Macroeconomics Test 2 (Chapters 5-8)

Front 1

What is GDP?

Back 1

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

Hint 1

a way to measure production

Front 2

Calculating GDP using expenditure approach

Back 2

y = C + I + G + NX

Front 3

Nominal GDP vs. Real GDP

Back 3

Real GDP expresses prices of the final goods and services using the prices for a base year. Nominal GDP expresses prices using the prices for the same year they are produced.

Front 4

Calculate real GDP from nominal GDP

Back 4

First calculate real and nominal GDP (same value) for base year, then calculate nominal GDP (qty x current year price) for current year, and last calculate real GDP for current year (qty x base year price). Subtract real GDP of base year from real GDP of current year then multiply by 100

Front 5

Limitations of GDP

Back 5

Household production and underground production

Front 6

Household production

Back 6

Real GDP omits this and underestimates the value of many people, most of them women. Household production is higher in developing countries.

Front 7

Underground GDP

Back 7

Economic activity hidden from government to avoid taxes and regulations or production that is illegal. Again, higher in developing countries.

Hint 7

people paid under the table

Front 8

Why does expenditure equal income?

Back 8

Because firms pay out everything they receive as incomes to the factors of production, total expenditure equals income.

Front 9

Disposable income

Back 9

Income received by households minus personal income taxes paid.

Front 10

Potential GDP

Back 10

The value of real GDP when all the economy's factors of production - labor, capital, land, and entrepreneurial ability - are fully employed.

Front 11

Relationship between real GDP and potential GDP

Back 11

Real GDP grows and fluctuates around the growth path of potential GDP.

Front 12

How is the official UR calculated?

Back 12

Number of people unemployed divided by the labor force then multiplied by 100

Front 13

Who is considered unemployed?

Back 13

To be considered unemployed, all persons who, during the week before the survey: had no employment; were available for work; and either had made efforts to find employment during the previous four weeks, or were waiting to be recalled to a job from which they had been laid off.

Front 14

Marginally attached workers

Back 14

a person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past.

Front 15

discouraged worker

Back 15

a marginally attached worker who has not made specific efforts to find a job within the past four weeks because previous unsuccessful attempts to find a job were discouraging.

Front 16

underemployed workers (part-time for economic reasons)

Back 16

people who work 1 to 34 hours per week but are looking for full-time work and cannot find it because of unfavorable business conditions

Front 17

3 types of unemployment

Back 17

frictional unemployment, structural unemployment, and cyclical unemployment

Front 18

frictional unemployment

Back 18

the unemployment that arises from people entering and leaving the labor force, from quitting jobs to find better ones, and from ongoing creation and destruction of jobs - from normal labor turnover

Hint 18

new graduates entering labor force

Front 19

structural unemployment

Back 19

the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs

Front 20

cyclical unemployment

Back 20

the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion

Front 21

full employment

Back 21

when there is no cyclical unemployment or, equivalently, when all the unemployment is frictional or structural

Front 22

unemployment insurance

Back 22

increases the natural unemployment rate by lowering the opportunity cost of job search

Front 23

Differences between alternative measures of unemployment - U3 vs. U5 vs. U6

Back 23

U3 is the official measure of unemployment but does not include marginally attached workers and people who work part time for economic reasons.

U5 total of U3 plus discouraged and marginally attached workers

U6 total of U5 plus part-time for economic reasons

Front 24

labor force participation rate

Back 24

the percentage of the working age population who are members of the labor force

labor force divided by working age population then multiplied by 100

Front 25

How has the labor force participation rate changed over time?

Back 25

it has increased mostly due to women entering the labor force

Front 26

natural unemployment rate

Back 26

the unemployment rate when the economy is at full employment. (when there is no cyclical unemployment)

Front 27

output gaps

Back 27

real GDP minus potential GDP expressed as a percentage of potential GDP

Front 28

Consumer price index (CPI)

Back 28

a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services

Front 29

calculating CPI

Back 29

first find the cost of the CPI market basket at base period prices

second, find the cost of the CPI market basket at current period prices

last, calculate the CPI for the base period and the current period

Front 30

Use the CPI to calculate inflation

Back 30

(CPI in current year minus CPI in previous year) divided by CPI in previous year then multiply by 100

Front 31

Use the CPI to calculate real wage

Back 31

nominal wage rate divided by CPI then multiply by 100

Front 32

use the CPI to convert prices between years

Back 32

Front 33

Biases in CPI and the problems they cause

Back 33

The potential sources of bias in the CPI are: new goods bias, quality change bias, commodity substitution bias, and outlet substitution bias.

New goods bias: the arrival of new goods puts an upward bias into the CPI and its measure of the inflation rate.

Quality change bias: a price rise that is a payment for improved quality is not inflation but might get measured as inflation.

Commodity substitution bias: the CPI basket doesn't change to allow for the effects of substitution between goods. If the price of beef rises faster than the price of chicken, people buy
more chicken and less beef.

Outlet substitution bias: if prices rise more rapidly, people use discount stores more frequently.

Front 34

What does the production function show?

Back 34

the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same