Melchor Economics Ch 24-27

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real GDP
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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)
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nominal GDP
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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)
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which type of GDP is the appropriate measure one should use to determine changes in economic activity across time
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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
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unemployment
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the state a person is in if he or she cannot get a job despite willing to work and actively seeking work
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inflation
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an increase in the overall level of prices
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savings
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generated when current consumption is less than current output
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investment
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resources are devoted to increasing future output
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financial investment
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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
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economic investment
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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
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households are the principal source of savings or investors
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savings
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businesses are the main economic investors or savers
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economic investors
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inflexible prices aka “sticky prices”
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help explain how unexpected changes in demand lead to fluctuations in GDP and employment, which is referred to as the business cycle
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real gross domestic product will increase if there is an increase in the…
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level of output
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suppose that real GDP increases by 5% while the population of a country increases by 7%. then output per person necessarily…
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decreases
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in economics, the word shocks refers to
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situations where firms’ expectations are unmet
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higher oil prices are most likely to lead to a positive or negative ____ shock
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a negative supply shock
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what is true about advanced economies
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economies experience a positive growth trend over the long run, but experience significant variability in the short run
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before the period of modern economic growth, rates of population growth virtually____ rates of output growth
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matched
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if an economy wants to increase its current level of investment, it must…
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sacrifice current consumption
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how does national income accounting measure the economy’s performance
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by measuring the flows of income and expenditures over a period of time
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GDP
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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
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intermediate goods aka semi-finished products
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goods , such as partly finished goods, used as inputs in the production of other goods including final goods
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does GDP keep intermediate goods
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no because intermediate goods would overstate GDP
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does GDP keep purely financial transactions like public transfer payments, private transfer payments, and the sale of stocks and bonds
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no
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are brokers’ fees included in GDP
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yes; for services rendered
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two ways to look at GDP
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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
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expenditures approach
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GDP = C + Ig + G + Xn
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categories of buyers in the market
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household consumers, businesses, government, and foreign buyers
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C
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personal consumption expenditures; includes durable goods, nondurable goods, and services
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Ig
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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)
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net private domestic investment (In)
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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
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G
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government purchases of consumption goods and capital goods
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Xn
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net exports; exports minus imports (can be positive or negative number)
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income approach
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demonstrates how the expenditures on final products are allocated to resource suppliers as income
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parts of income approach
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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
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national income
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all income earned by American supplied resources, whether here or abroad, plus taxes on production and imports
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GDP doesn’t measure some very useful output because it is…
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unpaid (homemakers’ services, parental child care, volunteer efforts, and home improvement projects)
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GDP doesn’t measure improved living conditions as a result of more…
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leisure
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GDP does not measure improvements in product quality or make allowances for…
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increased leisure time
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the Underground Economy
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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
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GDP and the environment
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the harmful effects of pollution are not deducted from GDP
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so what does GDP include in terms of the environment?
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payments made for cleaning up oil spills, and the cost of health care for the cancer victim
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noneconomic sources of well-being like courtesy, crime reduction, etc are covered or not covered in GDP
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not covered
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real GDP measures current or base year output and current or base year prices
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current output and base year prices
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real GDP and nominal GDP differ because the real GDP…
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has been adjusted for changes in price level
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a consumer price index attempts to measure changes in
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the price of a select market basket of goods and services
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the rule of 70
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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
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main sources of growth
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increasing inputs or increasing productivity of existing inputs
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real GDP has increased over how much since 1950
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six fold
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real per capita GDP has risen over…
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threefold
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rate of growth record shows that real GDP has grown about ___ percent per year since 1950
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3.2%
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real GDP per capita has grown about how much percent per year
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2%
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institutional features that promote and sustain modern economic growth
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1. strong property rights 2. patents and copyrights 3. efficient financial institutions 4. literacy and widespread education 5. free trade 6. competitive market system
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determinants of growth (supply)
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1. quantity and quality of natural resources 2. quantity and quality of human resources 3. the supply or stock of capital goods 4. technology
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determinants of growth (demand)
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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
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increases in the value of a product to each user, inc existing users, as the total number of users rises are called
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network effects
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critics of economic growth argue that economic growth does not resolve what type of problems?
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socioeconomic problems such as unequal distribution of income and wealth
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what’s the US’s economic growth trend
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long-run economic growth has been interrupted by periods of instability; uneven growth
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four phases of the business cycle
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peak, recession, trough, recovery
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peak
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temporary maximum with full employment and near-capacity output
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recession
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decline in total output, income, employment, trade lasting six months or more
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trough
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bottom of recession period
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recovery (aka expansion)
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when output and employment are expanding toward full-employment level (aka peak)
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durable goods are more what than non-durables and services
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volatile
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theories about causation
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major innovations trigger new investment and/or consumption spending changes in productivity monetary factors political events financial stability level of aggregate spending
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unemployment rate is defined as…
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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)
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shortcomings of unemployment rate
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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
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frictional unemployment
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those searching for jobs or waiting to take jobs soon (most desirable because there is mobility)
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structural unemployment
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due to the changes in the structure of demand for labor; when certain skills become obsolete or geographic distribution of jobs changes
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cyclical unemployment
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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
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full employment
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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
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the natural rate of unemployment is not fixed by depends on the…
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demographic makeup of the labor force and the laws and customs of the nations
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natural rate has dropped from…
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six percent to five percent to six percent as demographic factors, job search methods, and public policies change
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what is the natural rate
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achieved when labor markets are in balance; the number of job seekers equals to the number of job vacancies
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unequal burdens of employment include…
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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
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consumer price index (CPI)
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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
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demand-pull inflation
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spending increases faster than production; “too much spending chasing too few goods”
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cost-push or supply-side inflation
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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
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supply shocks
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major source of cost-push inflation; typically occur with dramatic increases in the price of raw materials or energy
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core inflation
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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
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who is hurt by inflation
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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
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who can be helped by inflation
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debtors because “cheaper” dollars
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when would real income rise (example)?
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ex. nominal income rises by 2 percent, and the price level remains unchanged

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