GDP Test

Peak

eal GDP reaches its maximum and resources are fully employed. When at productivity capacity, unemployment is low

demand-pull inflation

exists when there is an *increase in aggregate demand and prices rise*. This can happen if the money supply grows faster than the production of goods and services(than output)

There are three main types of unemployment

frictional, structural and cyclical unemployment

What is the formula for Real GDP

nominal GDP/GDP price index

Four phases of business cycle

peak, contraction, expansion, peak. Business cycle illustrates the general ups and downs of economic activity

Personal consumption expenditure

-food(non durable goods 29%) don't last a long time -appliances-more than 3 yrs durable Durable goods (12%) long term *Everything else is a service* (car wash, insurance, electricity, transportation going to doctor, getting a haircut) consumer expenditures for services(59%)

transfer payments

-not counted in production involved -opposite of a tax. *Government transfers money to an individual*. Subsidy welfare compensation

How can you measure inflation rate

by examining changes in the consumer price index, which tracks a market basket of common consumer goods and service over time. -To get the percentage change in the CPI it is simply "new minus old over old times 100."

Two types of inflation

demand -pull and cost-push inflation

Inflation

means that prices are rising. The effect of *rising prices* is that your money has *less purchasing power*. You can buy less stuff with the same income that you had in the past.

Troughs

"real GDP bottoms out" it is at its lowest point and unemployment is near its highest point. -The economy will eventually expand. Workers will be hired back, prices will rise, and real output will increase.

creditors

(lenders) are harmed by unanticipated inflation. Creditors are receiving cheaper dollars from debtors. People who earn *fixed incomes* are also negatively affected.

Expansions

(real GDP prises, price level rises, and unemployment rate falls)

NI (national income)

*NDP-NFFIEUS*(net foreign factor income earned in US)*-indirect business taxes*=NI(national income-how much are Americans earning worldwide-gross national product)

Disposable income

*Personal income-personal income taxes*= (DI is what you can spend/save and pay in taxes)

PI=personal income

*undistributed corporate profits-corporate income taxes-social security and TP*(transfer payment)

debtors

benefit from sudden inflation since these debits are essentially paying off loans with cheaper dollars. They*make fixed payments.* The real value of their debt is not worth less.

Which is the largest component of GDP and which is the smallest?

-*Consumption* is the largest component of GDP -*Net Exports* is the smallest.

Marginally attached workers

-ended their job search for a reason *other than a belief that no job was available*. -They may have gone back to *school* or become *disabled*. Marginally attached workers are also NOT included when calculating the unemployment rate.

Subcategories of government

-federal gov(40%) -50 state gov 89,000 local gov(60% for state and local )

There are three components to gross investment:

1. *Business investment* (tools, machinery, plants, capital goods, intellectual property, research, and development) 2. *Residential fixed investment* (construction of new housing..can rent for financial return and apartments) 3. *Adjustment to inventories* (accounts for unsold goods in the current year)... a net increase in inventories is positive, a net decrease in inventories is negative) Investment or disinvestment represents the sale of output produced in a given year.

Name 8 things excluded from a nation's GDP

1. Financial transactions (stocks and bonds) 2. Transfer payments(social security checks) 3. Used goods (secondhand golf clubs) 4. Non-market transactions (cleaning your room) 5. Illegal transactions (bootlegging) 6. Unreported transactions (tips you do not report to the government) 7. Intermediate goods (fabric in net) 8. Goods produced in other countries (your cellphone made in China)

Business cycle characteristics-Expansion

1. Less unemployment 2. Increase in Real GDP 3. Rapid job growth 4. *Increase in interest rates* 5. Increasing prices 6. Fewer social problems (alcoholism domestic violence, divorces and suicides) *Recession is the opposite*

shortcomings of GDP

1.non-market transactions do not count (leisure is not factored in) 2.Improved product quality 3.underground economy not counted 4.GDP impact on environment (spill over costs) 5.Does not reflect/account for income distribution (wealthy country can have the most poverty)

Why is unemployment rate never zero?

A worker who is *quite confident in finding a job has not accepted a position* is counted as unemployed.

GNP (gross national product) ownership

All goods and services produced legally for pay by citizens of a country in 1 yr. (*citizenship* mattered not geography)

GDP -location

All goods and services produced legally for pay in a *country's* border in 1 yr (Geography matters, not citizenship)

Structural unemployment

Also natural. It occurs when certain *skills of laborers are no longer needed*. This includes people who are replaced by *technology* or new industries through *creative destruction*. These people need to retrain or move to find work. There are more people seeking jobs in a labor market than there are jobs available at the current wage rate.

Economic growth

An increase in Real GDP per capita -(Real GDP/population=real GDP per capital) -growth is a goal(it lessons the burden of scarcity)

What makes up the private sector?

C(consumption) and Ig(gross investment)

What makes up the natural rate of unemployment at the full employment level of output.

Frictional and Structural unemployment. They are completely normal in an economy

unemployment rate

measures the percentage of people in the labor force that are *presently unemployed and actively looking for employment.*

NDP(Net Domestic Product)

GDP-depreciation (replacement capital/consumption of fixed capital/value of loss capital

GDP formula

GDP= C +IG +G +Xn GDP= consumption + gross investment + government spending +exports-imports.

GDP expenditures approach

GDP=(66%) + IG(18%) + G(17%) + Xn (-1%) Xn is negative because we *import more than we export*

Fisher equation

It defines the real interest rate and shows how inflation or expected inflation affects the real interest rate. Businesses that invest in capital goods and households that borrow and/or save money should pay close attention to this equation.

recession

Real GDP declines 6 months

Arithmetic of growth

Rule of 70 (70/10%=7 years)

Government purchases (G)

State, local and federal G purchases of goods and services produced (not transfer payments)

What is GDP

The monetary value of all final goods and services produced by a country in one year. Sum of expenditures of all goods produced (or income earned) within a nation's border in one year.

What is the base year? How do u know

The real GDP=nominal GDP -price index=100

Cost-push inflation

The scarier type. This occurs when *production costs increase or a negative supply shock occurs*. Aggregate supply shifts left and we end up with higher prices, but, we also end up with more unemployment. This is a condition known as stagflation

Discouraged workers

The unemployment rate is *understated* because unemployment rate does *NOT count discouraged workers* (people that have given up their job hunt.) They give up finding a job given the state of the job market.

Under-employed workers

Workers who would like to work more hours or are overqualified for their jobs. *They do NOT count as unemployed.* ex: College graduates who work as fast food clerks are considered the same as fully employed

Cyclical unemployment

Worst of the three types. Cyclical unemployment is the *result of a recession.* This includes people who are *laid off* from work because the *economy has contracted.* -It is associated with a downturn in the business cycle. As *unemployment rate increases beyond its natural rate*, cyclical unemployment now exists and the economy is most likely in recession.

Calculating GDP

You can add up a nation's overall income to get GDP too. GDP is equal to the sum of wages and salaries, rents, interest income, profits, indirect business taxes, depreciation of capital, and net foreign factor income

How does GDP effect unemployment rate

You can conclude that unemployment rate is rising.

unemployed person

an unemployed person is one that is over 16, non-institutionalized, and actively seeking employment.

Economic recovery

an upturn-Real GDP rises

Nominal GDP

has not been adjusted for changes in the price level and *reflects the market value of all goods and services in the year*

main sources of growth

increase in resources, productivity (health, training, education, and motivation improvements)

What is the relationship between GDP and unemployment

inverse relationship

Real GDP per capita

is another great way to measure economic growth and a nation's general economic well being. -It represents the output per person within an economy. We use this measure to *determine whether a nation's standard of living is increasing or decreasing*

labor force

is comprised of those people looking for work AND those that are currently working, including part time and full time workers.

Real GDP

is output that has been adjusted to hold the *price level constant.* This way we can measure the level of goods and services that are produced over a period of time without worrying about changes in prices Real GDP measures all of a nation's output, which makes it one of the most important measurements of economic growth over time. However, an increase in nominal GDP could mean that *prices and output have increased*; so *nominal GDP is NOT the best measurement of growth*

Frictional unemployment

is temporary(natural) or seasonal. This includes *recent graduates and people who quit their jobs to find something better*. People are between jobs. Frictional unemployment ALWAYS exists in an economy. There are always people looking for a better job than their first

Disinflation

is when the rate of inflation *slows down*.

Deflation

prices generally rise over time, but sometimes prices fall. Deflation occurs when the *inflation rate becomes negative.*

contractions

real GDP falls, price level falls, and unemployment rises, inventories rise

inflation can reduce

real interest rates and real wages.

How do you measure the rate of unemployment

take the number of people that are unemployed and looking for work and divide by the number of people that are working plus the number of people looking for work(labor force). -To make it a percentage multiply by 100.

What helps determine is a country is rich

technology, property rights, markets.

What is included in a nation's gross domestic product?

the four components to a nation's gross domestic product are *consumer expenditures*(what households buy), *gross investment spending* (what businesses buy,)*government spending* (what government buys) and *net export spending* (what we export minus what we import.)

The thin upward sloping line through the business cycle symbolizes

the trend of economic growth.

What does the business cycle show

upturns and downturns of the economy.