Inflation, unemployment, poverty, GDP, business cycles, and economic growth – Flashcards
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gross domestic product (GDP)
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dollar value of FINAL goods and services produced within a country, in a year
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four limitations of using GDP to measure economic growth
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nonmarket activities- babysitting, lawn mowing underground economy negative externalities quality of life
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real GDP
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GDP expressed in constant, or unchanging, prices
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nominal GDP
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GDP measured in CURRENT prices
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aggregate supply
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the total amount of goods and services in the economy available at all possible price levels
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aggregate demand
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the average of all prices in the economy
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national income accounting
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a system that collects macroeconomic statistics on production, income, investment, and savings
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GNP
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the annual income earned by the US owned firms and US residents
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GDP
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the dollar value of all final goods and services produced within a country's borders in a given year
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GDP includes...
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-Consumer spending -Business Investments -Government spending ex) missiles -Net exports *used to define standard of living
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consumer spending
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accounts for 70% of GDP -durable goods (cars, appliances, apartments*) -non durable goods -services (haircuts)
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business investment
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-capital goods -INC. in business inventory -construction ex) HOUSES*
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net exports is...
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exports-imports
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NOT apart of GDP...
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-financial transactions ex) Social Securities -stocks and bonds -used goods ex) eBay - do-it-youreself-work -underground economy
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what happens to the unemployment rate during an expansion?
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unemployment rate drops
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what happens to the real GDP at the peak of the business cycle?
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real GDP stops rising
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what happens to the real GDP during a contraction?
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real GDP declines
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What happens to unemployment rate during a contraction?
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unemployment rate rises
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what happens to the real GDP when the economy reaches a trough?
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the economy is "bottomed out" real GDP STOPS falling
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how do we know we are in a recession?
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if real GDP falls for 2 consecutive quarters (6mo's)
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recession
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prolonged economic contraction
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depression
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if a recession is particularly long and severe -high unemployment -low factory output
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stagflation
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decline in real GDP combined with a RISE in price level (inflation) ***result of negative supply shock
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how does an increase in investment affect the economy?
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all investment spending... -creates additional output jobs -increasing GDP -maintaining expansion
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how do high interest rates affect consumers?
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consumers are less likely to buy when rates are high
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how do high interest rates affect business spending on capital?
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*low rates* ---> business' borrow money to make new investments *high rates*---> investments dry up, job growth declines
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if consumers expect the economy to weaken, how does this impact consumption spending?
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weak economy causes consumer confidence to fall, so consumers begin to save money (contraction)
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how does this negative external shock affect the aggregate supply curve?
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GDP declines and price level rises ex) disruption of oil supply, wars, drought
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examples of positive supply shock
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discovery of oil, good growing season
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how would a positive supply shock affect aggregate supply?
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shift AS curve to the right lowering prices and increasing GDP
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what brought the economy out of the Great Depression?
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WWII
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what are leading economic indicators supposed to predict?
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business cycle
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how is human capital deepened?
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through training programs and on the job experience
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what happens when saving rises?
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more investment funds become available to firms, spend on capital
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how does increased investment help the economy?
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leads to higher amount of capital per worker (capital deepening)
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what happens when population growth and capital remains constant?
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amount of capital over worker decreases, lowering the standard of living
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how do economists measure the impact of technological progress on economic growth?
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how much growth in output comes from increase in capital and increase in labor
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how does the government aid technological innovation?
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organizations such as Nation Science Foundations *sponsors basic research ex) patents
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savings rate
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proportion of disposable income spent to income saved
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real GDP per capita
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the real GDP divided by the total population
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capital deepening
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increasing the amount of capital per worker
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savings
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income not used for consumption
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what happens to consumer and business spending when interest rates go up?
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both decline
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disposable personal income
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the amount of money a person has left after their income taxes
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how is nominal GDP converted into real GDP?
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through eliminating the effects of price increases on GDP growth
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higher savings leads to higher GDP in the future because...
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more capital is available for investment, leading to higher output through capital deepening
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when the economy is working properly, the unemployment rate should be...
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4-6%
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the market basket is made up of?
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typical goods and services for an urban household
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what is a major problem for businesses during a period of chronic inflation?
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producers raise prices to meet increased production costs
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unemployment rate (formula)
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(labor force-Employed) / labor force X 100
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what source of economic growth is reflected in the economy by an increase in productivity WITHOUT an increase in land, labor or capital?
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technological progress
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the poverty threshold, or poverty line varies according to...
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the size of the family
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one problem with using the real GDP per capita as a measure of standard of living is that it....
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fails to tell us the distribution of income in that country (rich, poor)
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if population grows and capital remains constant...
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living standards will begin to decline
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June 9th
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Our last recession
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productivity
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real output per worker hour
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high interest rates causes consumption of "big ticket" items to...
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decrease
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the underground economy includes..
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those who do not report their income
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aggregate demand (formula)
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C + I + G + Xn (consumption + business investments + government spending + net exports)
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labor productivity
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output per labor hour
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current GDP total
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17 trillion dollars
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our net export category of our GDP is currently...
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Negative
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nominal
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a $ number that has not been adjusted for inflation or deflation
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recovery
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phase of the business cycle occurs when the economy begins to grow after a recession
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a country's standard of living is defined by
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real GDP per capita
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real
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a $ number that HAS been adjusted for inflation or deflation
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Increase in investments cause aggregate demand to...
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Increase
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frictional unemployment
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*occurs when people take time to find a job ex) unhappy w/ current job, takes time to look for another ex) a students takes time to interview different job positions ex) family matters occur- then return to workforce
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seasonal unemployment
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*occurs as a result of harvest schedules or vacations, or when industries slow/shut down for a season ex) after school year ends, student takes time to find a summer job ex) seasonal workers - farmers
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structural unemployment
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*occurs when workers' skills DO NOT match available job 1) New Technology- job replacement 2) New Resources- whale oil to petroleum 3) Globalization- local to global (moving to another country for cheaper labor) 4) Lack of Education 5) Changes in Consumer Demand
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cyclical unemployment
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unemployment that RISEs during economic downturn and FALLS when economy improves downturn > demand drop > slow in production > labor demand drop > employee layoffs
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labor force
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ALL nonmilitary people who are employed AND unemployed
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unemployed
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-a person who has work lined up -actively seeking work -temporarily out of work -not working and has looked for work within the past 4 weeks
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full employment
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level of unemployment reached when there is NO cyclical unemployment *achieved when our unemployment rate = natural rate of unemployment
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natural rate of unemployment
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5-6%
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problems with unemployment statistics:
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- counts underemployed workers - does NOT count discouraged workers - does NOT count underground workers
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underemployed
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working at a job for which one is OVER qualified or working part-time when wanting full-time
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discouraged
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*not included in unemployed rate a person who wants a job but has given up looking
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underground
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unreported/ illegal ways of income
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included in labor force:
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- part-timers - underemployed - unemployed teacher
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NOT included in labor force:
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- discouraged workers - students * still employed - retired people * still employed - disabled people *still employed - housewives *still employed - no-good bums
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what condition must exist for everyone in a household to be counted as poor?
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if the family's total income is below the poverty threshold
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what does the poverty rate help us understand?
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-who the government considers poor -contributing factors
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what has divorce rate shown about poverty?
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divorce leads to more single parents which leads to higher poverty rates
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percentage of the nation's total income that the lowest 40% of the population receives
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12.5%
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Two key factors that contribute to the differences in income distribution:
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1) differences in skills and education 2) inheritances
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what programs and laws help working people achieve an adequate income?
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-enterprise zones -job trainings -welfare reform
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how might the welfare reform program help reduce poverty?
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by providing the poor with labor skills and access to steady income
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the income distribution is a...
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graphed curve that illustrates income distribution in the economy
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workfare
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the program that requires work in exchange for assistance
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poverty rate
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percentage of people in a particular group who are officially considered living in poverty 13% in US (40 million) 17% in Texas *higher for children blacks, hispanics, and single parent families
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poverty threshold
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the level on income below which is insufficient to support a family
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poverty threshold for a family of 4:
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about $12/hour $24,000/ year
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full employment as defined in this class means...
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no cyclical unemployment
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a core inflation rate...
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EXCLUDES food and energy
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generally hurt by unanticipated inflation
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lenders
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if the US economy experiences inflation then the...
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REAL value of the dollar DECREASES
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Increases in per-unit productions costs will cause...
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cost-push inflation
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inflation
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a general increase in prices ***affects the CONSUMER
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target inflation rate of Federal Reserve
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2%
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hyperinflation
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extreme inflation, out of control
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deflation
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a sustained drop in price level ***affects PRODUCERS
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disinflation
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a DECREASE in the inflation rate *goal of Federal Reserve
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price index
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measurement of the average price of a standard group goods changing over time **based on the market basket
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purchasing power
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ability to purchase goods and services
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how is the CPI computed?
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market basket
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how often is the market basket updated?
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monthly
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CPI (formula)
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(updated cost / base period cost) X 100
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Quantity theory of inflation
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theory that too much money in economy causes inflation
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Demand-pull theory
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theory that inflation occurs when demand for goods and services exceed existing supply
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Cost-push theory
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theory that inflation occurs when producers raise prices to meet increase costs ***increase in per unit per production cost ex) energy
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borrowers may....
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benefit from unanticipated inflation
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the TANF block grant program set a......
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5 year limit on welfare benefits
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most commonly used measurement of inflation
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CPI
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how much more of college grads earn than high school graduates over a life time?
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3x's
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what causes supply- side inflation?
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-an increase in per unit production costs -negative supply shock
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senior citizens on a fixed nominal income may be...
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hurt from unanticipated inflation
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the Lorenz curve
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shows the inequality of income distribution
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the base year of the CPI is always...
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100
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savers may be....
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HELPED by DEFLATION
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the core CPI includes...
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food and energy
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spending by all sectors in the economy is called...
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aggregate demand
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the market basket for the CPI s changed every...
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10 years
