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GDP, Unemployment and Inflation Test Review
Terms in this set (52)
State the purposes of macroeconomic measurement.
measures level of economic performance at a point in time and explains immediate cause of that level of performance, compares economic conditions over time, provides a basis for formulating public policies to improve economic performance
amount by which actual GDP falls short of potential GDP -- economy fails to create enough jobs for labor force, so potential production of goods/services is lost
For every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a GDP gap of about 2 percent occurs.
Rule of 70
approx. # yrs required to DOUBLE real GDP = (70/annual % rate of growth)
full employment, price stability, economic growth
(as of 1992) gross domestic product, measures total market value of all final goods/services produced in the economy in 1 year -- total output produced within the US (domestic AND foreign owned resources)
(until 1992) gross national product, measures total market value of all final goods/services produced in the economy in 1 year -- total output produced by Americans (domestic AND abroad)
final goods and examples
not used as inputs into production of another good/service, bought by their final users (ex: car, RC car, iPhone)
intermediate goods and examples
used as inputs into production of another good/service (ex: windshields, batteries, SIM card)
Explain the value-added approach to calculating GDP.
value of final product sold by a firm minus the value of the intermediate products (materials) purchased and used by the firm to produce the product --> avoids double-counting
What is the importance of double-counting when calculating GDP?
drastically distorts value of GDP --> inaccuracies are not helpful for evaluating progress toward macroeconomic goals
components of GDP (expenditure approach)
(C+I+G+Xn) C = personal consumption expenditures on durables, non-durables and services; I = gross private domestic investment in capital goods; G = government purchases; Xn = net exports (exports-imports)
components of GDP (income approach)
(emplyee wages + rental income + interest + proprietors income + corporate profits + depreciation + indirect business taxes) - American income earned abroad
What does GDP include and examples?
sale of final goods
What does GDP not include and examples?
sale of intermediate goods, non-market production, changes in product quality, disproducts, unreported tips/sales, bartering and illegal activities, purely financial transactions such as public transfer payments (SS), private transfer payments ($ and gifts), securities transactions (stocks and bonds), secondhand sales (not current output)
adults 16 and older who are able and willing to work, employed and unemployed BUT actively seeking work
= (unemployed/labor force)x100
How is unemployment measured by the Bureau of Labor Statistics (BLS)?
percentage of labor force unemployed (without a job)
What are the strengths of BLS unemployment statistics?
gives a basic idea of natural rate of unemployment, current rates and highest recorded rate
What are the limitations of BLS unemployment statistics?
discouraged workers (jobless) are not counted, all part-time workers are considered fully employed
natural rate of unemployment (NRU)
economy is producing its potential output, real GDP when economy is fully employed, job seekers = job vacancies
What is the cause of frictional unemployment?
(search unemployment and wait unemployment) workers who are either searching for jobs or waiting to take jobs in the near future -- labor market does not operate perfectly in matching workers and jobs
What is the cause of structural unemployment?
(compositional unemployment) changes over time in consumer demand and in technology alter structure of total labor demand -- skills become obsolete
What is the cause of seasonal unemployment?
certain goods/services are only useful during certain seasons of a year or set of years, when the market changes with the seasons, that particular product falls out of demand, putting producer in "unemployment" (ex: Christmas tree farms are seasonally unemployed during June.)
What is the cause of cyclical unemployment?
(deficient-demand unemployment) decline in total spending, occurs during recession phases, fall in demand for goods/services causes rise in unemployment
economic costs of unemployment
loss of output and income, decreased quality of human capital if unemployment is prolonged, increased crime rate, loss of self-esteem
What problems are associated with unemployment rates below the natural rate?
GDP gap (Okun's law), burdens are unequally distributed, social disasters
general rise in level of prices (not b/c of one-time shock, not all at the same time)
general decline in level of prices (rare, indicating serious recession)
decrease in inflation rate, sign of healthy economy
Why do we measure inflation?
allows you to tell if your real income rose or fell in given year
consumer price index (CPI)
most widely reported measure of inflation for cost of living, measures market basket of about 300 goods/services purchased by urban family of four
income adjusted for inflation (more accurate than nominal)
income in terms of price level at the time of measurement (less accurate than real)
spending increases faster than output can keep up with -- "too many dollars chasing too few goods"
results from increase in costs that causes producers to produce less
expected rate inflation
(1-2%) caused by rising resource costs
extremely rapid rise in prices, very rare
How is a price index calculated?
(current-year cost/base-year cost) x100
How is real GDP/income found using nominal data and the use of price index?
real GDP = nominal GDP/ (price index/100)
Who is hurt by inflation?
fixed-income recipients, savers, and creditors -- redistributes real income away from them and toward others
Who is helped by inflation?
flexible-income recipients, debtors -- redistributes real income toward them and away from others
Explain the historical causes of economic growth in the US.
technological progress, rapid increases in productive capacity, achieved the highest standard of living in the world, complicated by unemployment and inflation
recurrent ups and downs in the level of economic activity that extends over several years, phases vary greatly in duration and intensity
(prosperity) spending and income at temporary maximum, output (GDP) at full-employment, unemployment at the natural rate, price level (inflation rate) high
internal causes of the business cycle
consumer spending, investment spending, government spending, net exports (exports-imports) -- GDP = C+I+G+Xn
external causes of the business cycle
population changes, inventions/innovations, wars/political events
(contraction) decreases in spending, output (GDP), income and price level (inflation rate), increases in unemployment
(only depression if very prolonged) spending and income bottom out, output (GDP) at lowest levels, unemployment at highest levels, price level (inflation rate) at expected rate
(expansion), increases in spending, output (GDP), income and price level (inflation rate), decreases in unemployment
government program, employer contributes on your behalf, acts as income replacement program for limited time should you become faultlessly unemployed (laid off)
producer price index (PPI)
reports on resource prices to producers, leading indicator of consumer prices
Recommended textbook explanations
Cambridge IGCSE Business Studies
Karen Borrington, Peter Stimpson
William A. McEachern
Gary E. Clayton
Principles of Economics
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