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147 Cards in this Set

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Total final value of goods and services produced in a country within a specific period of time

Gross domestic product (GDP)

What is USA's current GDP?

16.3 trillion

What is the equation to calculate GDP?

GDP = Consumer spending + Business spending + Government spending + Net exports

What is the formula to calculate net exports?

Exports - Imports = Net exports

The spending of households on goods and services, with the exception of new housing is what? Examples?

Consumption or consumer spending




Examples:


1. Durable goods (automobiles, appliances)


2. Non-durable goods (clothing)


3. Some intangible services

What are the different types of consumption or consumer spending? Examples of each?

1. Durable goods (automobiles, appliances)


2. Non-durable goods (clothing)


3. Some intangible services (haircuts, medical care)

The market value of all final goods and services produced within a country in a given period of time is...

Gross domestic product (GDP)

What two things does GDP measure? How are they the same? Real-life example?

The total income of everyone in the economy and the total expenditure on the economy's output of goods and services.




Because every transaction has a buyer and seller; if someone spends a dollar, that dollar is an income for someone else.




Example of similar income and expenditure: Mary pays John $100 for lawn service; Mary spends while John earns. Whether measured as total income or expenditure, the $100 equally contributes to GDP.

An amount of money spent is what? What are the 4 components? The largest? How large?

Expenditure




1. Consumer spending


2. Business spending


3. Government spending


4. Net exports




Consumer spending is the largest at 2/3 total expenditure

Spending on goods and services by local, state, and federal government is what? What is not included? Why?

Government spending; transfer payments (social security, welfare) are not included because it's not made in exchange for a currently produced good or service and do not reflect the economy's production.

Is buying a new house considered business spending or consumer spending?

Purchase of a new home is considered business spending because hopefully the money spent on the house will generate more money upon resell or through renting out the property.

A good used as an input towards a final product is what? Example?

Intermediate good; paper is an intermediate good while a gift card is a final good.

A good or service consumed by an end user is what? Example?

Final good; hamburger meat is intermediate while a hamburger is final.

What is the difference between an intermediate and final good? Which are counted towards GDP?

An intermediate good is a good used as an input towards a final good while a final good is a good or service consumed by an end user. Intermediate goods aren't counted towards GDP because that would result in double counting.

What is the goal in computing GDP? Why should policymakers care?

To gauge overall economic well-being. Higher GDP means better healthcare, education systems, etc. are affordable.

What are some items not included in GDP measurement?

1. Black market


2. Intermediate goods


3. Welfare & social security payments


4. Inheritance payments


5. Sales of stocks & bonds


6. Sale of used goods


7. Negative externalities (e.g. pollution)

What contributes more to GDP-- production of a pound of hamburger or caviar? Why?

Caviar because GDP is measured by market price and the market price of caviar is significantly higher than hamburger.

The income people have to spend or save as they please. What is the equation?

Disposable income.




Personal income - Taxes = Disposable income

Real vs. nominal means...

Real is adjusted for inflation while nominal is not.

The production of goods and services valued at current prices...

Nominal GDP

The production of goods and services valued at prices adjusted for inflation.

Real GDP

What's the difference between nominal and real GDP? Which is a better measure of economic well-being?

Real GDP is the production of goods and services valued at prices adjusted for inflation while nominal is valued at current prices.




Real GDP is a better measure of economic well-being.

What is the current nominal GDP for US?

17.9 trillion

What is the current real GDP for US?

16.3 trillion

Percentage number that shows how a price has changed for an internal of time as compared to a specific base year is...

Price index

Measure of the overall cost of goods and services bought by a typical consumer is what? What is this used to find?

Consumer price index (CPI); inflation rate.

How is CPI calculated?

Choose a base year. Divide the price of basket of goods & services for a selected year by the base year basket price then multiple by 100.




example: You bought 4 hot dogs and 2 hamburgers. Hot dogs are $1 and hamburgers are $2.




($1 x 4 hot dogs) + ($2 x 2 hamburgers) = $8 per basket of goods & services




($8 / $8 base year price) x 100 = 100 CPI

What can be used as an economic indicator, deflator of other economic series, or as a means of adjusting dollar value?

Consumer price index (CPI)

How is inflation rate calculated?

First, determine the CPI for each year in question. Using the CPI:




CPI in year 2 - CPI in year 1 / CPI in year 1 x 100 = Inflation rate




example:


CPI year 1: 100


CPI year 2: 175




(175 - 100) / 100 x 100 = 75%

What is the goal of the consumer price index?

To measure changes in the cost of living.

A measurement of the cost of a basket of goods and services bought by a firm..

Producer price index (PPI)

Why is the producer price index (PPI) significant?

Because firms eventually pass on their costs to consumer prices, changes in the PPI are often thought to be useful in predicting changes in the CPI.

Why should I as an employee be concerned with the inflation rate?

Because employees should at least get a raise equal to cost of living increases. If I do not get a raise, then my unchanged wage or salary can buy fewer things.

What are the problems in measuring cost of living?

1. Substitution bias


2. Introduction of new goods


3. Unmeasured quality change

The natural rate of unemployment is composed of...

structural and frictional unemployment.

Current prime interest rate?

3.25%

Unexpected inflation benefits ____________ and hurts ____________.

borrowers; lenders

If the actual inflation rate is less than the expected inflation rate, _________ are better off and __________ are worse off.

lenders; borrowers

Suppose the ex ante real interest rate is 2.1% and the nominal interest rate is 5.4%. Then the expected inflation rate is:

3.3%

You have gone to the bank to borrow money for one year. The nominal rate is 9 %. The ex ante real rate of interest is 4%. Over the course of the year, overallprices increased by 4%. This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated (expected) rate of inflation.

borrower; lower

In the country of Bulldogs, a market basket of goods and services cost$130 in 2007, $140 in 2008, and $160 in 2009. Based on this information and considering 2007 as the base year, the price index in 2009 was:

123.07

To be counted as unemployed, one must:

be currently not employed for a paid job and be actively looking for a job.

If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its unemployment rate is:

10%

If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then its number of discouraged workers is:

10 million

The labor force is...

the total number of people working plus those who areunemployed.

What is the difference between nominal interest rate and real interest rate? How do you find the real interest rate?

Nominal interest rate is reported without a correction for inflation while real interest rate is corrected for the effects of inflation.




To find the real interest rate, you subtract the inflation rate from the nominal interest rate.

A survey reveals that on a small island 40 people have jobs, 10 people are looking for jobs, and 30 people are neither working nor looking for work. The unemployment rate on the island is:

20%

Assume that the base year is 2007. The consumer price index in 2006 was 105. In 2007 it was 100. What was the rate of inflation from 2006 to 2007?

-4.76 %

Macro or micro?




The effects of government regulations on auto emissions

Macro

Macro or micro?




the impact of higher national savings on economic growth

macro

Macro or micro?




relationship between inflation and quantity of money

macro

Macro or micro?




A family's decision about how much income to save

Micro

Macro or micro?




A firm's decision about how many workers to hire.



Micro

For an economy as a whole, income must equal expenditures because......

every transaction has a buyer and seller; every dollar one person spends is a dollar of income earned for someone else.

How are transfer payments handled within the GDP?

Transfer payments (welfare, social security, etc.) are excluded from the GDP because they're not made in exchange for a currently produced good or service.

Why are transfer payments excluded from the GDP?

Because they're not made in exchange for a currently produced good or service.

What component(s) of GDP would this transaction affect?




Aunt Jane buys a new house.

Investment spending

What component(s) of GDP would this transaction affect?




General motors builds $500 million in cars, but consumers only buy $470 million.

Consumption rises by $470 million, inventory investment rises by $30 million, therefore GDP rises by $500 million

What component(s) of GDP would this transaction affect?




You buy a pizza.

Consumption and therefore GDP rise.

What component(s) of GDP would this transaction affect?




Your parents buy a bottle of French wine.

Positive consumer expenditure and reduction to net exports so GDP remains the same.

A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?

The contribution to GDP is $3, the market value of the bread, which is the final good that is sold. The $2 wheat is an intermediate good and its market value has been included into the market value of the bread. To avoid double counting the value of intermediate goods, a government only collects the market values of final goods.

Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?

The sale of used records does not affect GDP at all because it involves no current production.

Which one, real GDP or nominal GDP, is more appropriate to calculate the growth of total output? Briefly explain.

Real GDP because it's been adjusted to include only the change in quantity of goods and services whereas nominal GDP reflects both the change in quantity of goods and services and the change in price levels.




Basically because real GDP has been adjusted for inflation.

How is net exports calculated?

Exports - Imports = Net Exports

What component(s) of GDP would this transaction affect?




A household purchases a $30,000 Volvo, Swedish carmaker.

$30,000 positive consumer expenditure and $30,000 reduction to net exports.

What is the largest component of expenditure or GDP? How large?

Consumption spending; 2/3; 68%

The ideal GDP growth rate is....

2-3%

Consider an economy that only produces chocolate bars. Year 1 is base year. What is nominal GDP for each of the years?




Year 1 - 3 bars produced at $4 each


Year 2 - 4 bars at $5


Year 3 - 5 bars at $6

Year 1 - $12


Year 2 - $20


Year 3 - $30

Current US unemployment rate..

5.1%

The current (or nominal) US prime interest rate is 3.25%. The US inflation rate is .2%. What is the real interest rate?

3.05% real interest rate

Nominal interest rate is ___________ market value and is _________________.

Current; not adjusted for effects of inflation

The current US inflation rate is...

.2%

Consider an economy that only produces chocolate bars. Year 1 is base year. What is real GDP for each of the years?




Year 1 - 3 bars produced at $4 each


Year 2 - 4 bars at $5


Year 3 - 5 bars at $6

Year 1 - $12


Year 2 - $16


Year 3 - $20

Real GDP:




Year 1 - $12


Year 2 - $16


Year 3 - $20




What is the percentage growth rate of real GDP from year 2 to year 3?

25%

Basket: 4 hot dogs; 2 hamburgers




Year 2010 - $1 hot dog; $2 hamburger


Year 2011 - $2 hot dog; $3 hamburger


Year 2012 - $3 hot dog; $4 hamburger




Year 2010 is base year. What is nominal GDP for each year?

2010 - $8


2011 - $14


2012 - $20

Basket: 4 hot dogs; 2 hamburgers




Year 2010 - $1 hot dog; $2 hamburger


Year 2011 - $2 hot dog; $3 hamburger


Year 2012 - $3 hot dog; $4 hamburger




Year 2010 is base year. What is real GDP for each year?

2010 - $8


2011 - $8


2012 - $8

Basket: 4 hot dogs; 2 hamburgers




Year 2010 - $1 hot dog; $2 hamburger


Year 2011 - $2 hot dog; $3 hamburger


Year 2012 - $3 hot dog; $4 hamburger




Year 2010 is base year. What is CPI for each year?

2010 - 100


2011 - 175


2012 - 250

Basket: 4 hot dogs; 2 hamburgers




Year 2010 - $1 hot dog; $2 hamburger


Year 2011 - $2 hot dog; $3 hamburger


Year 2012 - $3 hot dog; $4 hamburger




Year 2010 is base year. Use CPI to find inflation rates for 2011 and 2012.

2011 - 75%


2012 - 43%

CPI is tied to ____________ which is a measure of ______________ and influences amount of ________________ which overstates _____________.

inflation;


cost of living;


Social Security payments;


inflation

Assuming CPI overstates inflation, Social Security would provide the elderly with...

an improvement in their standard of living each year because the payments are tied to CPI.

What is the impact of inflation on a fixed income American?

Unexpected inflation means they're able to buy less with the same amount of money.

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, what is the real interest rate?

5%

The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period with 6.5 percent. What was the real interest rate during this period?

2.5%

How is real interest rate calculated?

Nominal interest rate - inflation rate = real interest rate

Labor force is the...

total number of workers, including unemployed and employed.

The percent of the US population that is included in the labor force is..

Labor force participation rate

How is labor force participation rate calculated?

(Labor force / Adult population) x 100 = Labor force participation rate

What is the current US labor force participation rate?

62.4%

How is unemployment rate calculated?

(Number of unemployed / Labor force) x 100 = Unemployment rate

Year 2004


Adult pop. - 2000


Number employed - 1400


Number of unemployed - 200




Year 2005


Adult pop. - 3000


Number employed - 1300


Number unemployed - 600




Year 2006


Adult pop. - 3200


Number employed - 1600


Number unemployed - 200




What is the unemployment rate for Year 2004?

12.5%

Year 2004


Adult pop. - 2000


Number employed - 1400


Number of unemployed - 200




Year 2005


Adult pop. - 3000


Number employed - 1300


Number unemployed - 600




Year 2006


Adult pop. - 3200


Number employed - 1600


Number unemployed - 200




What is the unemployment rate for Year 2005?

31.58%

Year 2004


Adult pop. - 2000


Number employed - 1400


Number of unemployed - 200




Year 2005


Adult pop. - 3000


Number employed - 1300


Number unemployed - 600




Year 2006


Adult pop. - 3200


Number employed - 1600


Number unemployed - 200




What is the labor force participation rate for Year 2004?

80%

Year 2004


Adult pop. - 2000


Number employed - 1400


Number of unemployed - 200




Year 2005Adult pop. - 3000


Number employed - 1300


Number unemployed - 600




Year 2006


Adult pop. - 3200


Number employed - 1600


Number unemployed - 200




What is the labor force participation rate for Year 2006?

56.25%

A company pays its workers $7.50 an hour. If CPI is currently 176 and was 168 a year ago, the company should increase the hourly wage of its workers by?

.36 cents

The natural rate of unemployment is composed of....

Structural unemployment & frictional unemployment

Is the natural rate of unemployment 0%? Why or why not?

No because the natural rate of unemployment is composed of structural and frictional unemployment, both of which occur even at full employment.

Results between mismatch of jobs available in the market and skills of the available workers in the market, such as when technology advances cause unskilled manufacturing workers to be laid off and replaced by robots.

Structural unemployment

Results from temporary or incidental factors, like someone who leaves their job to look for another...

Frictional uneployment

Deviation from the natural rate of unemployment as a result of fluctuations in the business cycle, such as when auto workers are laid off due to recession and rehired when the market rebounds.

Cyclical unemployment

List an example of structural unemployment

Technology advances cause unskilled manufacturing workers to be laid off and replaced by robots.

List an example of frictional unemployment

A recent college grad who suddenly becomes available in the job market, but has yet to find his first job.

List an example of cyclical unemployment

Auto workers are laid off due to recession and rehired when the market rebounds.

Full employment means...

update

What are the 4 stages of the business cycle?

1. Peak


2. Contractionary


3. Trough


4. Expansionary

2 consecutive quarters of declining growth is....

recession.

2 consecutive recessions is a...

depression

What are 3 causes of the business cycle?

1. Innovation


2. Random events


3. Changes in money supply

What are examples of durable goods?

Cars, appliances, machinery

....are more stable to the effects of the business cycle.

Service & non-durable goods

...are hardest hit by effects of the business cycle.

Capital goods & consumer durables

Cyclical employment is associated with what phase of the business cycle?

Contractionary; recession

What are some flaws of the BLS unemployment rate?

1. Doesn't include discourage workers


2. Doesn't distinguish between full & part time work


3. Some people misreport work status in BLS survey

Discouraged workers aren't included in unemployment statistics. What are they?

People who would like to work but have given up looking for a job.

Short term unemployment is associated with...

frictional unemployment

Long term unemployment is associated with...

structural unemployment

How might the unemployment rate understate joblessness?

Fails to account for discouraged workers.

How might the unemployment rate overstate joblessness?

Frictional and structural unemployment are always present and may unduly influence unemployment rate

Overall rise of prices in the market..

Inflation

As interest rates are increased, consumers tend to have less money to spend. With less spending, the economy slows and...

inflation decreases

As interest rates decrease, consumers have more money to spend. With more spending, economic growth and..

inflation increase

What are flaws of using GDP as a measure of economic growth?

1. Excludes things that don't have practical value but lack market value like homemaking


2. Excludes value of leisure


3. Excludes income equality or negative externalities



Having a large GDP enable a country to...

afford better schools, infrastructure, and healthcare.

Many indicators of quality of life are positively correlated with...

GDP

Although it is flawed, what is the main indicator of a country's economic well-being?

GDP

Measures the typical consumer's cost of living...

consumer price index (CPI)

Basket:


10lbs. beef, 20lbs. chicken




Year 2010 - $4 beef, $4 chicken


Year 2011 - $5 beef, $5 chicken


Year 2012 - $9 beef, $6 chicken




CPI for base year 2010 is $120. What is the CPI in 2011?

125

Basket:


10lbs. beef, 20lbs. chicken




Year 2010 - $4 beef, $4 chicken


Year 2011 - $5 beef, $5 chicken


Year 2012 - $9 beef, $6 chicken




CPI for base year 2010 is $120. What is the CPI in 2012?

175

3 problems with CPI that cause it to be overstated:

1. Introduction of new goods


2. Unmeasured quality change


3. Substitution bias

Minimum wage:


$1.15 in 1964. CPI is 31.3


$7.25 in 2010. CPI is 220.3




Use CPI to concert 1964's wage into today's dollar value. Which wage has more purchasing power?





$8.09. The 1964 wage has more purchasing power.

A problem with CPI is substitution bias. What is an example?

When consumers substitute Texas grapefruit for Florida oranges because of a freeze in Florida that causes prices to spike. CPI would not accurately account for this substitution.

A problem with CPI is introduction of new goods. What is an example?

Introduction of VCR allowed new option of watching movies at home and the increased value isn't accurately reflected in CPI.

A problem with CPI is unmeasured quality bias. What is an example?

Useful life of car tires has increased over the past few decades, decreasing the tire cost on a per mile basis that isn't accurately reflected in CPI.

Natural rate of unemployment is what? What is it composed of?

The normal rate of unemployment around which the actual unemployment fluctuates. It is composed of structural and frictional unemployment.

Occurs when there are fewer jobs than workers...

Structural unemployment

Occurs when workers spend time searching for the jobs that best suit their skills and tastes...

Frictional unemployment

The government eliminating minimum wage would like likely reduce

structural unemployment

A new law banning labor unions would likely reduce

structural unemployment

The government increasing unemployment insurance will likely increase...

frictional unemployment

Sectoral shifts becoming more frequent will likely increase..

frictional unemployment

More workers posting their resume at Monster.com and more employers using Monster.com to hire would likely speed up the process of matching workers & jobs, would would likely reduce...

frictional unemployment

Due to minium wages, labor unions, efficiency wages...

structural unemployment

It takes time to search for the right jobs....

Frictional unemployment

Occurs even if there are enough jobs to go around...

Frictional unemployment

Full employment where there is no...

cyclical unemployment

Full employment is composed of...

structural and frictional unemployment

Full employment does not mean...

zero employment.

The percentage of those who would like to work who do not have jobs is..

unemployment rate.