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Hyperinflation

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an extreme and rapid rise in the price of goods and services

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Economic Indicators

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statistics that help economists judge the health of an economy

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Gross Domestic Product (GDP)

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the market value of all final goods and services produced within a country during a given period of time -Department of Commerce's Bureau of Economic Analysis measures US GDP -attaches market value to each product

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Market Value

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the price buyers are willing to pay for a good or service in a competitive market

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Final Good

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any new good that is ready for consumer use; final goods are included in the calculation of GDP

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Intermediate Good

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a good used in the production of a final good; intermediate goods are not included in the calculation of GDP (not counted in GDP because it is already included in the market value of the final good)

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How Economists Calculate GDP

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divide the economy into four sectors: households, businesses, government, and foreign trade. Each sector's spending makes up one of the four components of GDP: household consumption (C), business investment (I), government purchases (G), and the net of exports minus imports (NX) Formula: C + I + G + NX = GDP

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Net Exports

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the value of all exports minus all imports -When exports exceed imports, net exports are positive and increase GDP, vice versa

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Nominal GDP

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a measure of a country's economic output (GDP) valued in current dollars; nominal GDP does not reflect the effects of inflation

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Current Dollars

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the value of a dollar in the year it is spent; a measure of the dollar's value that reflects current purchasing power, without taking inflation into account

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Real GDP

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a measure of a country's economic output (GDP) valued in constant dollars; real GDP reflects the effects of inflation

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Constant Dollars

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the value of the dollar fixed at a specified base year; a measure of the dollar's value adjusted for inflation to reflect purchasing power over time

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Per Capita GDP

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a nation's real GDP divided by its population; a measure of average economic output per person

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Limitations of GDP as an Indicator of Economic Health

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-GDP leaves out unpaid household and volunteer work -GDP ignores informal and illegal exchanges -GDP counts some negatives as positives -GDP ignores negative externalities -GDP places no value on leisure time -GDP says nothing about income distribution

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Informal Economy

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a sector of the economy that operates without government regulation or monitoring and is not officially recorded or taxed; the informal economy is not included in the calculation of GDP

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How GDP Growth Makes People Better Off

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-Literacy and education (countries with a high per capita GDP have high levels of education) -Health and life expectancy -Standard of living

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Literacy Rate

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the percentage of people in a country who can read and write

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Life Expectancy

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the number of years, on average, that a person is expected to live; a key indicator of a nation's health and well-being

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Infant Mortality

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the rate at which babies die during their first year of life; a key indicator of a nation's health and well-being

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Unemployment Rate

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the percentage of the labor force that is not employed but is actively seeking work -determined by Bureau of Labor Statistics (BLS) -BLS surveys about 60,000 households each month -unemployment rate = number unemployed/number in labor force x 100

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Frictional Unemployment

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a type of unemployment that results when workers are seeking their first job or have left one job and are seeking another

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Structural Unemployment

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a type of unemployment that results when the demand for certain skills declines, often because of changes in technology or increased foreign competition; under such conditions, workers may need retraining to find new jobs

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Seasonal Unemployment

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a type of unemployment that results when businesses shut down or slow down for part of the year, often because of weather (ex: tourism, agriculture)

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Cyclical Unemployment

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a type of unemployment that results from a period of decline in the business cycle; unemployment caused by a contraction

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Natural Rate of Unemployment

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the percentage of the labor force without work when the economy is at full employment; a condition in which the economy is strong and there is no cyclical unemployment

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Discouraged Workers

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unemployed workers who have ceased to look for work; discouraged workers are not considered part of the labor force and are not factored into the unemployment rate -left out of BLS calculations

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Involuntary Part-time Workers

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people who settle for part-time employment because they are unable to find full-time work - official unemployment rate does not recognize

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Underground Economy

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a sector of the economy based on illegal activities, such as drug dealing and unlawful gambling -counted as unemployed in BLS calculations

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Inflation Rate

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the percentage increase in the average price level of goods and services from one month or year to the next -tracked by Bureau of Labor Statistics (BLS)

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Price Index

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a measure of the average change in price of a type of good over time

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Consumer Price Index (CPI)

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a measure of price changes in consumer goods and services over time; the CPI shows changes in the cost of living from year to year -Changes in the average prices of these items approximate the change in the overall cost of living.

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Cost-of-living Index

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a measure of change in the overall cost of goods and services; another term for the consumer price index

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Nominal Cost of Living

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the cost in current dollars of all the basic goods and services needed by the average consumer

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Real Cost of Living

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the cost in constant dollars of all the basic goods and services needed by the average consumer; the nominal cost of living adjusted for inflation

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Nominal Wages

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wage levels based on current dollars

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Real Wages

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wage levels based on constant dollars; nominal wages adjusted for inflation

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Creeping Inflation

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a gradual, steady rise in the price of goods and services over time

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Hyperinflation

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inflation goes into overdrive

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Deflation

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a fall in the price of goods and services; the opposite of inflation - good news for consumers and savers

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Deflationary Spiral

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a downward trend in prices, wages, and business activity; a deflationary pattern in which falling prices cause a business slow-down, which in turn leads to lower wages, a further fall in prices, and even less business activity -early days of Great Depression

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Pull Inflation

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a rise in the price of goods and services caused by an increase in overall demand

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Cost-push Inflation

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a rise in the price of goods and services caused by increases in the cost of the factors of production -often triggered by increases in energy prices

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Wage-Price Spiral

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an upward trend in wages and prices; an inflationary pattern in which rising prices lead to demands for higher wages, causing producers to raise prices further and workers to demand additional wage hikes

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Limitations of the CPI as a Measure of Inflation

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1) Substitution bias: does not take into account consumers' ability to substitute goods in response to price change 2) Outlet substitution bias: money saved by consumers who shop at these low-cost outlets may not be reflected in the CPI 3) New product bias: BLS cannot predict which new products will succeed; new products are not incorporated into the market basket until they have become commonplace 4) Quality change bias: technological advances may improve the quality or add to the lifetime of a product

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The Economic Costs of Inflation

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1) Loss of purchasing power: inflation could affect people's standard of living 2) Higher interest rates 3) Loss of economic efficiency: When prices fluctuate due to inflation, buyers and sellers cannot rely on an increase or decrease in prices to give them clear information about market conditions

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Expansion

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a period of economic growth; phase of business cycle

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Peak

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the highest point of an expansion, or period of economic growth; a peak is followed by economic decline; phase of business cycle

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Contraction

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a period of general economic decline marked by falling GDP and rising unemployment; phase of business cycle

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Trough

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the lowest point of a contraction, or period of economic decline; a trough is followed by economic growth; phase of business cycle

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Leading Economic Indicators

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measures that consistently rise or fall several months before an expansion or a contraction begins - used to forecast the peak and trough of a business cycle

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Coincident indicators

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measures that consistently rise or fall along with expansions or contractions; coincide with the phases of the business cycle -most helpful in tracking expansions and contractions as they happen -most reliable coincident indicators is real GDP

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Lagging Economic Indicators

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measures that consistently rise or fall several months after an expansion or contraction begins

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Recession

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a period of declining national economic activity, usually measured as a decrease in GDP for at least two consecutive quarters (six months) -possible causes of recession: • a negative shock to the economy, such as rapidly rising oil prices, a terrorist attack, or a stock market crash. • a rise in interest rates • shortages of raw materials

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Inventory

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merchandise that companies or stores have on hand

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Depression

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a prolonged economic downturn characterized by plunging real GDP and extremely high unemployment

Economics Unit 3, Ch 13 – Flashcards

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