Unit 2- Measurement of Economic Performance Flashcards
(106 cards)
1
Q
Macroeconomics
A
The study of the large economy as a whole
- analyze everyone and all businesses
2
Q
Macroeconomics made to
A
- Measure the health of the whole economy
2. Guide government policies to fix problems
3
Q
3 Major Economic Goals
A
- Promote Economic Growth
- Limit Unemployment
- Keep prices stable (limit inflation)
4
Q
GDP- Gross Domestic Product
A
The dollar value of all final goods and services produced within a country’s borders in 1 year
- measured in dollars
5
Q
What does GDP tell us?
A
Measures how well the US is doing financially
6
Q
How do you use GDP?
A
- Compare to previous years (is there growth?)
- Compare to policy changed (Did a new policy work?)
- Compare to other countries (Are we better off?)
7
Q
How can you measure growth from year to year
A
Change in GDP = (year 2-year 1)/year 1 X 100
8
Q
What is not included in GDP?
A
Intermediate goods, non production transactions (old cares, used clothes)., and non-market activities (illegal drugs, etc.)
9
Q
Expenditures Approach
A
Add up all the spending on final goods and service produced in a given year
10
Q
Income Approach
A
Add up all the INCOME that resulted from selling all final goods and services produced in a given year
11
Q
Expenditures Approach and Income Approach both…
A
Generate same amount since every dollar spent is a dollar of income
12
Q
What makes up GDP?
A
Consumer spending, Investments, Gov spending, Net Exports (exports-imports)
GDP= C+I+G+Xn
13
Q
The Problem with GDP
A
INFLATION!
14
Q
Nominal GDP
A
GDP measured in current price, it does not account for inflation from year to year
15
Q
Real GDP
A
Real GDP is the best measure of economic growth
- “deflates” nominal GDP by adjusting for inflation in terms of base year prices
16
Q
Real GDP per Capita (per person)
A
Real GDP per Capita is real GDP divided by the total population it identifies on average how many products each personal make
- best measure of Standard of living
17
Q
Why do some countries have a higher GDPs han others?- PRODUCTIVITY
A
- Economic System
- Property Rights
- Capital
- Human Capital (knowledge )
- Natural Resources
18
Q
Unemployment Rate
A
The percent of people in the labor force who want a job but are not working
19
Q
Unemployment Rate Equation
A
Unemployment Rate= (# unemployed)/(# in labor force) X 100
20
Q
Who is in the labor force?
A
- Above 16 years old
- Able and willing to work
- Not institutionalized (jails, hospitals)
- Not in military, school full time, or retired
21
Q
3 types of Unemployment
A
- Frictional Unemployment
- Structural Unemployment
- Cyclical Unemployment
22
Q
Frictional Unemployment
A
- Temporarily unemployed or being in between jobs
- individuals are qualified workers its transferable skills
Seasonal Unemploy.
23
Q
Structural Unemployment
A
- Changes in the structure of the labor force make some skills obsolete
- Workers do not have transferable skills and these jobs will never come back
- ex. VCR repairman
24
Q
Cyclical Unemployment
A
- results from economic downturns (recessions)
- as demand for goods and services falls, demand for labor falls and workers are fired
25
The Natural Rate of Unemployment
Struct. And Fric. Are unavoidable forms of unemployment, together they make up the natural rate of unemployment
26
We are at full employment when...
We have only the natural rate of unemployment that we SHOULS have
- number of job vacancies = number of job seekers
- NO cyclical unemployment
27
Natural Rate of Unemployment is about...
4-6%
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Okun’s Law
When unemployment rises 1% above the natural rate, GDP falls by about 2%
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What happens if there is unemployment benefits?
There is no incentive o begin to work hence the 8% to 10% unemployment in Germany/France
30
What is inflation?
Inflation is rising of general level of prices
- reduces the “purchasing power of money”
- when inflation occurs, each dollar of income will buy fewer goods than before
31
Is a rise in prices automatically a bad thing?
Not if wages go up with them
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Real Wage Equation **
Wage rate/price level
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Real Income **
Income/price lvl
34
Shoe Leather cost ***
Increased cost of transactions caused by inflation
| - basic ideas of prices going up
35
Menu Costs ***
real cost fo changing listed prices
| - reprint menus
36
Unit of Account Cost ***
The way inflation makes money less reliable unit of measurement
37
How is inflation measured?
The government tracks the prices of the same goods and services each year
- this market basket is made up of about 300 commonly purchased goods
38
Inflation Rate
% change in prices to a given base year (usually 1982)
39
Hyperinflation
monetary inflation occurring at a very high rate.
40
Real Interest Rate
The percentage increase in purchasing power that a borrower pays (adjusted for inflation)
41
Real interest rate equation
Real = nominal interest rate-expected inflation
42
Nominal Interest Rate
The percentage increase in MONEY that the borrower pays not adjusting for inflation
43
Nominal interest rate equation
Nominal= real interest rate+expected inflation
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Hurt by Inflation
- Lenders people who lend money (at fixed interest reates)
- people with fixed incomes
- savers
45
Helped by Inflation
- Borrowers- people who borrow money
| - a business where the price of the product increases faster than the price of resources
46
Cost of Living Adjustment (COLA)
- some world have salaries that mirror inflation
| - thy negotiated wages that rise w/inflation
47
Consumer Price Index (CPI) ***
The most commonly used measurement for inflation
48
How CPI works
- the base year is given an index of 100
| - to compare, each year is given an index # as well
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Consumer Price Index Equation
CPI= (Price of Market Basket)/(Price of market Basket in Base Year) X 100
50
Problems with Consumer Price Index
1. Substitution Bias
2. New Products
3. Product Quality
51
Substitution Bias
As prices increase for the fixed market basket, sonsumers buy ess of these products adn more substitutes may not be part of the market basket
- Result: CPI may b higher than what consumers are really paying
52
New Product
The CPI market basket may not include the newest consumer products
- result: SPI measures prices but not the increase in choices
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Product Quality
The CPI ignores both improvements and decline in product quality
- results: CPI may suggest that prices stay the same through the economic well being has improved significantly
54
CPI vs GDP Deflator
The GDP deflator measures the prices of all goods produced, whereas CPI ensures prices of only the goods/services bought by consumers
55
GDP includes
Only those goods/services produced domestically, imported goods aren’t part of GDP therefore don’t show up in GDP deflator
56
GDP Deflator Equation
GDP Deflator= (Nominal GDP)/(Real GDP) X100
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3 causes of Inflation
1. The Gov Prints too much money (the quantity theory )
2. Demand- Pull Inflation
- demand increases but supply stays the same therefore a shortage, driving prices up
3. Cost-Push Inflation
- Higher Production costs increase prices
— A negative supply shock increases the costs of production and forces producers to increase prices (Hurricane Katrina)
58
The Wage-Price Spiral
Workers demand raises
Owners increases prices to pay for raises
Workers demand rises
Owners increases prices to pay for raises
Etc....
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Achieving the 3 goals
The government role is to prevent unemployment and prevent inflation at the same time
- if gov focuses too much on preventing inflation and slows down Econ we will have unemployment and vise versa
60
National Income and Product Accounts (national accounts)
Keeps track of the spending of consumers, sales of producers, business investment spending, government purchases and a variety of other floes of money
61
Circle Flow Diagram
Simplified representation of the macroeconomy
- shows the flows of money, good, and services, and factors of production
- flow of physical things and money to pay for things
- household and firms
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Household
Consists of an individual or group of people who share income
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Firm
is an organization that produces goods/services for sale- and employs members of households
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Product Markets
Where goods/services are bought and sold
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Factor Markets
Where resources, especially capital and labor are bought and sold
66
Stock
A safe in the ownership of a company held by a shareholder
67
Bond
A loan in the forms of a loan that pays interest
68
Government purchases of goods and services
Total expenditures on good and services by federal, state and local gov.
69
Exports
Where goods are sold
70
Imports
Goods/services bought from other countries
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Inventories
Are stocks of good and raw materials held to facilitate business operations
72
Investment spending
Spending on a new productive physical capital, such as machinery and structures and on changes in inventories
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Final goods and services
Are goods/services sold to the final or end, user
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Intermediate goods and services
Goods/services bought from 1 firm by another firm to be used as inputs into the production of a final good
75
Income approach
calculating GDP by adding up the total factor income earned by household fro firms in the economy, including vent, wages, interests, and profits
76
The circular flow diagram is a simple model of the macroeconomy in which..
Households own the factors of production
77
Which component makes up the largest % of the GDP measure by aggregate spending?
Consumer spending
78
Aggregate output is another name for...
GDP- the total quantity of final goods and services produced with an economy
79
Chain-linking
Is the method of calculating changes in the real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using late base year
80
US Stats on real GDP always expressed in...
Chained dollars
81
Real GDP doesn’t measure
- how output is used
- quality of life
- how income is distributed
82
What is true of real GDP?
It is adjusted for inflation and increases whenever aggregate output increases
83
What is the best measure for comparing a country;s output over time?
Real GDP
84
Job Separations
Terminations of employment that occurred because a worker was either fired or quit voluntarily
85
Job Search
When workers spend time looking for employment
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Minimum Wage
Gov mandated floor on price of labor
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Labor Unions can often..
Higher wages from employers than workers who bargain individually
- knob as collective bargaining
88
Efficiency Wages
Wages that employers set above equilibrium wage rate as an incentive for better employment performance
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Causes of change in natural rate of unemployment
Changes in Labor Force
Changes in Labor Market Institutions
Changes in Gov Policies
90
A person took 2 months to find a new job experienced which type of unemployment?
Frictional
91
What type of unemployment is created by a recession?
Cyclical
92
A person who is unemployed because fo a mismatch between quantity of labor supplied and demanded is experiencing...
Frictional
93
Inflation Rate Equation
Inflation Rate= Price lvl in yr 2-price level in yr 1/price level in yr 1 X 100
94
Unit of Account Costs
Arrise from the way inflation makes money a less reliable unit of measurement
95
Disinflation
The process of bringing inflation Rate frown
| -very difficult and costly once a high rate of inflation has become well establish in the Econ
96
What is true regarding prices in an Econ?
An increase in the price level is called inflation
The level of prices doesn’t matter
The rate of change in prices matters
97
If your nominal wage doubles t the same time as prices doubles, your real wage will...
Not change
98
If inflation causes people to frequently convert their dollars into other assets, the Econ expenses what type of cost?
Shoe-leather
99
Because dollars are used as the basis for contracts inflation leads to which type of cost?
Unit of account
100
Changing the listed price when inflation leads to a price increase is an example of which type of cost?
Menu
101
Aggregate price level
A measure of the overall level of prices in the economy
102
Price Index
Measures the cost of purchasing a given market basket in a given year
103
What is true of the CPI?
1. It’s the most common measure of the price level
2. It measures the price of a typical market basket of goods
3. Currently uses a base period of 1982-84
104
The value of a price index in the base year is...
100
105
If your wage doubles at the same time CPI goes from 100 to 300, your real wages...
Falls
106
Aggregate Spending
total spending on domestically produced final goods and services in the economy
