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67 Cards in this Set

  • Front
  • Back

What are the 3 macro indicators and what do they measure?

Income (variation across countries)

Price (rising or stable)

Employment (expansion or contraction)

Define GDP

Measure of the income and expenditures of an economy

How do you measure GDP?

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

Explain "GDP is the Market Value..."

Output in valued at market prices.

"...Of all..."

Includes ALL items produced in the economy and legally sold in the markets


It records only the value of final good, not intermediate goods

"...Goods and Services..."

It includes both tangible goods and intangible services


It includes goods and services currently produced, not transactions involving goods produced in the past.

"...Within a country..."

It measures the value of production within the geographic confines of a country

"..in a given period of time.."

It measures the value of production that takes place within a specific interval of time, usually a year or a quarter(three months)

What are not counted in GDP?

GDP excludes most items that are produced and consumed at home and that never enter the marketplace.

Excludes items produced and sold illicitly, such as illegal drugs.

What are the components of Y

C + I + G + NX

Explain C

The spending by household son goods and services, with the exception of purchases of new housing.

Explain I

The spending on capital equipment, inventories, and structures, including new housing.

Explain Government Purchases(G)

The spending on goods and services by governments.

Does not include transfer payments because they are not made in exchange for currently produced goods or services.

Explain Net Exports (NX)

Exports minus imports.

Real GDP

Real GDPvalues the production of goods and services at constant prices.

Nominal GDP

Nominal GDP values the production of goods and services at current prices.

Why do we use Real GDP? How do we convert between the two?

An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.

What is the GDP Deflator?

The GDP deflator is a measure of the price levelcalculated as the ratio of nominal GDP to realGDP times 100.

The GDP deflator is a measure of the price levelcalculated as the ratio of nominal GDP to realGDP times 100.

What does the GDP Deflator tell us?

It tells us what portion of the rise in nominal GDPthat is attributable to a rise in prices rather than a rise in the quantities produced.

Is GDP a good measure of Economic Well-Being?

GDP is the best single measure of the economic well-being of a society.

Higher GDP per person indicates a higher standard of living.

Is GDP a good measure of Non-Economic Well-Being?

Some things that contribute to well-being are not included in GDP.

–The value of leisure.

–The value of a clean environment.

–The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

How do you measure the cost of living?

1. Inflation

2. CPI (Consumer price index)

What is CPI?

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.

When the CPI rises, the typical family has to spend more money to maintain the same standard of living.

CPI = ?

Substitution Bias (CPI Flaw)

The basket of goods (in CPI) does not change to reflect consumer reaction to changes in relative prices.

Consumers substitute toward goods that have become relatively less expensive.

CPI overstates the increase in cost of living by not considering consumer substitution.

New Goods (CPI Flaw)

The basket does not reflect the change in purchasing power brought on by the introduction of new products.

New products result in greater variety, which in turn makes money more valuable.

Consumers need less money to maintain any given standard of living.

New Goods (Unmeasured Quality Changes)

If the quality of a good rises (falls) from one year to the next, the value of money rises(falls), even if the price of the good stays the same.

Changes in qualities are hard to measure. Hence, construction of prices for constant qualities is difficult.

What is Inflation?

Inflation refers to a situation in which the economy’s overall price level is rising.

The inflation rate is the percentage change in the price level from the previous period.

Inflation Rate in Year 2 = ?

How do we use GDP deflator to measure the cost of living? What is the difference between using CPI?

The GDP deflator reflects the prices of all goods and services produced domestically, whereas...

…the consumer price index reflects the prices of all goods and services bought by consumers.

What about the validity of the items in the price basket?

The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year (only occasionally does the government change the basket)...

…whereas the GDP deflator compares the price of currently produced goods and servicesto the price of the same goods and services in the base year.

Correcting for inflation : How to correct Monetary Values from Different Times

Correcting for inflation : Indexation

When some money amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

Examples: Cost-of-living allowance, indexation of wage to CPI, CPF Minimum Sum

Correcting for inflation : Real and Nominal Interest Rates

The nominal interest rate is the interest rate usually reported and not corrected for inflation. (It is the interest rate that a bank pays.)

The real interest rate is the interest rate that is corrected for the effects of inflation.

If I borrow $1000 for one year at 15% and inflation was 10%. What is the real interest rate?

Why do Real and Nominal i/r not co-move sometimes?

In some years, inflation may spike, causing real interest rates to fall while nominal interest rates remain the same.

The long-run problem of unemplyoment refers to...

the natural rate of unemployment…

The short-run problem of unemplyoment refers to...

the cyclical rate of unemployment…

What is the natural rate of unemployment?

Unemployment that does not go away on its own even in the long run. (Normal unemployment)

Sometimes it is also known as the full-employment rate of unemployment.

What is the cyclical rate of unemployment?

Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate.

It is associated with short-term ups and downs of the business cycle.

How Is Unemployment Measured?

Unemployment is measured by government statistical agency.

It surveys randomly selected households.

Employed–Unemployed–Not in the labor force

Employed vs. Unemployed

A person is considered employed if he or she has spent some of the previous week working at a paid job.

A person is unemployed if he or she is on temporary layoff, or is looking for a job. (Would like to work!!)

Defn: Labor Force

The labor force is the total number of workers, including both the employed and the unemployed.

Labor force = No. of Employed + No. of Unemployed

Def: Unemployment Rate

The unemployment rate is calculated as the percentage of the labor force that is unemployed. (It's an imperfect measure!!)

Unemployment Rate = (No. employed/Labor Force) * 100

Labor-Force Participation Rate

The labor-force participation rate is the percentage of the adult population that is in the labor force.

Rate = (Labor force/Adult population) * 100

Does the Unemployment Rate Measure What We Want It To?

It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.

(e.g. Want to work but give up on looking for a job & purposely reporting unemployed to receive financial assistance)

How Long Are the Unemployed without Work?

Most spells of unemployment are short.

Most unemployment observed at any giventime is long-term.

Most of the economy’s unemploymentproblem is attributable to relatively fewworkers who are jobless for long periods oftime.

Why Are There Always Some People Unemployed?

Frictional and Structural unemployment exists

Def: Frictional Unemployment

Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. (e.g. Jobs that best suit tastes & skills)

Def: Structural unemployment

Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Reason for Unemployment (1) : Job Search

Job search is the process by which workers find appropriate jobs given their tastes and skills.

It results from the fact that it takes time for qualified individuals to be matched with appropriate or “right” jobs. Nothing to do with salary!!

Why is Search Unemployment inevitable?

Search unemployment is inevitable because the economy is always changing.

Changes in the composition of demand among industries or regions are called sectoral shifts.

What affects the Job Search Process?

Government programs can affect the time it takes unemployed workers to find new jobs. (Govt-Run employment agencies + public training programs + unemployment benefits)

Def: Unemployment benefits

Unemployment benefitsis a government program that partially protects workers’ incomes when they become unemployed.

Offers workers partial protection against job losses.

Is unemployment benefits good/bad?

Unemployment benefits (UB’s) increase the amount of search unemployment. (Bad)

UB’s may improve the chances of workers being matched with the right jobs. (Good)

Def: Structural Unemployment

Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded.

Explain how Min Wage will affect Struc Unemployment

Explain how Unions and Collective Bargaining will affect Struc Unemployment

A union is a worker association that bargains with employers over wages, benefits and working conditions. (Exerting market power)

The process by which unions and firms agree on the terms of employment is called collective bargaining.

Explain the consequences of a strike

A strike will be organised if the union and the firm cannot reach an agreement.(Withdrawal of labour from the firm)

Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.

Do union members have higher salaries?

By acting as a cartel with an ability to strike or otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members.

Union workers earn 10 to 20 percent more than nonunion workers.

Are Unions Bad for the Economy?

Critics argue that unions cause the allocation of labor to be inefficient and inequitable.

Wages above the competitive level reduce the quantity of labor demanded and cause unemployment.

Does not benefits all workers!!

Are Unions Good for the Economy?

Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers.

They claim that unions are important for helping firms respond efficiently to workers’ concerns.

Does the union in Singapore increase wage rigidity, leading to a higher unemployment rate?

NTUC does not organise strikes but instead makes members more competitive

Def: Theory of Efficiency Wages

Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.

The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level.

Why set Higher wages?

Worker health improves, lesser turnover, attract higher quality and motivates better effort