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What is GDP? (Gross Domestic Product)
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Macro Midterm
Macro Chapters 5-8
| Question | Answer |
|---|---|
| What is GDP? (Gross Domestic Product) | Market value of all final goods and services produced in a country in a given year. Measured quarterly |
| average price level? | Measure of the overall level of prices at a PARTICULAR POINT IN TIME |
| What are the phases of the business cycle? | Expansion Peak Contraction Trough Expansion again |
| Expansions | Expansions are longer than contractions Economy grows over time |
| Contractions | Contraction = recession REALLY bad contraction = depression |
| What phase are we in right now? | Expansion |
| What is a leading indicator? | Variables predicting turns in business cycle. EX. Orders of equipment Stock market |
| What is a coincident indicator? | Reflecting the business cycle as it occurs EX. Total employment Personal income |
| What is a lagging indicator? | These variables change as a result of the business cycle EX. Interest rates The unemployment rate The duration of unemployment |
| What relationship is shown by the AD (Aggregate Demand) curve? | Relationship between price level and real GDP demanded |
| Why does the AD (Aggregate Demand) curve slope down? | Higher price level reduces wealth and spending |
| What relationship is shown by the AS (Aggregate Supply) curve? | Relationship between price level and real GDP supplied |
| Why does the AS (Aggregate Supply) curve slope up? | Short Run- firms do not adjust their price instantly to changes in the economy. |
| 2007-09 recession | Fall in housing prices 18 months Falling in wealth Financial crisis for lenders Falls in spending and AD GDP Decline 5% Employment fell 6.1% |
| Great Depression | Post WWII average: 11 months |
| 1973-75 Stagflation | Widespread inflation Result: higher production costs decrease AS |
| What is measured in GDP | The total value of all final goods and services produced in a country in a given year. |
| How often is GDP Measured? | Every Year |
| Calculating GDP--expenditure approach What are the components? | Consumption (70%) Investment Gov’t purchases Exports - Imports |
| GDP Expenditure What is the largest component? | Consumption (70%) |
| GDP Expenditure What is the most volatile component? | Investment |
| Calculating GDP--income approach | Calculated by summing the value of resource costs and incomes generated during the measurement period. |
| Calculating GDP--income approach What is the largest component? | Income |
| What are the limitations of GDP as a measure of output & social welfare? | GDP only one measure of well-being for a nation |
| Other factors affecting well-being, equity, the environment | Crime rate Education Health |
| The underground economy | Unreported production of goods and services Drugs, Tips |
| Exclusion of nonmarket activities | Unpaid work Housework |
| Nominal vs. real GDP--what’s the difference? | Real GDP measures changes in production only Nominal GDP measures changes in prices AND production |
| Nominal GDP increases when.. | • Price level rises • Output rises • Or both |
| Real GDP Increases When... | • Output rises |
| CPI (Consumer Price Index) --What does it measure? | Measures price level for goods and services used by typical urban consumer “market basket” Measured Monthly by Bureau of Labor Statistics (BLS) |
| CPI (Consumer Price Index)- How is it measured? | Cost of basket in year Z (Divided by) Cost of basket in base year X 100 |
| What are some problems with the CPI as a measure of the cost of living? | CPI overstates true inflation Imperfect accounting of quality improvements Fixed market basket |
| What is GDP Price Index | A measure of the overall price of goods and services related to some base year. |
| How does GDP Price Index differ from CPI? | -The GDP price index uses the prices of all the goods and services in GDP. -The CPI uses prices of consumption goods and services. |
| What is better? Real or Nominal GDP | Real GDP Measures of changes in an economy’s productive capacity over time |
| Real GDP per Capital | Real GDP (divided by) population Standard of living |
| Nominal GDP 2012 | Value of 2012 output in 2012 prices |
| Real GDP 2012 | Value of 2012 output in base yr. prices (2005) |
| Economic Growth | % change in Real GDP/ (Divided by) Time economic growth |
| US unemployment Percentage | 6% |
| Bureau of Labor Statistics (BLS) Household survey | Monthly Survey 60,000 Households |
| Who is in the labor force? | working for pay OR actively looking for work |
| Who is not in the labor force? | children homemakers retirees prisoners full-time students |
| Calculating unemployment rate | # Unemployed (Divided by) Labor Force (Times) 100 |
| Labor force participation rate | # labor force (Divided by) adult population (times) 100 |
| What is the duration of unemployment? | During a recession, median duration rises |
| Fricctional Unemployment | People switch jobs Takes time, info to match people to jobs |
| Seasonal Unemployment | Seasonal changes in labor demand |
| Structural Unemployment | More Serious Changing economy and what/where skills are in demand Solution: retrain or relocate |
| Cyclical Unemployment | Not enough jobs in total Due to a recession We are inside the PPF Solution: government stimulus |
| What do we mean by full employment? | 4-6% unemployment No cyclical unemployment structural, frictional at minimum |
| Why is the goal of unemployment NOT zero? | Frictional unemployment will always exist |
| What is inflation and how is it measured? | increase in the average price level |
| What is the current Inflation Rate | 2% |
| What causes inflation? | Demand Pull, Cost Push |
| Cost Push Inflation | supply side increase in cost of production cost increase passed on all prices rise stagflation |
| Demand Pull Inflation | demand side production cannot keep up with consumer demand “too many $ chasing too few goods” |
| Why is Inflation a Problem? | NOT BECAUSE COST INCREASE Redistributes income Creates uncertainty Causes inefficiencies |
| Shorter Time horizons (Inflation) | Consumers, lenders, firms less willing to commit long-term GDP growth slows |
| Real interest rates | = nominal interest rate – inflation rate |
| Nominal Interest Rates | Stated interest rate |
| Problem with Unemployment | Personal costs Lost output Lower tax revenue Loss of human capital |
| Deflation | Decrease in Price Level |
| Disinflation | Reduce the RATE of inflation |
| Uncertainty (Inflation) | When inflation is high & variable Uncertainty about future prices Some investment not undertaken Some purchases not made Result: lower growth of GDP |
| What is GPD Per Capita | measures improvements in the standard of living of a nation? |
| What causes GDP per capita to rise over time? | Real GDP must increase more rapidly than population. |
| Short Run PPF | Temporary Better use of existing production possibilities Move from INSIDE PPF to OUTSIDE PPF |
| Long Run PPF | Lasting increase in output,& rising living standards Increase in productive capacity PPF shifts out |
| Measure economic growth by | Percent change in real GDP annually |
| What is productivity? | total output per unit of input (Times) Labor productivity* = total output per unit of labor |
| Why do we use labor productivity to measure productivity? | Labor is largest production cost Labor is more easily measured |
| What is the per worker production function? | Relationship between- Labor productivity Capital per worker |
| What is physical capital? | Tools, factories, machines, computers, infrastructure |
| What is human capital? | Knowledge and skills of labor |
| As capital per worker rises | capital deepening Increases in labor productivity and economic growth |
| What affects productivity in practice? | Intense Labor Capital Intensive |
| What do we mean by rules of the game? | Institutions that promote economic activity |
| The role of research | Expand base of knowledge Particular questions & product development |
| What is industrial policy? | Government takes active role in nurturing domestic industries Tax breaks and subsidies |
| US Productivity Slowdown in 1970s | Oil prices and stagflation Environmental regulation |
| US productivity Rebound in 1990 | Information revolution Computer chips, internet |
| Formal Rule of game | laws, governance |
| Informal Rule of game | Corruption, Money Lending |
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