Macroeconomics Problem Set 2 – Flashcards
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Macroeconomics
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study of the economy as a whole
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What are the three economic goals?
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Promote economic growth, limit unemployment, limit inflation
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Gross Domestic Product (GDP)
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dollar value of all final goods and services produced in one country per year
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National Income Accounting
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statistics on production, income, investments, and savings
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GDP Change Formula
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%change in GDP=((year 2- year 1)/year 1)*100
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GDP per capita
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GDP divided by the population; identifies the amount an individual produces
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What are the five elements of Productivity?
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economic system, property rights, capital, human capital, and natural resources
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What is not included in GDP?
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Intermediate goods, financial transactions, used goods, and non-market/illegal activities
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What are the two ways of counting GDP?
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Expenditures and Income Approach
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Expenditures Approach
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add up all money spent on final goods in a year
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Income Approach
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add up all income as a result of selling goods and services in a year
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What are the four components of GDP in the expenditures approach?
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Consumer spending, investments, government spending, and net exports
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Formula for GDP
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GDP=C+I+G+Xn
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What are the four components of GDP in the income approach?
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labor income, rental income, interest income, and profit
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Inflation
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the rising general level of prices; reduces purchasing power of money
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Nominal GDP
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GDP measured in current prices
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Real GDP
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GDP adjusted to inflation
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Unemployment
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people who are looking for a job but are currently out of work
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Unemployment Rate Formula
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Unemployment Rate=(#unemployed/#in the labor force)*100
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Who is included in the labor force?
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age 16 and older, able and willing to work, not institutionalized, not in military, not in school full time, retired
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Frictional Unemployment
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temporary unemployment in between jobs either because the worker was fired or quit
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Seasonal Unemployment
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type of frictional unemployment caused by time of year and nature of job (ex:snowplow workers)
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Structural Unemployment
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change in the labor force making some skills obsolete (ex:VCR repairman)
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Technological Unemployment
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type of structural unemployment where workers are replaced by machinery
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Cyclical Unemployment
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unemployment caused by recession; demand for goods and services falls leading to decrease demand for labor, leading to the firing of workers
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Natural Rate of Unemployment (NRU)
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amount of unemployment that exists when the economy is healthy and growing; adds frictional and structural unemployment
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Full Employment Output
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real GDP created when there is no cyclical unemployment
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What are some criticisms of unemployment rates?
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unemployment rates do not take into account discouraged workers, underemployed workers, and race/age inequalities
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Deflation
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decrease in general prices
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Disinflation
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prices increase at slower rates
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Who is hurt by inflation?
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lenders, people with fixed incomes, and savers
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Who is helped by inflation?
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Borrowers, businesses where price of a product increases faster than the price of resources
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Nominal Wage
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wage measured by dollars rather than purchasing power
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Real Wage
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wage adjusted for inflation
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Inflation Rate
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percent change in prices from year to year
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Price Indices
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index numbers assigned to each year that show how prices have changed relative to a specific base year
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Consumer Price Index (CPI) Formula
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CPI=(price of market basket/ price of market basket in base year)*100
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What are some of the problems with CPI?
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does not measure substitution bias, new products, or product quality
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GDP Deflator Formula
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GDP Deflator=(nominal GDP/real GDP)*100
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What are the three causes of inflation?
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government prints too much money, demand-pull inflation, and cost-push inflation
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Velocity of Money
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the average number of times a dollar is spent and re-spent in a year
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Quantity Theory of Money Equation
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money supply*velocity=price level*quantity of output
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Demand-Pull Inflation
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demand pulls prices up; economy with excessive spending but the same amount of goods
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Cost-Push Inflation
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higher production cost results in increased prices
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Real Interest Rates
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percentage increase in purchasing power that a borrower pays (adjusted to inflation)
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Real Interest Rates Formula
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Real Interest Rate= nominal interest rate- expected inflation
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Nominal Interest Rates
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percentage increase in money that the borrower pays not adjusted to inflation
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Nominal Interest Rates Formula
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Nominal Interest Rate= real interest rate+expected inflation
