Unit 2 Flashcards by Shivangi S

Macroeconomics

study of economics as a whole

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Three major economic goals

Promote economic growth
Limit unemployment
Keep prices stable

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percent change in GDP

(Year 2 - Year 1)/Year 1*100

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GDP per capita

GDP divided by the population

measures the standard of living

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Why do some countries have higher GDPs?

Economic system
Rule of Law
Capital Stock
Human capital
Natural resources

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What is not included in GDP?

Intermediate goods
Nonproduction transactions (stocks, used goods)
Nonmarket and illegal activities

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Expenditures approach

add up spending on financial goods and services produced in a given year

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Income approach

Add up all the income that resulted from selling all final goods and services produced in a given year

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Three components of consumer spending

Durable goods (washing machines)
Non-durable goods (food, clothes)
Services (dental work, repairs)

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Investment

when businesses buy capital

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does GDP include real estate?

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Income approach

income earned from selling all final goods and services PRODUCED in a given year

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What types of income are included in GDP?

Labor income
Rental income
Interest income
Profit

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What’s wrong with nominal GDP?

It doesn’t account for inflation

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Why is real GDP better?

It adjusts for inflation

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How do you calculate real GDP?

Base year $*quantity

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How do you calculate nominal GDP?

Current year $*quantity

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What is the best measure of economic growth?

real GDP

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Problems with GDP

Disasters increase spending
Wage gap messes it up
Does not take time into account
Not a perfect measurement
Inflation could increase GDP

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upwards slope on business cycle

recovery

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downwards slope on business cycle

recession

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gaps above the full employment line in the business cycle

inflationary gap

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gaps below the full employment line

recessionary gap

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How long is a recession?

6 months

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Unemployment rate formula

(# unemployed/# in labor force)*100

People in the labor force are...

at least 16 able and willing to work Not institutionalized (jail) Not in military, in school full time or retired

Three types of unemployment

Frictional unemployment Structural Unemployment Cyclical Unemployment

Frictional unemployment

Temporary unemployment or being between jobs

Structural Unemployment

Changes in the labor force make some skills obsolete

Cyclical Unemployment

Unemployment caused by a recession

How much unemployment is at the full employment line?

4-6%

Why is zero unemployment bad?

Frictional and structural unemployment are present at all times because people will always be between jobs or replaced by technology

NAIRU(Non-accelerating inflation rate of unemployment)

focuses on inflation and not having too little unemployment

NRU

frictional + structural unemployment

non-accelerating

low unemployment that doesn’t cause higher prices

Why is the unemployment rate criticized?

Can misdiagnose the actual unemployment rate Labor Force participation rate Underemployed workers Race/Age inequalities

Who is hurt by inflation?

lenders people with fixed incomes savers

Who is helped by inflation?

borrowers

nominal wage

wage measured by dollars rather than purchasing power

real wage

wage adjusted for inflation

Costs of inflation

Menu costs Shoe Leather costs Unit of account costs

Menu costs

the real cost of changing listed prices

Shoe leather costs

the increased costs of transactions

unit of account costs

currency is no longer reliable as a way of measuring value

Consumer Price Index formula

(price of market basket/price of market basket in base year)*100

GDP deflator formula

(nominal GDP/real GDP)*100

GDP deflator

measures the prices of all goods produced

Quantity Theory of Money Equation

Money supply * velocity = price level * quantity of output

Quantity Theory of Money

Governments that keep printing money to pay debts end up with hyperinflation

Why is velocity constant?

people’s spending habits are not quick to change

Three causes of inflation

Govt prints too much money Demand-pull Inflation Cost-Push Inflation

Demand-Pull Inflation

demand pulls up prices

Cost-Push Inflation

Higher production costs increase prices

Real interest rate formula

nominal interest rate - expected inflation

Nominal interest rates

real interest rate + expected inflation

Why doesn't CPI measure the true cost of inflation?

Improvements in the quality of goods or services is not fully reflected

Problems with CPI

Substitution bias New product Product quality

If the real interest rate is +

good for the lender

If the real interest rate is negative

bad for the lender

Does inflation reduce income?

not necessarily

How do you calculate market basket?

$ x quantity

Unit 2 Flashcards

(61 cards)