Gross Domestic Product (GDP), Unemployment, and Inflation
What is not included in GDP?
GDP does not include the value of intermediate goods (goods used in the production of final goods and services), nonproduction transactions, and non-market (illegal) activities.
Define gross domestic product (GDP).
Gross domestic product (GDP) is the dollar value of all final goods and services produced within a country's borders in one year.
How is the unemployment rate calculated?
Unemployment rate = (# of unemployed)/(# in labor force) x 100
If zero unemployment is NOT desirable, why?
Zero unemployment is not wanted and is impossible because people will always be searching for better jobs after they quit their previous job.
Define Consumer Price Index (CPI).
Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.
What is frictional unemployment?
Frictional unemployment is defined as "temporarily unemployed" or being between jobs. These individuals are qualified workers with transferable skills, but they are not working.
What are the two types of unemployment that make up the natural rate of unemployment?
1. Frictional unemployment 2. Structural unemployment
What are the 3 types of unemployment?
1. Frictional unemployment 2. Structural unemployment 3. Cyclical unemployment
If someone told you that the nominal GDP increased by 4% in 2004, what 2 additional pieces of information would you need to conclude that the standard of living for the typical person also increased by 4%?
1. Inflation rate (to find the real growth rate) 2. Growth rate of population (to find the real GDP per capita)
What is the natural rate of unemployment at full employment?
At full employment, we have only the natural rate of unemployment.
What is cyclical unemployment?
Cyclical unemployment is unemployment that results from economic downturns. As demand for goods and services falls, demand for labor falls and workers are fired.
Is zero unemployment desirable?
Economists generally agree that an unemployment rate of around 4 to 6% is acceptable.
If the actual inflation is greater than the anticipated inflation, fully explain who would benefit and who would be hurt and explain why?
If actual inflation is greater than the anticipated inflation, then borrowers of money on a fixed interest rate would benefit because they are paying back their debt with less real dollars. Lenders who loan money on a fixed rate interest would suffer because they are getting less real dollars.
Difference between nominal GDP and real GDP
Nominal GDP is GDP based on current output at current prices. While it gives the level of output of the country, GDP can also rise because of rising prices due to inflation. Real GDP gives the level of output in a base year's prices, which shows actual growth.
How to calculate the nominal interest rate?
Nominal rate = Real interest rate + inflation rate
How to calculate the real interest rate?
Real interest rate = Nominal interest rate - inflation rate
What is structural unemployment?
Structural unemployment is defined as changes in the structure of the labor force making some skills obsolete. Workers do not have transferable skills and these jobs will never come back. Workers must learn new skills to get a new job. The permanent loss of these jobs is called "creative destruction".
What are the 4 components of GDP?
The four components of GDP are consumer spending, investment spending, government spending, and net export spending.