Chapter 16/17 econ

consumer price index

-Measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods/services -always fixed (basket of goods) for an urban consumer -Bureau of Labor Statistics calculates CPI every month

cost of living index

-a measure of the change in the amount of money that people need to spend to achieve a given standard of living

chained consumer price index (C-CPI)

-a measure of the price level calculated using current month and previous month prices/expenditures

production function

-a relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same -boundary between the attainable and the unattainable -it is possible to produce at any point on it and beneath the curve -not possible to produce at points above the production function

economic growth

-a sustained expansion of production possibilities -sustained trend not a temporary cyclical expansion

GDP price index

-an average of the current prices of all the goods/services included in GDP expressed as a percentage of base year prices

personal consumption expenditures price index (PCEPI)

-an average of the current prices of the goods/services included in the consumption expenditure component of GDP expressed as a percentage of base year prices

core inflation rate

-annual percentage change in the PCEPI excluding the prices of food and energy

economic growth rate

-annual percentage change of real GDP -growth rate of real gdp = real gdp in current year - real gdp in previous year/real gdp in previous year x 100 -tells us the changes in the balance of economic power among nations, not about changes in the standard of living

When consumers substitute lower priced broccoli for higher priced carrots the CPI overstates the rise in the price of veggies

-commodity substitution bias

two consequences of CPI bias

-distortion of private contracts -increases in government outlays and decreases in taxes

diminishing returns

-each additional hour employed produces a successively smaller additional amount of real GDP -arises because quantity of capital is fixed -as more labor is hired the additional output produced decreases because the extra workers have less capital with which to work

the quantity of labor supplied increases as the real wage rate increases because of two reasons

-hours per person increase -labor force participation increases

economic freedom

-is present when people are able to make personal choices -stopped by barriers to trade, import bans, high tax rates, corruption in courts

saving and investment in physical capital increase the amount of capital per work and increase

-labor productivity

the slope of the production function becomes ____ steep as the quantity of _____ increases because of diminishing returns

-less -labor

inflation rate

-measure of the percentage change in the price level from one period to the next -CPI current year-CPI in previous year/CPI in previous year x 100

To measure the CPI the BLS must compare the price of today's smartphone with that of the 1970s walkman and 1980s discman

-new goods become available and old good disappear

Sources of bias in the CPI

-new goods bias -quality change bias -commodity substitution bias -outlet substitution bias

Real GDP fluctuates around potential GDP

-on average over the business cycle real GDP equals potential GDP

as consumers shop around for the lower prices outlet substitution occurs and the CPI overstates the rise in prices actually paid

-outlet substitution bias

economic freedom requires free markets

-property rights and markets create incentives for people to specialize and trade, to save and invest, to expand their human capital and experience economic growth

to compare the price of today's cars with those of earlier years the BLS must value the improvements in features and quality

-quality change bias

the nominal wage rate

-the average hourly wage rate measured in current dollars

real wage rate

-the average hourly wage rate measured in the dollars of a given reference base year

a higher real wage rate brings a higher income which increases

-the demand for leisure and encourages less work -for most the opportunity cost effect is stronger than the income effect

The CPI market basket contains the goods and services represented in the index and the relative importance, weight, attached to each of them

-the idea is to make the weight of the items in the CPI basket the same as in the budget of an average urban household

rule of 70

-the number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable

law of diminishing marginal returns

-the quantity of capital is small, an increase in capital brings a large increase in production; and if quantity of capital is large, an increase in capital brings a small increase in production

demand for labor

-the relationship between the quantity of labor demanded and the real wage rate when all other influences on firms' hiring plans remain the same

property rights

-the social arrangements that govern the protection of private property -rights to physical property (land, buildings) -rights to financial property (one person against another) -intellectual property (inventions)

Potential GDP

-the value of GDP when all the economy's factors of production (labor, capital,land, and entrepreneurial ability- are fully employed)

Keynesian macroeconomics

-the view that the market economy is inherently unstable and need active government intervention to achieve full employment and sustained economic growth -too little private spending is the cause of depression (and recession) so government spending must rise -in a recession an increase in spending by gov'ts or a tax cut that leaves people with more of their earnings to spend, can help to restore full employment

Classical macroeconomics

-the view that the market economy works well, that aggregate fluctuations are a natural consequence of an expanding economy, and that government intervention cannot improve the efficiency of the market economy -predicted that the GD would end but offered no method for ending it more quickly

monetarist macroeconomics

-the view that the market economy works well, that aggregate fluctuations are a natural consequence of an expanding economy, but that fluctuations in the quantity of money generate the business cycle -a slowdown in the growth of money brings recession

policies to achieve faster economic growth

1. create incentive mechanisms 2. encourage saving 3. encourage research and development 4. encourage international trade 5. improve the quality of education

human capital comes from three sources:

1. education and training 2. job experience 3. health/diet

constructing CPI includes three parts:

1. selecting the CPI market basket 2. conducting the monthly price survey 3. calculating the CPI

In the reference base year, the aveerage household spent $132 on firecrackers. The price of a firecracker in 2016 was $4. So the CPI market basket contains

132/4= 33 firecrackers

Reference base period

CPI is defined to equal 100 for a period called the reference base period

A rise in the prices of items increases the CPI but increased quantities of things like gas/electricity bought don't change the CPI because the CPI market basket is

FIXED

price level

an average of the level of prices during a given period

CPI =

cost of CPI basket at current period prices/cost of CPI basket at base period prices x 100 -Consumer expenditure survey updates it frequently

COLA

cost of living adjustment -when gov't pays benefits will be adjusted to cost of living -adjust money accordingly to CPI -payment coming from gov't pay less over time due to inflation

if the real wage rate is at the full employment equilibrium real GDP is

equal to potential GDP, which is efficient but is not the most that can be produced

Bureau of Labor Statistics

if the price goes up on bananas BLS adjust CPI (longest answer in the test)

GDP deflator =

nominal GDP/real GDP x 100

real wage rate in 2015 =

nominal wage rate in 2015/CPI in 2015 x 100

When economy is at full employment real GDP equal

potential GDP

Real GDP depends on the quantity of labor employed and Potential GDP depends on the

production function and the quantity of labor employed

advances in technology and growth of human capital make labor and capital more

productive and shift the productivity curve upward bringing economic growth (growth in quantity of labor and labor productivity bring real GDP growth)

the lower the real wage rate the greater is the

quantity of labor demanded

full employment occurs when the quantity of labor demanded equals the

quantity of labor supplied

nominal IR =

real + inflation (12 = 7 + 5)

labor productivity

real gdp/aggregate hours when labor productivity grows, real GDP per person grows

deflation

situation in which the CPI is falling and the inflation rate is negative

Real GDP can exceed potential GDP only temporarily as it approaches and then recedes from a business cycle peak

so the potential GDP is the sustainable upper limit of production

nominal interest rate

the dollar amount of interest expressed as a percentage of the amount loaned

The real wage rate influences the quantity of labor demanded because what matters to firms is how much output they must sell to earn

the dollars they pay the workers.

real interest rate

the goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate

the quantity of labor supplied

the number of labor hours that all the households in the economy plan to work during a given time period at a given real wage rate

supply of labor

the relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same

productivity curve

the relationship that shows how real GDP per hour or labor changes as the quantity of capital per hour of labor changes

quantity of labor demanded is the

total labor hours that all the firms in the economy plan to hire during a given time period at a given real wage rate

When the price level rises rapidly, the inflation rate is high

when the price level rises slowly, the inflation rate is low;