Unit 2 Flashcards
(49 cards)
Four Factors of Production
- Land: raw materials + natural resources
- Labor: humans
- Capital: man-made resources used to produce other goods (physical/human)
- Entrepreneurship: managers/creators of the product
What does the circular flow model tell us about spending and income?
Total spending = total income
3 Primary Indicators of Macroeconomics
-GDP = indicator of economic growth
-Unemployment rate = indicator of employment
-Inflation = indicator of stable price level
Definition of GDP
the market value of all final goods and services produced within a country in one year
Intermediate Goods
Goods that are inputs for production of final goods (not counted in GDP)
Final Goods
Goods sold to final end user (counted in GDP!)
3 Ways to Measure GDP
- Total Expenditures: Sum of all spending on final goods + services: C + I + G + (X - M)
- Total Income: Sum of all income earned from the production of goods + services: Wages + Rent + Interest + Profit (WRIP)
- Total Value Added: Sum of value added at each stage of the production process
Consumption
Spending of disposable income
1. Durable goods = goods for long-term use
2. Non-Durable goods = goods w/ shorter life span
3. Services
Consumption = largest GDP component
Investment
Spending on Capital Goods! / physical investments needed to produce products
-Capital stock = newly produced capital goods to run a business replacing machinery doesn’t count
-Newly constructed homes = counted as investment, not consumption b/c it can be rented out
-Inventories = business’ surpluses that haven’t been sold
-What doesn’t count: stocks + bonds b/c they don’t actually make anything
Government Expenditures
Federal, state, and local funding
-Gov receives taxes as income —> uses for national defense, schools, and roads
-Gov makes transfer payments
–> pay money w/o return
–> excluded from GDP
–> ex: SS, Unemployment + welfare benefits
Net Exports
-Open economy = economy that engages in international trade
-Net exports = X-M
-GDP ONLY includes goods + services produced domestically
GDP per capita
-The average spending and income of someone in the economy
-GDP/population
-Most common measure used to represent standard of living
Limits of GDP
GDP is only a measure of wealth, not society’s health.
-Quality of Education, Patriotism, and LOVE are not included in GDP calculations
-Factories that produce pollution, weapons, and jails are included in GDP calculations
Nominal vs. Real GDP
nominal = current output in current year’s prices, not adjusted for inflation
real = current output in base year prices, adjusted for inflation
How can nominal GDP increase (2 ways)? How can real GDP increase (1 way)?
-nomGDP can increase w/ inflation and inc in goods + services.
-rGDP can only increase w/ increase in goods + services.
How do we measure growth?
%change = change / original x 100
Adult Population/Working-Age Population
All people 16+ excluding those who are in the military or institutionalized
Employed
Working as a paid employee full or part time
Unemployed
Does not have a job but is available to work and has looked for work in last 4 weeks
Not in Labor Force
Any adult in the working-age population but not in the other 2 categories (Ex: students, retirees, homemaker)
Labor Force
Employed + Unemployed
Unemployment Rate
Unemployed / Labor Force x 100
Labor Force Participation Rate
Labor Force / Adult Population x 100
Common Critiques of the Unemployment Rate
-Discouraged workers: people who gave up looking for work
-Underemployment: part time workers who would prefer full time
