Economics Ch 12 & 13

To understand GDP, we need to know which exchanges are included in the final calculations, and which are not. What is included?

"C" = all *private consumption, or consumer spending*, in a nation's economy "G" = sum of *government spending* "I" = sum of a *nation's businesses spending* on capital "NX" = a *nation's total net exports*, calculated as total exports minus total imports

Business cycles are made up of major changes in real GDP above or below normal levels. The *business cycle consists of 4 phases:*

1. Expansion 2. Peak 3. Contraction 4. Trough

Business cycles are affected by *four main economic variables*:

1. business investment 2. interest rates and credit 3. consumer expectations 4. external shocks

A period of growth as measured by a rise in real GDP

Expansion

The average of all prices in the economy

price level

income not used for consumption

savings

The best-known price index, the ___, focuses on consumers. This is determined by measuring the price of a *standard group of products* meant to represent the *"market basket"* of a typical urban consumer. The market basket is divided into eight categories of goods and services. About every 10 years, the items in the market basket are __ to account for shifting consumer buying habits. Economists also find it useful to calculate the __ rate - the *percentage rate of change in price level over time*. To determine the CPI, the BLS establishes a based period to which it can compare prices. Currently the base period is 1982-1984. The BLS determines the CPI for a given year using the following formula: (updated cost / base period cost) x 100

Consumer Price Index (CPI) Updated Inflation

A price index determined by measuring the price of a standard group of goods meant to represent the "market basket" of a typical urban consumer

Consumer price index

The rate of inflation excluding the effects of food and energy prices

Core inflation rate

*Unemployment that rises during economic downturns and falls when the economy improves* is called __ unemployment. During a recession, many workers lose their jobs. Many of these laid-off employees will be *rehired when the recession ends and the business cycle resumes an upward* trend. Today, unemployment insurance provides weekly payments to workers who have lost their jobs. The payments usually provide about half of a worker's lost wages each week for a limited amount of time.

Cyclical employment

unemployment that rises during economic downturns and falls when the economy improves

Cyclical unemployment

Income that does not increase even when prices go up

Fixed income

Unemployment always exists, even in an expanding economy. Economists look at *four categories of unemployment*:

Frictional Seasonal Structural Cyclical

type of unemployment that occurs when people take time to find a job

Frictional unemployment

____ occurs when people take time to find a job. A person who is __ unemployed may be: - Changing jobs to find more satisfying work - Laid off and looking for a new job - Recently out of school and interviewing for a job - Returning to the workforce after a voluntary absence

Frictional unemployment Frictionally

The level of employment reached when there is no cyclical unemployment

Full employment

Economists generally agree that in an economy that is working properly, an unemployment rate of around 4- 6% is normal. *___ is achieved when no cyclical unemployment exists.* *Full employment means that nearly everyone who wants a job has one*. However, some people remain __, which means they are working at a job for which they are overqualified, or working part-time when they desire full-time work. Other people simply give up hope of finding work. These __ workers have stopped searching for employment. Although they are without work, __ workers do not appear in the unemployment rate determined by the BLS because they are not actively looking for work.

Full employment Underemployed Discouraged Discouraged

__ measures the amount of money brought into a nation in a single year through the selling of that nation's goods and services. It is an *approximate measurement of how well a nation's economy is doing for a particular year*. A high GDP means the nation is doing well. A low GDP means the nation is doing poorly.

GDP

The shift from local to global markets as countries seek foreign trade and investment

Globalization

The __ keeps track of how many people are unemployed and why. The *Bureau of Labor Statistics (BLS)* computes the unemployment rate from a monthly household survey of 60,000 families who represent a cross-section of the United States. *The unemployment rate is adjusted for seasonal unemployment.* Taking this step allows economists to more accurately compare unemployment rate from month to month. This comparison helps them better detect changing economic conditions. The unemployment rate is only an average for the nation. It does not reflect regional differences

Government

A general increase in prices across an economy

Inflation

GDP expressed in constant, or unchanging, prices is called

Real GDP

the percentage of the nation's labor force that is unemployed

Unemployment rate

the loss of the value of capital equipment that results from normal wear and tear

depreciation

A recession that is especially long and severe

depression

those goods that last for a relatively long time, such as refrigerators, cars, and DVD players

durable goods

products used in the production of final goods

intermediate goods

There are *three types of contractions*, each with different characteristics. A __ is a prolonged economic contraction that generally lasts from 6 to 18 months and is marked by a high unemployment rate. A __ is a recession that is especially long and severe characterized by high unemployment and low economic output. __ is a decline in real GDP combined with a rise in price level, or inflation.

recession depression Stagflation

the proportion of disposable income that is saved

savings rate

a decline in real GDP combined with a rise in the price level

stagflation

The US economy began to grow slowly in 2001 and was surging by late 2003 with GDP growing at a rate of 7.5% over three months. However, growth slowed again as a result of high gas prices in 2006. The __ caused further decline in 2007. 2008 and 2009 marked a __ in the economy, but by the end of 2009, a rebound occurred

sub-prime mortgage crisis Recession

an increase in efficiency gained by producing more output without using more inputs

technological progress

Foreign trade can result in a __, a *situation in which the value of goods a country imports is higher than the value of goods it exports*. If these imports consist of investment goods, a trade deficit can foster ___. When the funds are used for long-term investment, capital deepening can offset the negatives of a trade deficit by helping generate economic growth, helping a country pay back the money it initially borrowed

trade deficit capital deepening

The lowest point of an economic contraction, when real GDP stops falling

trough

*Wage increases* are the largest single production cost for most companies. Increasing wages can lead to a spiral of ever- higher price because one increase in costs leads to an increase in prices, which leads to another increase in costs, and on and on. This process is known as the __

wage-price spiral

the dollar value of all final goods and services produced within a country's borders in a given year

Gross domestic product

the annual income earned by U.S.-owned firms and people

Gross national product

Inflation that is out of control

Hyperinflation

Another method calculates GDP by adding up all the incomes in the economy. This is known as the __. The rationale for this approach is that when a firm sells a product or service, the selling price minus the dollar value of goods service purchased from other firms represents income from the firm's owners and employees

Income approach

When the economy is expanding, *business investment* __, which in turn increases GDP and helps maintain the expansion. When firms decide to decrease spending, the result is a decrease in GDP and the price level. This is how business investments affect the business cycle.

Increases

a prolonged rise in the general price level of goods and services attributed to an increase in the volume of money

Inflation

___ is a *general increase in prices across an economy*. Over the years, prices generally go up. Inflation __ the value, or purchasing power of things. Over time, prices of goods have gone up due to inflation.

Inflation Shrinks

The percentage rate of change in price level over time

Inflation rate

Consumers often use credit to buy new cars, home, electronics, and vacations. If the interest rates on these goods rise, consumers are __ likely to buy them. The same principle holds true for businesses who are deciding whether or not to buy new equipment or make large investments. Therefore, interests rates and credit affect business cycles.

Less

Do higher tax rates increase or reduce investment? *If government raises taxes, households will have __ money*. People will __ saving, thus __ the money available to businesses for investment. However, if government invests the extra tax revenues in public goods, like infrastructure, this will __ investment, resulting in capital deepening.

Less Reduce Reducing Increase

A representative collection of goods and services

Market basket

What are the causes and effects of inflation? The *causes of inflation* are: -The growth of the __ -Changes in aggregate __ -Changes in aggregate ___ The *effects of inflation* include: -Decrease in ___ -Erosion of income -Decrease in return on savings

Money supply Demand Supply Purchasing power

What are the *3 causes of inflation*? 1. Growth of ___; too much money in the economy causes inflation - this is the real reason! 2. Changes in ___ - inflation can occur when demand for goods and services exceeds existing supplies 3. Changes in ___ - inflation can occur when producers raise prices in order to meet increased costs

Money supply Aggregate demand Aggregate supply

If the amount of money people save increases, then __ investment funds are available to businesses. These funds can then be used for capital investment and expand the stock of capital in the business sector

More

There are different measurements of Income. ___ is the total income earned by everyone in the economy. ___ is the total income for an individual before personal taxes are paid. ___ is the income that people have left after taxes.

National income (NI) Personal income (PI) Disposable personal income (DI)

Aggregate supply and demand represent supply and demand on a ___ level.

Nationwide

__ external shocks, like war breaking out in a country where U.S. banks and businesses have invested heavily, can have a great effect on business, causing GDP to decline. ___ external shocks, like the discovery of large oil deposits, can lead to an increase in a nation's wealth. Therefore, external shocks can affect the business cycle.

Negative Positive

GDP measured in current prices

Nominal GDP

type of unemployment that occurs as the result of harvest schedules, vacations, or when industries make seasonal shifts in their production schedules

Seasonal unemployment

____ occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules. This kind of unemployment can also occur as a result of *harvest schedules or vacations*. Economists expect to see seasonal unemployment throughout the year. Government policymakers do not take steps to prevent this kind of unemployment because it is a normal part of a healthy economy. The lives of __ unemployed workers can be very difficult. Migrant farm workers, for example, face seasonal unemployment once the harvest season is over. Harvest schedules are often unpredictable, making the transition from one crop to another hard to gauge.

Seasonal unemployment Seasonally

If the *population grows while the supply of capital remains constant*, the amount of capital per worker will __, which is the opposite of capital deepening. This process leads to lower standards of living. On the other hand, a nation with *low population growth and expanding capital stock* will experience significant capital __.

Shrink Deepening

type of unemployment that occurs when workers' skills do not match those needed for the jobs available

Structural unemployment

When the __ of the economy changes, the *skills* that workers need to succeed also change. Workers who lack necessary skills lose their jobs. ___ occurs when workers' skills do not match those needed for the jobs that are now available

Structure Structural unemployment

___ is a key source of economic growth. It can result from new scientific knowledge, new inventions, and new production methods. Measuring technological progress can be done by determining how much growth in output comes from increases in capital and how much comes from increases in labor. Any remaining growth in output must come from technological progress. *Causes of technological progress include*: 1. Scientific ___ and __ New products increase output and boost GDP and profits 2. Scale of the __ Larger markets provide more incentives for innovation 3. __ and __ Increases human capital 4. ___ Increased natural resources use can create a need for new technology

Technological progress Scientific research and innovation Market Education and experience Natural resources

There are *5 major causes of structural unemployment:* 1. The development of new __ 2. The discovery of new __ 3. Changes in consumer __ 4. Globalization 5. Lack of education

Technology Resources Demand

Working at a job for which one is overqualified or working part time when full time work is desired

Underemployed

the process by which rising wages cause higher prices, and higher prices cause higher wages

Wage price spiral

the amount of goods and services in the economy that will be purchased at all possible price levels

aggregate demand

the total amount of goods and services in the economy available at all possible price levels

aggregate supply

A nation with a large amount of physical capital will experience economic growth. The process of *increasing the amount of capital per worker*, known as ___, is one of the most important sources of growth in modern economies

capital deepening

The process of increasing the amount of capital per worker

capital deepening

A period of economic decline marked by falling real GDP

contraction

A steady, long-term increase in real GDP

economic growth

In the 1970s, the United States experienced an __ when the price of gasoline and heating fuels skyrocketed as a result of the OPEC embargo on oil shipped to the US. The U.S. economy also experienced a __ in the early 1980s and another brief one in 1991, followed by a period of steady economic growth. The attacks of 9/11 led to another sharp __ in consumer spending in many service industries

external shock Recession Drop

Inflation rates in the United States have changed greatly over time. When the inflation rate exceeds 5%, it makes economic planning difficult. The worst kind of inflation is ___ in which inflation rates can go as high as 100 or even 500 percent per month

hyperinflation

set of key economic variables that economists use to predict future trends in a business cycle

leading indicators

a system economists use to collect and organize macroeconomic statistics on production, income, investment, and savings

national income accounting

Economists use a system called ___ to monitor the U.S. economy? They collect macroeconomic statistics, which the government uses to determine economic policies. The most important data economists analyze is ___, which is the approximate dollar value of all final goods and services produced *within a country's borders* in a given year. Basically, gross domestic product tracks exchanges of money.

national income accounting Gross Domestic Product (GDP)

those goods that last a short period of time, such as food, light bulbs, and sneakers

nondurable goods

The height of an economic expansion, when real GDP stops rising

peak

High inflation is a major economic problem, *affecting* ___, ___, and ___. Inflation can erode ___. For example, if the inflation rate is 10%, $1.00 will buy the equivalent of only $.90 of goods today

purchasing power, income, and interest rates purchasing power

To predict the next phase of a business cycle, forecasters must anticipate movements in __ before they occur. Economists use *leading indicators* to help them make these predictions. The ___ is a leading indicator. Often, the stock market turns sharply __ before a recession

real GDP stock market Downward

The basic measure of a *nation's economic growth rate* is the percentage of change in real GDP over a period of time. Economists prefer a measuring system that takes population growth into account. For this, they rely on ___

real GDP per capita

real GDP divided by the total population of a country

real GDP per capita

a prolonged economic contraction

recession

___ is the amount of goods and services that will be purchased at all possible price levels. As price levels in the economy move up and down, individuals and firms change how much they buy - in the __ direction that aggregate supply changes. (if prices rise, demand will __. If prices drop, demand will __). *Any shift in aggregate supply or aggregate demand will have an impact on real GDP and the price level.*

Aggregate demand Opposite Drop Rise

___ is the total amount of goods and services in the economy available at all possible price levels. In a nation's economy, as the prices of most goods and services change, the price level changes and firms respond by changing their output. As the price level rises, real GDP, or aggregate supply __. As the price level falls, real GDP __.

Aggregate supply Rises Fall

What factors affect the phases of a business cycle? -Periods of economic growth -Periods of economic decline -__ investments -Interest rates and credit -__ expectations -__ shocks

Business Consumer External

a period of macroeconomic expansion followed by one of macroeconomic contraction

Business cycle

Before the 1930s, many economists believed that when an economy declined, it would recover quickly on its own. The Great Depression changed this belief and led economists to consider the idea that modern market economies could fall into long- lasting contractions. Not until WW2, more than a decade later, did the economy achieve full recovery. ____ & ____ were two major signs of the *Great Depression, the longest recession in U.S. history*.

Declining GDP & high unemployment

How does an economy grow? The economy grows through -An increase in capital ___ -A higher __ rate -A population that grows along with capital growth -Government intervention -__ progress

Deepening Savings Technological

A sustained drop in the price level

Deflation

Someone who wants a job but has given up looking

Discouraged worker

*GDP measures the standard of living but it cannot be used to measure people's quality of life.* In addition, GDP tells us nothing about how output is __ across the population. While real GDP per capita tells us little about individuals it does give us a starting point for measuring a nation's ___. In general, though, nations with a high GDP per capita experience a __ quality of life

Distributed quality of life Greater

One method used to calculate GDP is to estimate the annual expenditures on 4 categories of final goods and services: 1. Consumer goods 2. Business goods and services 3. Government goods and services 4. Net exports This method is known as the ____.

Expenditure approach

__ GDP is measured in *current prices*. To calculate it, we use the current year's prices to calculate the value of the current year's output. The problem with nominal GDP is that it does not account for the ____. Even though output might be the same from year to year, the prices won't be and nominal GDP would be different. To solve this problem, economists determine ___, which is GDP expressed in constant, or *unchanging, prices.*

Nominal GDP Rise in prices (inflation) real GDP

What are economic activities that *GDP does not include?* 1. ___ - GDP does not measure goods and services that people make or do themselves 2. ___ - GDP does not account for black market activities 3. ___ - unintended economic side effects, like pollution, are not subtracted from GDP 4. ___ - a high GDP does not necessarily mean people are happier/living better life Real limitations - difficulty in obtaining reliable data and the presence of government spending in the formula!

Nonmarket activities Underground economy Negative externalities Quality of life

A measurement that shows how the average price of a standard group of goods changes over time

Price index

To measure inflation, economists compare price levels. To help them calculate price level, economists use a __, which is a measurement that shows how the average price of a standard group of goods changes over time. They help consumers and businesspeople make economic decisions. The government also uses them in making policy decisions

Price index

The ability to purchase goods and services

Purchasing power

the theory that too much money in the economy causes inflation

Quantity theory

If people expect that the economy is going to start to contract, they may __ spending. High consumer confidence, though, will lead to people buying more goods, pushing up GDP. This is how consumer expectations affect the business cycle.

Reduce