Ii. Economic Measures & Indicators

Front 1

What are the 4 most popular Economic Measures?

Back 1

1) Real Gross Domestic Product (Real GDP)

2) the unemployment rate

3) the inflation rate

4) interest rates

Front 2

What is The National Income & Product Accounting (NIPA)?

Back 2

• a system developed by the U.S. Department of Commerce to moitor the health & performance of the U.S. Economy
• the two methods for measuring GDP, Expenditure Approach & Income Approach are calculated being NIPA

Front 3

What is GDP?

Back 3

the total dollar value of all new final goods & services produced within the economy in a given period

Front 4

What are the 4 sectors of GDP?

Back 4

1) Households (or consumers)

2) Business

3) Federal, State & Local Governmends

4) The foreign sector

Front 5

What are the 2 methods of measuring GDP?

Back 5

1) Expenditure Approach (GICE)

2) Income Approach (IPIRATED)

Front 6

What are the 4 components of the Expenditure Approach?

(GICE)

Back 6

Government purchases of goods & services

+ gross private domestic Investment

+ personal Consumption

+ net Exports

= GDP

Front 7

What are the 8 components of the Income Approach?

(I PIRATED)

Back 7

Income of propreitors

+ Profits of corporations

+ Interest (net)

+ Rental income

+ Adjustments for net foreign income & misc items

+ Taxes (indirect business taxes)

+ Employee compensation (wages)

+ Depreciation (capital consumption allowance)

Front 8

What are the Expenditure Approach & the Income Approach used for?

Back 8

used to prepare an "income statement" for the domestic economy (the GDP)

Front 9

What is the difference in the Expenditure Approach & the Income Approach?

Back 9

• the Expenditure Approach is a flow of product approach (at market prices)
• the Income Approach is a flow of earning & other resources that generate domestic income

Front 10

What are the 6 other common measures of National Income?

Back 10

1) Net Domestic Product (NDP) = GDP - depreciation

2) Gross National Product (GNP) = value of final goods & services produced by residents of a country

3) Net National Product (NNP) = GNP - economic depreciation (losses in the value of capital goods due to age & wear)

4) National Income (NI) = NNP - indirect business taxes (sales taxes)

5) Personal Income (PI) = hoseholds + noncorporate businesses

6) Disposable Income (DI) = personal income - personal taxes

Front 11

What is the Unemployment Rate?

Back 11

the ratio of the # of people classified as unemployment to the total labor force

Front 12

Who is included in the Total Labor Force?

Back 12

all non-institutionalized individuals 16 years of ago or older who either are working or are actively looking for work

Front 13

What is the Unemployment Rate formula?

Back 13

(# of unemployed/total labor force) x 100

= Unemployment Rate

Front 14

What are the 4 types of Unemployment?

Back 14

1) Frictional

2) Structual

3) Seasonal

4) Cyclical

Front 15

What is Frictional Unemployment?

Back 15

• normal unemployment resulting from workers routinely changing jobs or from workers being temporatily laid off
• the unemployment that arises because of the time needed to match qualified job seekers with available jobs

Front 16

What is Structual Unemployment?

Back 16

occurs when:

• jobs available in the market do not correspond to the skills of the workforce
• unemployed workers do not live where the jobs are located

Front 17

What is Seasonal Unemployment?

Back 17

the result of seasonal changes in the demand & supply of labor

Front 18

What is Cyclical Unemployment?

Back 18

• the amount of unemployment resulting from declines in real GDP during periods of contraction or recession
• when Real GDP is below the potential level of output, Cyclical Unemployment is positive
• when Real GDP is above the porential level of output, Cyclical Unemployment is negative
• thus, Cynical Unemployment rises during a recession & falls during an expansion

Front 19

What is the Natural Rate of Unemployment?

Back 19

• the "normal" rate of unemployment around which the unemployment rate fluctuates dur to cyclical unemployment
• the sum of frictional, structual, & seasonal unemployment
• or, the employment rate that exists when the economy is at its potential output level

Front 20

What is Full Employment?

Back 20

• the level of unemployment when there is no cylical unemployment
• does not mean 0 unemployment
• when the economy is operating at full employment, there is still frictional, structual, & seasonal unemployment

Front 21

What is Inflation?

Back 21

• a sustained increase in the general prices of goods & services
• it occurs when prices on average are increaseing over time
• increase in AD or decrease in AS

Front 22

What is Deflation?

Back 22

• a sustained decrease in the general prices of goods & services
• occurs when prices on average are falling
• decrease in AD or increase in AS

Front 23

How is Inflation/Deflation measured?

Back 23

typically measured as the % change in the consumer price index (CPI) from one period to the next

Front 24

What is the Consumer Price Index (CPI)?

Back 24

a measure of the overall cost of a fixed basket of goods & services purchased by an average household

Front 25

What is the CPI formula?

Back 25

(current cost of market basket/base year cost of market basket) x 100

= CPI

Front 26

What is the Inflation formula?

Back 26

((CPI this period - CPI last period)/CPI last period) x 100 = Infaltion Rate

Front 27

What is the Producer Price Index (PPI)?

Back 27

measures the overall cost of a basket of goods & services typically purchased by firms

Front 28

What causes Inflation/Deflation?

Back 28

• a rightward shift in the aggregate demand curve will cause the price level to rise, leading to inflation
• a leftward shift in the short-run aggregate supply curve will also cause the price level to rise, leading to inflation

Front 29

What is Demand-Pull Inflation?

Back 29

• caused by increases in demand
• thus, could be caused by factors such as:

1) increases in government

2) decrease in taxes

3) increase in wealth

4) increase in the money supply

Front 30

What is Cost-Push Inflation?

Back 30

• caused by reductions in short-run aggregate supply
• thus, could be caused by factors such as:

1) an increase in oil prices

2) an increase in nominal wages

Front 31

How is Inflation related to Puchasing Power?

Back 31

• inflation has an inverse relationship with purchasing power
• as the price level rises, the value of $ (purchasing power) decline

Front 32

What are Monetary Assets & Liabilities?

Back 32

Monetary A&L (cash, AR, NP, etc.) are fixed in dollar amount regardless of changes in specific prices or the general price level

Front 33

What are NonMonetary Assets & Liabilities?

Back 33

NonMonetary A&L (a building, land, machinery, rent collected in advance, etc.) will fluctuate with inflation and deflation

Front 34

Holding Monetary Assets

Back 34

• during a time of inflation, those with a fixed amount of money or income (retired people) will be hurt
• their purchasing power will be eroded
• similarly, firms that loan $ at fixed interest rates are likely to be hurt by inflation

Front 35

Holding Monetary Liabilities

Back 35

• during a time of inflation, those with a fixed amount of debt (those with home mortgages) will be aided
• the debt will be repaid with inflated dollars
• thus, inflation also tends to benefit firms with large amount of outstanding debt

Front 36

What is the Phillips Curve?

Back 36

illustrates the inverse relationship between the rate of inflation & the unemployment rate

Front 37

What is the budget?

Back 37

the budget is the federal government's plan for spending funds & raising revenues through taxation, fees, & other means (& for borrowing funds if necessary)

Front 38

Budget Deficit

Back 38

occurs when a country spends more than it takes in

Front 39

How are Budget Deficit's financed?

Back 39

• by government borrowing, which affects interest rates
• by producing new money, but this causes inflation

Front 40

What is a Budget Surplus?

Back 40

occurs when government revenues exceed government spending during the year

Front 41

What is the Nominal Interest Rate?

Back 41

• the amount of interest paid (or earned) measured in current dollars
• NOT adjusted for inflation

Front 42

What is the Real Interest Rate?

Back 42

• a measure of the purchasing power of interst earned or paid
• nominal interest rate - the inflation rate

Front 43

Real Interest Rate Formula

Back 43

Nominal Interest Rate

- Inflation Rate

= Real Interest Rate

Front 44

Nominal Interest Rate Formula

Back 44

Real Interest Rate

+ Inflation Rate

= Nominal Interest Rate

Front 45

Money

Back 45

the set of liquid assets that are generally accepted in exchange for goods & services

Front 46

Money Supply

Back 46

the stock of all liquid assets available for transactions in the economy at any given point in time

Front 47

M1

Back 47

• money that is used for purchases of goods & services
• includes coins, currency, checkable deposits, & travelor's checks
• does not include savings accounrs or CD's

Front 48

M2

Back 48

• M1 plus liquid assets that cannot be used as a mediu of exchange but that can be converted easily into checkable deposits or other components
• includes CD's less than $100,000, money market deposit accounts, mutual fund accounts, & savings accounts

Front 49

M3

Back 49

includes all items in M2 as well as time certificates of deposit of $100,000 or more

Front 50

Monetary Policy

Back 50

• the use of the money supply to stabilize the economy
• the Federal Reserve uses Monetary Policy to increase or decrease the money supply in an effort to promote price stability & full employment

Front 51

Open Markey Operations

Back 51

• consist of the purchases & sale of government securities (treasury bills & bonds) in the open market by the Federal Reserve as a means to expand or contract the existing money supply
• most common method used by the Federal Reserve to impacy monetary policy

Front 52

What happens when the Federal Reserve purchases government securities?

Back 52

• it increases the money supply
• puts money into circulaion to pay for the securities
• MS up, IR down, AD up

Front 53

What happens when the Federal Reserve sells government securities?

Back 53

• it decreases the money supply
• takes money out of circulation
• MS down, IR up, AD down

Front 54

Discount Rate

Back 54

• the interest rate the Federal Reserve charges member banks for short-term (normally overnight) loans
• raising the discount rate = discourages borrowing by member banks & decreases the money supply
• lowering the discount rate = encourages borrowing by member banks & increases the money supply

Front 55

Required Reserve Ratio

Back 55

• the fraction of total deposits banks must hold in reserve (cannot loan)
• raising the required reserve = decreases the money supply
• lowering the required reserve = increases the money supply