| 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 |
