Chapter 7

GDP gap

Actual gross domestic product minus potential output; may be either a positive amount or a negative amount

Real interest rate

Expressed in dollars of constant value and equal to the nominal interest rate less the expected rate of inflation

Rule of 70

Tells how many years it takes to double real GDP; found by dividing 70 by annual percent rate of growth.

Deflation

Decline in economy's price level

Nominal interest rate

Expressed in terms of annual amounts currently charged for interest and not adjusted for inflation

Unanticipated inflation

Increases in the price level at rate greater than expected

Productivity

Measured as real output per unit of input.

Structural unemployment

Total demand for labor changes due to change in demand for a product or changes in technology. (ex. many workers in cassette tape factories had to find new jobs because cassette tapes are no longer largely demanded)

Business Cycle

Alternating increases and decreases in the level of economic cycle. Four stages: recession, trough, expansion, peak.

Cost of living adjustments

An automatic increase in the incomes of workers when inflation occurs guaranteed by a collective bargaining contract between firms and workers

Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades?

Economic growth is important because it's allows people to meet their economic wants and lessens the the burden of economic scarcity. The difference between growth rate would be of a great significance because it may mean the difference between starvation and mere hunger.

Recession

In a business cycle, this is a period of decline in output, income, and employment. There is widespread contraction of the economy. Real GDP decreases, while unemployment increases.

Expansion

In a business cycle, this is a period where real GDP, income, and employment rises as the economy approaches full employment.

Peak

In a business cycle, this is a temporary maximum where the economy is at or near full employment. Real output is at or near capacity.

Trough

In a business cycle, this is where output and employment is at its lowest levels.

Economic Growth

Increase in real GDP occuring in a time period OR increase in real GDP per capita over a time period

Cost push inflation

Increases in price level resulting from an increase in resource costs

Demand pull inflation

Increases the price level resulting from an excess of demand over output at the existing price level caused by an increase in aggregate demand

Anticipated inflation

Increases the price level that occur at the expected time

Discouraged workers

Individuals that do not have a job and are not actively seeking work. These people are NOT in the labor force.

Real GDP Per Capita

Measures economic growth; found by dividing real GDP by size of population

Labor force

People in a population who are able and willing to work. Employed people and those actively seeking work are included.

Frictional unemployment

People in this category are searching for jobs (ex. college students who just graduated and are looking for jobs) or waiting to get a job (ex. people going from a low paying job to a higher paying one). Inevitable and always exists in an economy.

Hyperinflation

Rapid rise in pride level and inflation

Inflation

Rise in the general level of prices in the economy

Real income

The amount of goods and services that can be purchased with nominal income during some period of time nominal income adjusted for inflation

Per unit production costs

The average production cost of a particular level of output total input cost divided by units of output

What are the four phases of a business cycle? How long do business cycles last? How do seasonal variations and long run trends complicate measurement of the business cycle? Why does the business cycle affect output and unemployment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables?

The four phases of the business cycle are peak, recession, trough, and expansion. Business cycle lengths vary. Seasonal variations and long run trends complicate the measurement of the business cycle because people are not prepared for the shift in the cycle since they are unexpected. The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables because the quantity and quality of purchases of nondurables will decline, but not as much as will purchases of capital goods and consumer durables.

Okuns law

The generalization that any 1 percentage point rise in the unemployment rate above the full employment unemployment rate will increase the GDP gap by two percent of the potential output of the economy

CPI

The index that measures the prices of a fixed market basket of some 300 goods and services bought by a typical consumer

Nominal income

The number of dollars received by an individual or group for its resources during some period of time

Unemployment rate

The percent of the labor force that is unemployed. It is found by dividing the number employed by the number in the labor force and then multiplying by 100.

Potential output

The real output an economy can produce when it fully employs its available resources

Cyclical unemployment

Unemployment caused by insufficient demand for goods and services as well as a decline in total spending. This usually occurs during a recession.

Full rate of unemployment (Natural rate of unemployment)

Usually at a 4-5% unemployment rate (NOT at 0%!! There will be frictional and structural unemployment even at full employment). At this rate, the economy is said to be producing at potential output and is at full employment. The number of job seekers equal the number of job vacancies. Economy cannot remain at this rate for a long time.