and benefits borrowers. Also reduces real wages if wages aren’t indexed. Analogy: Like agreeing on a debt in gold and being repaid in chocolate coins.
What is the Fisher Effect?
The tendency of nominal interest rates to rise with expected inflation, keeping real interest rates stable. Helps lenders anticipate inflation impacts.
