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.