Study Session 4

Front 1

GDP

Back 1

measures the current value of G and S produced domestically (country production)

Front 2

Nominal GDP

Back 2

GDP measured in terms of current price

Front 3

GNP

Back 3

measures the current value of G and S produced by a countries citizens

Front 4

Expenditure Approach

Back 4

uses total expenditures onm all final G + S produced during a year (demand based)
1. Personal consumption
2. Gross Private Investment
3. Government Consumption
4. Net Experts

Front 5

Resource Cost

Back 5

Income approach(supply side) measures GDP by summing

1. Employee compensation
2. Proprietor's Income
3. Rents
4. Corporate Profits
5. Interest Income
Indirect Buisness Tax
Depreciation
Net Income of Foreigners

Front 6

National Income (NI)

Back 6

total earning of a nation's citizens

1. Employee compensation
2. Proprietor's Income
3. Rents
4. Corporate Profits
5. Interest Income

Front 7

Real GDP

Back 7

GDP measured in terms of prices from a base year

Front 8

Price Index

Back 8

Index to indicate relative price change between periods

Front 9

GDP deflator

Back 9

general price index with a very large market basket- all find G + S produced (Base year 1992)

Front 10

Consumer Price Index (CPI)

Back 10

price index with small market basket (364 items) Market basket is fixed from year to year

Front 11

Personal Income (PI)

Back 11

total income recieved by Individuals (include transfer payments like SS and welfare)

Front 12

Disposable Income (DI)

Back 12

Personal income- taxes

Front 13

4 phases of the business cycle

Back 13

1. Peak
2. Contraction
3. Recessiary Trough
4. Expansion

Front 14

Recession

Back 14

a period during which rGDP declines for 2 or more successive quarters.

Front 15

depression

Back 15

prolonged or severe recession

Front 16

Labor force

Back 16

people 16+ who are employed or seeking employment

Front 17

3 types of unemployment

Back 17

Frictional unemployment
Structural unemployment
Cyclical Unemployment

Front 18

Frictional unemployment

Back 18

* caused by constant changed in the economy prevent qualified workers from being matched with jobs.
* 2 causes
- imperfect information
- job search (until cost and benefit are equal)

Front 19

Structural unemployment

Back 19

* caused by structural changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified.

Front 20

Cyclical Unemployment

Back 20

* changed in the general level of economic productivity
* Economy<full capacity yields positive Cyclicial unemployment

* Economy> full capacity yields negative cyclical unemployment

Front 21

Full employment

Back 21

*When cyclical unemployment equals 0.
*However at full employment both frictional and structural unemployment still exist.

Front 22

Employment/ Population Ratio

Back 22

# of people 16 or older who are employed as a percentage of total population

Front 23

inflation rate (i)

Back 23

i= (this years price index-last years PI)/last years PI

Front 24

Stagflation

Back 24

period of high inflation coupled with low or negative real growth in output (GDP)

Front 25

Permanent income hypothesis

Back 25

consumption depends upon expected LR income, so a large portion of any temperary increase in income will be saved (smoothing of consumption partner)

Front 26

Three Self Correcting Mechanisisms of a Market Econonmy

Back 26

1. Comsumption demand
2. Real interest rates
3. Resources Prices

Front 27

Comsumption Demand

Back 27

* in expansion household save larger proportion of income
* in recession households save less

Front 28

Real Interest Rates

Back 28

* in expansion real interest rates rise due to increased demand for borrowed funds which reduces borrowing and capital spending
*during recession real interest rates decline due to borrowing and spending rising.

Front 29

Resource Prices

Back 29

* when economy is greater then full employment capacity prices of resources increase
* when economy is under capacity cost of resources are low encouraging spending

Front 30

Say's Law

Back 30

it is impossible to over produce relative to total demand because supply (production) creates it own demand (supply side)

Front 31

Aggregate Expenditure (AE)
(Keynesian)

Back 31

firms will supply a level of output(GDP) that they believe will be demanded (expenditures) during the next period

Front 32

rGDP

Back 32

rGDP= planned expenditures
rGDP= planned C+I+G+NX

Front 33

Expenditures multiplier (M)

Back 33

M= 1/(1-MPC)

MPC= marginal propensity to consume- the proportion of each additional dollar of income spent on personal consumption (not shared)

Front 34

Expenditures Multiplier shows...

Back 34

shows why small changes in C, I, or G can cause large changes in output