Econ 202 midterm 1
What is the price level? Inflation? Deflation? Why are we interested in these things?
A price level is the average of current prices across the entire spectrum of goods and services produced in the economy. n economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of currency. inflation a general increase in prices and fall in the purchasing value of money
Which price index is most commonly used in the US and what is its definition?
CPI The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
What is the core inflation rate and why do we use it?
Core inflation. Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like food and energy.
the difference between a final good and an intermediate good
Final good. ... Consumer goods are ultimately consumed, rather than used in the production of another good. For example, a microwave oven or a bicycle that is sold to a consumer is a final good or consumer good, but the components that are sold to be used in those goods are intermediate goods.
How do we make GDP comparisons across time and across countries?
Gdp per capita GDP per capita is a measure of a country's economic output that accounts for its number of people. It divides the country's gross domestic product by its total population. That makes it the best measurement of a country's standard of living. It tells you how prosperous a country feels to each of its citizens.
What is potential GDP? How does it relate to the business cycle?
Generally speaking, the business cycle is measured and tracked in terms of GDP and unemployment - GDP rises and unemployment shrinks during expansion phases, while reversing in periods of recession.
How do we measure GDP in the United States?
Gross Domestic Product (GDP) measures the total value of final goods and services produced within a given country's borders. It is the most popular method of measuring an economy's output and is therefore considered a measure of the size of an economy.
Know the forces that make potential GDP grow and how these things change the labor market and the production function
Higher production leads to a lower unemployment rate, further fueling demand. Increased wages lead to higher demand as consumers spend more freely. This leads to higher GDP combined with inflation. Scenario 2 implies there is no increase in demand from consumers, but that prices are higher.
Be aware of how households and firms interact with each other
Households interact with business firms it two distinct ways: (1) households supply economic resources, such as labor, to businesses in exchange for income, and (2) households use their incomes to buy goods and services produced and sold by business firms. The first type of interaction occurs in markets for resources.
What type of inflation is a problem? Why?
Hyperinflation
What is hyperinflation?
Hyperinflation is when the prices of goods and services rise more than 50 percent a month. At that rate, a loaf of bread could cost one amount in the morning and a higher one in the afternoon. ... The next worst, galloping inflation, only sends prices up 10 percent or more a year.
What is depreciation, gross investment, and net investment and how are they related?
It is basically gross investment minus the depreciation on existing capital. ... Thus, gross investment is the total amount spent on goods in order to produce other goods and services, whereas net investment is the increase in productive stock. a reduction in the value of an asset with the passage of time, due in particular to wear and tear
Be aware of how the CPI is constructed
It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
Why have living standards been increasing around the world?
One way to measure the improvement in the living standards of a country is by looking at the growth rate of its gross domestic product (GDP) per capita. This measure can be decomposed into: ... The growth rate of the number of hours per capita (a measure of the extent of labor utilization)
What are the reasons that the CPI is biased? Know the definitions of each of those and be able to give examples of each. What are the problems with the CPI being biased?
PI Biases. The CPI tends to overstate inflation because of the following biases: Substitution bias - when the price of a product in the consumer basket increases substantially, consumers tend to substitute lower-priced alternatives.
Know what it means for someone to be counted as unemployed
People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities: Contacting: An employer directly or having a job interview.
What is potential GDP? How does it relate to the business cycle?
Potential gross domestic product (GDP) is defined in the OECD's Economic Outlook publication as the level of output that an economy can produce at a constant inflation rate. Although an economy can temporarily produce more than its potential level of output, that comes at the cost of rising inflation.
Be able to tell and give examples of the things that influence the pace of rGDP growth
Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices, and is often referred to as "constant-price," "inflation-corrected" GDP or "constant dollar GDP."
Be able to calculate the GDP deflator and its components
The GDP deflator is a measure of price inflation. It is calculated by dividing Nominal GDP by Real GDP and then multiplying by 100. (Based on the formula). Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation.
What are the 4 important parts of the Gdp definition and why are they importnant
The four components of gross domestic product are personal consumption, business investment, government spending, and net exports.
Be aware of how the production function and the labor market tell us what potential GDP is
The full employment quantity of labor is 150 billion hours per year. If this is the quantity of labor employed, then, from the aggregate production function, we can obtain potential GDP, which is $9 trillion. When the labor market is in equilibrium, the economy is at full employment and real GDP equals potential GDP.
What are the limitations of using rGDP and why are they a problem?
There are many limitations to using GDP as a way to measure current income and production. Major ones include: Changes in quality and the inclusion of new goods - higher quality and/or new products often replace older products.
Know the definitions and formulas for the 3 labor market indicators
Three key measures of labor market activity are the unemployment rate, The labor force participation rate: refers to the number of people available for work as a percentage of the total population available to work and the employment-to-population ratio.
What is the relationship between the price level and the inflation rate?
Thus an increase in the price level (i.e., inflation) will cause an increase in average interest rates in an economy. In contrast, a decrease in the price level (deflation) will cause a decrease in average interest rates in an economy.
Know how to calculate CPI and be able to interpret the resulting number
To calculate CPI, or Consumer Price Index, add together a sampling of product prices from a previous year. Then, add together the current prices of the same products. Divide the total of current prices by the old prices, then multiply the result by 100. Finally, to find the percent change in CPI, subtract 100.
What is the natural rate of unemployment? What factors influence it?
5.5 % The natural rate of unemployment is a combination of frictional, structural, and surplus unemployment. Even a healthy economy will have this level of unemployment because workers are always coming and going, looking for better jobs. This jobless status, until they find that new job, is the natural rate of unemployment.
Know the definitions and formulas for the 3 labor market indicators
A person who does not have a job, is available for work and is actively seeking work is considered to be unemployed. Key labor market indicators include: ... The Unemployment Rate - This is computed by dividing the number of unemployed by the number of people in the civilian labor force.
Be aware of the circular flow diagram and what its implications are? To clarify, know the components (especially what each of the arrows represent).
circular flow diagram represents how goods, services, and money move through our economy. There are two major actors known as households and firms. Firms offer goods and services for households to consume. They also offer incomes to the households.
What are the limitations of using rGDP and why are they a problem?
goods and services that are produced but that are not exchanged in markets are not counted
Know the fundamental GDP equation and what each of its components are
he formula for GDP is: GDP = C + I + G + (Ex - Im), where "C" equals spending by consumers, "I" equals investment by businesses, "G" equals government spending and "(Ex - Im)" equals net exports, that is, the value of exports minus imports.
What is GDP?
the market value of all final goods and services produced within a country in a given period of time
What measure do we use to measure the standard of living?
there is a generally accepted measure for standard of living: average real gross domestic product (GDP) per capita. Let's break it down piece by piece: GDP measures annual economic output — the total value of new goods and services produced within a country's borders.
Know how to calculate the inflation rate
watch vid
What determines potential GDP
1. aggregate production function 2. aggregate labor market Economic growth is the sustained, year-on-year increase in potential GDP. Potential GDP is the quantity of real GDP produced when the quantity of labor employed is the full-employment quantity. To determine potential GDP we use a model with two components: An aggregate production function.
What are the three types of unemployment? Know what they are and be able to give examples of each
Cyclical unemployment is a factor of overall unemployment that relates to the regular ups and downs, or cyclical trends in growth and production, that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will tend to be low because total economic output is being maximized. Frictional unemployment is the unemployment that results from time spent between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and can be based on the circumstances of the individual. Structural unemployment is a form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers. Structural unemployment is often brought about by technological changes that make the job skills of many of today's workers obsolete
What is economic growth and what is not economic growth?
Economic growth is one of the features of economic development. ... Economic growth enables an increase in the indicators like GDP, per capita income, etc. On the other hand, economic development enables improvement in the life expectancy rate, infant mortality rate, literacy rate and poverty rates.
Be able to apply the rule of 70
Exponential Growth and the Rule of 70. There's an easy way to figure out how quickly something will double when it's growing exponentially. Just divide 70 by the percent increase, and you've got the doubling time. It works in reverse, too: divide 70 by the doubling time to find the growth rate.