ECO 120 review
flows that occur between: households and governmetn
Households pay taxes receipt of transfers lend funds to governments
How inflation creates winners and losers
The borrower receives funds are the beginning and the loan contract specifies how much he or she must repay at some future date. But what that dollar repayment is worth in real terms-that is, in terms of purchasing power-depends realty on the rate of inflation over the intervening years of the loan.
what makes up the largest percentage of GDP measured by aggregate spending?
consumer spending
menu costs
cost of changing the list price of items that are offered for sale. In periods of high inflation, firms are forced to alter prices often, which results in higher costs for the economy as a whole
price index equation
cost of market basket in given year/cost of market basket in base year X 100
why do growth rates vary
countries w rapid growth tend to add physical capital, increase human capital, or experience rapid technological progress.
depreciation
currency becomes less valuable
problems w deflation
-a surprise fall in the price level -creates winners and losers -customers were unable to pay back their loans
problems w disinflation
-bringing the inflation rate down -very difficult and costly once a higher rate of inflation has become well established in the economy.
depression
deep and prolonged downturn
why do growth rates vary in diff regions of the world?
due to diff in their rates of accumulation of physcial and human capital as well as differences in technological processes. prime factor: differences in savings and investment rates
markets where labor and capital are bought and sold are called ____ markets
factor markets
appreciation causes exports to _______ and imports to _____
fall, rise
deflation
falling aggregate price level
when economy is experiencing expansions....unemployment ____________ (rises or falls)
falls
Natural unemployment = ___ + ____
frictional unemployment + structural unemployment
cirucular flow diagram assumes that the factors of production are owned by _________
households
flows that occur between: household and firms
i. Sale of FOP to firms, ii. Purchasing from firms of final goods and services iii. Household lend funds to firms
economists focus on real GDP per capita because.....
its the only measure that accounts for both changes in the population and changes in price
physical capital
manmade resources like buildings and machines
convergence hypothesis
predicts that poorer economies per capita incomes will tend to grow at faster rates than richer economies
how is unemployment rate overstated
some ppl can get a job but are searching for a specific job
GDP is equal to
the income earned by the factors of production
Value added is best defined as
the value of a firm's sales minus the value of purchased intermediate goods and services
Why real GDP is the appropriate measure of real economic activity
total value of g&s produced in the economy during a year, calculated with same price of base year real GDP focuses on changes in Q by eliminating influence of changes in prices.
frictional unemployment
unemployment due to job search; whether this job search is due to the process of job creation and job destruction or the fact that new workers are constantly entering the labor force
depreciation causes exports to ___ and imports to ___
rise, fall
economic costs of inflation
shoe-leather costs menu costs unit of account costs
what does the CPI do
shows how cost of all purchases have chagned over time
Real GDP rule of 70
# of years it takes a variable to double is approximately equal to 70/the annual growth rate of the variable. real GDP is slowly increasing
unemployment rate equation
# unemployed ppl/LF X 100
labor force participation rate
(LF/population age 16 and older) X 100
how is inflation rate measured
(price index in 2 - price index in year 1)/ price index year 1 X 100
unemployed
ppl actively looking for work but arent employed
how is unemployment understated
ppl who have given up looking for a job
human capital
improvement in labor created by education and knowledge
real value of income
income/price level
sources of LR economic growth
incr. physical capital ince. human capital incr. technology
nominal interest rate
interest rate in dollar terms
real interest rate
nominal interest rate - inflation rate
recession
periods of economic downturns where output and employment are falling
business-cycle peak
point economy turns from expansion to recession
business-cycle trough
point economy turns from recession to expansion
inflation
rise in aggregate level of prices
GDP
sum of consumer spending on goods and services, investment spending, gov spending, and the difference between spending on exports and imports
3 ways to calculate gdp
1. Add up total spending on domestically produced final goods and services in an economy during a given time period 2. Sum of the total value of factor income paid by firms in the economy to households. 3. Add up the total value of final goods and services produced in an economy during a given time period. **Requires that the value of intermediate goods be excluded from the calculation in order to avoid double counting
structural unemployment
1. unemployment that occurs when there are more people seeking jobs in a labor market than there are jobs. Might happen when there are more workers with a particular skill than there are available jobs using that skill 2. ???
shoe-leather costs
refer to the effort people expend to reduce their holdings of money during periods of high inflation.
challenges to growth bc of natural resources
resource scarcity
define business cycle
short-run alteration between recessions and expansions
labor force
sum of employed and unemployed
In a circular-flow diagram, funds that flow between households and the government are _____ and ______
taxes and transfers
real gdp
value of aggregate production during a given time period uses prices from same given base year. uses constant prices
4 types of income recieved by households from firms via factor methods
wage stock interest income
real wages
wage rate/price level
expansion
(recoveries) periods of ec. upturns when output and employment are rising
aggregate production function definition
a mathematical equation describing the relationship between level of output per worker (productivity) and the amount of human capital per worker, phsycial capital per worker, and the state of technology
sources of LR economic growth
productivity. increases in human capital, physcial capital, and technology
appreciation
currency becomes more valuable in terms of other countires
how to measure LR economic growth
depends almost only on increases in output per worker (labor productivity) Real GDP/# of ppl working
price index definition
measures cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the base year
what determines exchange rates
prices at which currencies trade
unit-of-account costs
tthe way inflation makes money a less reliable unit of measurement; in particular, in periods of high inflation, contracts that are stated in monetary terms are harder to evaluate due to the changing value of the monetary unit. Tax systems are subject to unit of account costs if these tax systems are not adjusted for inflation, since the inflation can distort the measures of income on which taxes are collected.