Unit 2: Macro Measures – Flashcards
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3 Major Economic Goals
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1. promote economic growth 2. limit unemployment 3. keep prices stable (limit inflation)
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GDP
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the dollar value of all final goods and services produced within a country's border in one year
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dollar value
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GDP is measured in dollars
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Final good
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gdp doesn't include intermediate goods
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one year
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gdp measures annual economic performance
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What do we compare gdp to?
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1. compares to previous years 2. compares to policy changes 3. compares to other countries
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% change in gdp
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[ (year2-year1)/ year 1 ]x100
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Not included in gdp
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1. intermediate goods 2. nonproduction goods 3. non-market (illegal) activities
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intermediate goods
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no multiple counting, only final goods. ex: price of finished car, not the radio, tires, etc.
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non-production transactions
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financial transactions(nothing produced). ex:stocks, bonds, real estate. ex: used goods. ex: old cars, used clothes.
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non-market(illegal)activities
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ex: illegal drugs, unpaid workers.
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2 ways of calculating gdp
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1. expenditures approach (c+i+g+xn) 2. income approach (w+i+p+r)
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nominal gdp
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the dollar value of all final goods and services produced in a country's borders in one year, not adjusted to inflation
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real gdp
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the dollar value of all final goods and service produced in a country's border in one year, adjusted to inflation.
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productive
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1. economic system 2. property rights 3. capital 4. human capital (knowledge) 5. natural resources
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business cycle
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the national economy fluctuates resulting in periods of boom and busts
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unemployment rate
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the percent of people in the labor force who want to a job but aren't working
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unemployment rate formula
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unemployment rate= #unemployed/ #labor force *100
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who's in the labor force?
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1. above 16 years old 2. able and willing to work 3. not institutionalized (jail & hospitals) 4. not in military, in school full-time or retired
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3 types of unemployment
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1. frictional unemployment 2. structural unemployment 3. cyclical unemployment
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frictional unemployment
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between jobs/seasonal unemployment
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structural unemployment
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skills become obsolete
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cyclical unemployment
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recessions/ economic downturns
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Natural Rate of Unemployment
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full employment. frictional employment+structural unemployment. means no cyclical unemployment. (4-6%)
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Okun's Law
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when unemployment rises 1 percent above the natural rate, GDP falls about 2%
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C-O-L-A
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cost of living adjustment
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Consumer price index (CPI)
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price of market basket/ price of market basket of base year *100
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inflation rate
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% change in prices= year2-year1/year1 *100
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gdp deflator
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nominal/ real *100
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problems with cpi
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1. substitution bias 2. new products 3. product quality
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3 causes of inflation
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1. govt. prints too much money 2. Demand- pull inflation 3. cost push- inflation
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quantity theory of money
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the velocity of money is the average times a dollar is spent and re-spent in a year
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equation for quantity theory of money
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M*V=P*Y M=money v=velocity p=price level y= quantity of output
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real interest rate
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the % increase in purchasing power that a borrow pays (adjusted for inflation). real=nominal interest rate- expected inflation
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nominal interest rate
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the percentage increase in money that the borrow pays not adjusted for inflation. nominal=real interest rate + expected inflation
