Melchor Economics Ch 24-27

real GDP
measures the value of final goods and services produced within the borders of a given country during a given period of time, typically a year (measured in constant dollars, aka GDP without inflation)
nominal GDP
measures the dollar value of all goods and services produced within the borders of a given country using their current during the year that they were produced (differs from the other kind of GDP because this one is in current dollars)
which type of GDP is the appropriate measure one should use to determine changes in economic activity across time
real GDP because nominal GDP captures both changes in output and changes in prices over time, meaning that nominal GDP may increase without any change in real economic activity
the state a person is in if he or she cannot get a job despite willing to work and actively seeking work
an increase in the overall level of prices
generated when current consumption is less than current output
resources are devoted to increasing future output
financial investment
captures what ordinary people mean when they say investment, namely the purchase of assets like stocks, bonds, or real estate in the hope of reaping financial gain
economic investment
only includes money spent purchasing newly created capital goods such as machinery, tools, factories, and warehouses; this is what economists mean when they refer to investment
households are the principal source of savings or investors
businesses are the main economic investors or savers
economic investors
inflexible prices aka “sticky prices”
help explain how unexpected changes in demand lead to fluctuations in GDP and employment, which is referred to as the business cycle
real gross domestic product will increase if there is an increase in the…
level of output
suppose that real GDP increases by 5% while the population of a country increases by 7%. then output per person necessarily…
in economics, the word shocks refers to
situations where firms’ expectations are unmet
higher oil prices are most likely to lead to a positive or negative ____ shock
a negative supply shock
what is true about advanced economies
economies experience a positive growth trend over the long run, but experience significant variability in the short run
before the period of modern economic growth, rates of population growth virtually____ rates of output growth
if an economy wants to increase its current level of investment, it must…
sacrifice current consumption
how does national income accounting measure the economy’s performance
by measuring the flows of income and expenditures over a period of time
the monetary measure of the total market value of all final goods and services produced within a country in one year; what has been produced in the economy over the year, not what was actually sold
intermediate goods aka semi-finished products
goods , such as partly finished goods, used as inputs in the production of other goods including final goods
does GDP keep intermediate goods
no because intermediate goods would overstate GDP
does GDP keep purely financial transactions like public transfer payments, private transfer payments, and the sale of stocks and bonds
are brokers’ fees included in GDP
yes; for services rendered
two ways to look at GDP
what is spent on a product is income to those who helped to produce and sell it

this is an important identity and the foundation of the national accounting process

expenditures approach
GDP = C + Ig + G + Xn
categories of buyers in the market
household consumers, businesses, government, and foreign buyers
personal consumption expenditures; includes durable goods, nondurable goods, and services
gross private domestic investment

all final purchases of machinery, equipment, and tools by businesses

all construction (including residential)

changes in business inventory

noninvestment transactions – only newly created capital is counted as investment

net private domestic investment (In)

net private domestic investment (In)
as output is being produced, existing capital equipment is wearing out and buildings are deteriorating (aka consumption of fixed capital)

gross investment minus depreciation is called net investment

when gross investment and depreciation are equal, a nation’s productive capacity is static

gross investment is less than depreciation, an economy’s production capacity declines

government purchases of consumption goods and capital goods
net exports; exports minus imports (can be positive or negative number)
income approach
demonstrates how the expenditures on final products are allocated to resource suppliers as income
parts of income approach
compensation of employees

rents: payments for supplying property resource (Adjusted for depreciation it is net rent)

interest: payments from private businesses to suppliers for money capital

proprietors’ income: income of incorporated businesses, sole proprietorships, etc.

corporate profits: dividends are distributed to shareholders after corporate income taxes are paid to government, and the remainder is left as undistributed corporate profits (aka retained earnings)

taxes on production and imports

the sum of above entries equals national income

national income
all income earned by American supplied resources, whether here or abroad, plus taxes on production and imports
GDP doesn’t measure some very useful output because it is…
unpaid (homemakers’ services, parental child care, volunteer efforts, and home improvement projects)
GDP doesn’t measure improved living conditions as a result of more…
GDP does not measure improvements in product quality or make allowances for…
increased leisure time
the Underground Economy
illegal activities are not counted in GDP (8% of the US GDP); legal economic activity may also be part of the underground, usually in an effort to avoid taxation
GDP and the environment
the harmful effects of pollution are not deducted from GDP
so what does GDP include in terms of the environment?
payments made for cleaning up oil spills, and the cost of health care for the cancer victim
noneconomic sources of well-being like courtesy, crime reduction, etc are covered or not covered in GDP
not covered
real GDP measures current or base year output and current or base year prices
current output and base year prices
real GDP and nominal GDP differ because the real GDP…
has been adjusted for changes in price level
a consumer price index attempts to measure changes in
the price of a select market basket of goods and services
the rule of 70
uses the absolute value of a rate of change, divides it into 70, and the result is the number of years it takes the underlying quantity to double
main sources of growth
increasing inputs or increasing productivity of existing inputs
real GDP has increased over how much since 1950
six fold
real per capita GDP has risen over…
rate of growth record shows that real GDP has grown about ___ percent per year since 1950
real GDP per capita has grown about how much percent per year
institutional features that promote and sustain modern economic growth
1. strong property rights
2. patents and copyrights
3. efficient financial institutions
4. literacy and widespread education
5. free trade
6. competitive market system
determinants of growth (supply)
1. quantity and quality of natural resources
2. quantity and quality of human resources
3. the supply or stock of capital goods
4. technology
determinants of growth (demand)
1. aggregate demand must increase for production to expand
2. full employment of resources and both productive and allocative efficiency are necessary to get the max amount of production possible
increases in the value of a product to each user, inc existing users, as the total number of users rises are called
network effects
critics of economic growth argue that economic growth does not resolve what type of problems?
socioeconomic problems such as unequal distribution of income and wealth
what’s the US’s economic growth trend
long-run economic growth has been interrupted by periods of instability; uneven growth
four phases of the business cycle
peak, recession, trough, recovery
temporary maximum with full employment and near-capacity output
decline in total output, income, employment, trade lasting six months or more
bottom of recession period
recovery (aka expansion)
when output and employment are expanding toward full-employment level (aka peak)
durable goods are more what than non-durables and services
theories about causation
major innovations trigger new investment and/or consumption spending

changes in productivity

monetary factors

political events

financial stability
level of aggregate spending

unemployment rate is defined as…
the percentage of the labor force that is not employed (includes those age 16 and over who are willing and able to work, and actively seeking work)
shortcomings of unemployment rate
part-time workers are counted as employed and discouraged workers who want a job but are not actively seeking one are not counted as being in the labor force, thus they are not part of the unemployment statistic
frictional unemployment
those searching for jobs or waiting to take jobs soon (most desirable because there is mobility)
structural unemployment
due to the changes in the structure of demand for labor; when certain skills become obsolete or geographic distribution of jobs changes
cyclical unemployment
caused by the recession phase of the business cycle; as firms respond to insufficient demand for their goods and services, output and employment are reduced
full employment
doesn’t mean zero unemployment; the full employment rate of unemployment is also referred to as the natural rate of unemployment; equal to frictional and structure unemployment
the natural rate of unemployment is not fixed by depends on the…
demographic makeup of the labor force and the laws and customs of the nations
natural rate has dropped from…
six percent to five percent to six percent as demographic factors, job search methods, and public policies change
what is the natural rate
achieved when labor markets are in balance; the number of job seekers equals to the number of job vacancies
unequal burdens of employment include…
rates are lower for white-collar workers, teenagers have higher rates, african-americans have higher rates than whites, rates for males and females are comparable historically, less educated workers have lower rates, and long term unemployment rate is much lower than overall rate but it has nearly tripled from 2007 to 2009
consumer price index (CPI)
main index used to measure inflation; subtract last year’s price index from this year’s price index and divide by last year’s index, then multiply by 100 to receive a percentage
demand-pull inflation
spending increases faster than production; “too much spending chasing too few goods”
cost-push or supply-side inflation
prices rise because of rise in per-unit production costs (unit cost = total input cost/units of output); output and unemployment decline while the price level is rising
supply shocks
major source of cost-push inflation; typically occur with dramatic increases in the price of raw materials or energy
core inflation
used to prevent misinterpretation of the changes in the CPI that might be due to temporary changes in supply and demand; economists should be concerned if core inflation increases
who is hurt by inflation
fixed income groups because their real income suffers, savers because their savings will lose purchasing power, lenders because the money debtors are paying back are “cheap” dollars that have less purchasing power for the lender
who can be helped by inflation
debtors because “cheaper” dollars
when would real income rise (example)?
ex. nominal income rises by 2 percent, and the price level remains unchanged

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