AP Macroeconomics: GDP, Inflation, Unemployment Quiz

What is economic growth?

1. An increase in real GDP over time 2. An increase in real GDP per capita over time (usually used to determine standard of living)

Criticisms of unemployment rate

Discouraged job seekers- • Some people are no longer looking for a job because they have given up. Part-Time Workers- • Someone who wants more shifts but can't get them is still considered employed. Race/Age Inequalities- • Hispanics - 5.8% for January • African American- 8.9% for January • Teenagers- 15.3% for January Illegal Labor- • Many people work under the table.

Appreciation

Appreciation •The increase of value of a country's currency with respect to a foreign currency •Less units of dollars are needed to buy a single unit of the other currency. •The dollar is said to be "Stronger"

Characteristics of a Recession

Characteristics of a Recession More unemployment Decrease in Real GDP Reduced job growth Lower interest rates Decreasing prices More social problems (alcoholism, domestic violence, divorce and suicides)

Deflation

Decrease in price due to excess availability of goods

labor force participation rate

Employed + Unemployed / Total number of people eligible to participate (adult population)

What are the FOUR components of GDP for the Expenditure Approach?

Four components of GDP: 1. Consumer Spending Ex: $5 Little Caesar's Pizza 2. Investments -When businesses put money back into their own business. Ex: Machinery or tools 3. Government Spending Ex: Bombs or tanks, NOT social security 4. Net Exports Exports (X) - Imports (M) Ex: Value of 3 Ford Focuses minus 2 Hondas GDP = C + I + G + Xn

What is the most important measure of growth for a country?

GDP

What does the GDP tell us?

GDP measures how well the U.S. is doing financially.

Seasonal Unemployment (A type of frictional unemployment)

Seasonal Unemployment •This is a specific type of frictional unemployment which is due to time of year and the nature of the job. •These jobs will come back Examples: •Professional Santa Clause Impersonators •Construction workers in Michigan

Cost-of-Living-Adjustment (COLA)

Some works have salaries that mirror inflation. They negotiated wages that rise with inflation

Unemployment Rate calculation

unemployed/labor force x 100

Who is in the Labor Force?

• Above 16 years old • Able and willing to work • Not institutionalized (jails, hospitals) • Not in military, in school full time, or retired

What does an increase in GDP imply?

• Increase in economic activity • More money in circulation • Increase in price levels

What is the government's responsibility?

• Promote long-term growth. • Prevent unemployment (resulting from a bust). • Prevent inflation (resulting form a boom).

Why is economic growth the goal of every society?

• Provides better goods and services • Increases wages and standard of living • Allows more leisure time • Economy can better meet wants

Frictional Unemployment

•"Temporarily unemployed" or being between jobs. •Individuals are qualified workers with transferable skills but they aren't working. Examples: •High school or college graduates looking for jobs. •Individuals that were fired and are looking for a better job. ** Also: Seasonal Unemployment

Disinflation

A process or actions taken to control the rate of inflation

Stagflation

A simultaneous increase in price, decrease in GDP, and increase in unemployment that is caused by a decrease in supply

How can you measure growth from year to year?

% Change in GDP = (Year 2 - Year 1 )/ Year 1 x 100

Calculating Inflation Rate

(Year 2 - Year 1)/ Year 1 x 100

FOREX Shifters

1. Changes in Tastes- Ex: British tourists flock to the U.S... Demand for U.S. dollars increases (shifts right) Supply of British pounds increases (shifts right) Pound-depreciates Dollar-appreciates 2. Changes in Relative Incomes (Resulting in more imports)- Ex: US growth increase US incomes.... U.S. buys more imports... U.S. Demand for pounds increases Supply of U.S. dollars increases Pound- appreciates Dollar- depreciates 3. Changes in Relative Price Level (Resulting in more imports)- Ex: US prices increase relative to Britain.... U.S. demand for cheaper imports increases... U.S. demand for pounds increases Supply of U.S. dollars increases Pound- appreciates Dollar- depreciates 4. Changes in relative Interest Rates- Ex: US has a higher interest rate than Britain. British people want to invest in US Capital Flow increase towards the US British demand for U.S. dollars increases... British supply more pounds Pound-depreciates Dollar- appreciates

How do you use GDP?

1. Compare to previous years (Is there growth?) 2. Compare policy changes (Did a new policy work?) 3. Compare to other countries (Are we better off?)

What are the two ways of calculating GDP?

1. Expenditures Approach-Add up all the SPENDING on final goods and services produced in a given year. 2. Income Approach-Add up all the INCOME that RESULTED from SELLING all final goods and services produced in a given year. Both ways generate the same amount since every dollar spent is a dollar of income.

3 Types of Unemployment

1. Frictional 2. Structural 3. Cyclical

What is NOT included in GDP?

1. Intermediate Goods • No Multiple Counting, Only Final Goods • EX: Price of finished car, not the radio, tire, etc. 2. Nonproduction Transactions •Financial Transactions (nothing produced) •Ex: Stocks, bonds, Real estate •Used Goods •Ex: Old cars, used clothes 3. Non-Market (Illegal) Activities •Ex: Illegal drugs, unpaid work

Why was macroeconomics created?

1. Measure the health of the whole economy. 2. Guide government policies to fix problems.

For all countries there are three major economic goals, what are they?

1. Promote Economic Growth 2. Limit Unemployment 3. Keep Prices Stable (Limit Inflation)

Problems with CPI

1. Substitution Bias- As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket. (Result: CPI may be higher than what consumers are really paying) 2. New Products- The CPI market basket may not include the newest consumer products. (Result: CPI measures prices but not the increase in choices) 3. Product Quality- The CPI ignores both improvements and decline in product quality. (Result: CPI may suggest that prices stay the same though the economic well being has improved significantly)

3 Cause of Inflation

1. The Government Prints TOO MUCH Money (The Quantity Theory) - Governments that keep printing money to pay debts end up with hyperinflation. • There are more "rich" people but the same amount of products. • Result: Banks refuse to lend and GDP falls Examples: • Bolivia, Peru, Brazil • Germany after WWI 2. DEMAND-PULL INFLATION "Too many dollars chasing too few goods" DEMAND PULLS UP PRICES!!! • Demand increases but supply stays the same. What is the result? • A Shortage driving prices up • An overheated economy with excessive spending but same amount of goods. 3. COST-PUSH INFLATION Higher production costs increase prices A negative supply shock increases the costs of production and forces producers to increase prices. Examples: •Hurricane Katrina destroyed oil refineries and causes gas prices to go up. Companies that use gas increase their prices.

The Wage-Price Spiral

A Perpetual Process: 1.Workers demand raises 2.Owners increase prices to pay for raises 3. High prices cause workers to demand higher raises 4. Owners increase prices to pay for higher raises 5. High prices cause workers to demand higher raises 6. Owners increase prices to pay for higher raises

Recession

A Recession is 6 month period of decline in output, income, employment, and trade. (If really bad...then depression)

Balance of Payments (BOP)

Balance of trade includes only goods and service but balance of payments considers ALL international transactions. •The balance of payments is a broader measure of international trade. Details: The BOP summary is within a given year: Prepared in the domestic country's currency Ex. If accounting the BOP of the U.S. it would be in the Dollar. The balance of payments is made up of two accounts. The current account and the capital account.

GDP = C + I + G + Xn : Explain the variable

C- Consumer Spending I - Investments G - Government Spending Xn - Net exports

Characteristics of Expansion

Characteristics of Expansion Less unemployment Increases in real GDP Rapid job growth Increasing interest rates Increasing prices Fewer social problems (alcoholism, domestic violence, divorce, and suicides)

What is 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. • Dollar value- GDP is measured in dollars. • Final Goods-GDP does not include the value of intermediate goods. Intermediate goods are goods used in the production of final goods and services. • One Year-GDP measures annual economic performance.

Hurt vs Helped by Inflation

Hurt Lenders-People who lend money (at fixed interest rates) • People with fixed incomes • Savers Helped • Debtors-People who borrow money • A business where the price of the product increases faster than the price of resources

Inflation

Inflation is rising general level of prices. Inflation reduces the "purchasing power" of money.

What is macroeconomics?

Macroeconomics is the study of the large economy as a whole. It is the study of the big picture. • Instead of analyzing one consumer, we analyze everyone. • Instead of one business we study all businesses.

Quantity Theory of Money Equation

Money Supply (M) x Velocity (V) = Price Level (P) x Quantity of Output (Y) PxY is GDP GDP and Unemployment is inverse relationship GDP and inflation is direct relationship

How do we know how well the economy is doing?

National income accounting. • Economists collect statistics on production, income, investment, and savings.

Balance of Trade

Net Exports (XN) = Exports - Imports Trade Surplus = Exporting more than is imported Trade Deficit (aka. trade gap) = Exporting less than is imported

Nominal GDP

Nominal GDP is GDP measured in current prices. It does not account for inflation from year to year. It is a sum of all goods and services purchased in today's dollars.

How to calculate GDP Deflator

Nominal GDP/Real GDP x 100

Why do some countries have higher GDPs than others? (*Acronym)

Productivity (TECHN) 1. Technology 2. Economic System Example#1: Capitalist countries have historically had more economic growth. - Capital (like robots) can produce more than people - Countries with more capital, can produce more products than countries without a lot of capital. 3. Capital Ex: Capital stock is machinery, tools, and man-made resources. Example#1: India has over a billion people (human resources) but relatively few capital resources and therefore a lower GDP than the U.S. Example#2: Japan has few natural resources but a high GDP 4. Human Capital (Knowledge) 5. Natural Resources Ex: Syria has a lower GDP because it is mostly desert.

How does real GDP deflate nominal GDP?

Real GDP "deflates" nominal GDP by adjusting for inflation in terms of a base year prices.

Real GDP

Real GDP is GDP expressed in constant, or unchanging, dollars. Real GDP adjusts for inflation. REAL GDP IS THE BEST MEASURE OF ECONOMIC GROWTH! Real GDP= Nominal GDP - Inflation

Real GDP per capita (per person)

Real GDP per capita is real GDP divided by the total population. It identifies on average how many products each person makes. Real GDP per capita is the best measure of a nation's standard of living.

Capital Account

The Capital Account measures the purchase and sale of financial assets abroad. Purchases of things that stay in the foreign country. Examples: - US company buys a hotel in Russia - A Korean company sells a factory in Ohio - Australian company owns local Mall

Current Account

The Current Account is made up of three parts: 1. Trades in Goods and Services (Net Exports)- Difference between a nation's exports of goods and services and its imports of goods and services Ex: Toys imported from China, US cars exported to Mexico 2. Investment Income- income from the factors of productions including payments made to foreign investors. Ex: Money earned by Japanese car producers in the US 3. Net Transfers- Money flows from the private or public sectors Ex: donations, aids and grants, official assistance

CPI vs GDP deflator

The GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers. An increase in the price of goods bought by firms or the government will show up in the GDP deflator but not in the CPI. The GDP deflator includes only those goods and services produced domestically. Imported goods are not a part of GDP and therefore don't show up in the GDP deflator.

Consumer Price Index

The most commonly used measurement inflation for consumers is the Consumer Price Index Here is how it works: • The base year is given an index of 100 • To compare, each year is given an index # as well CPI = (Price of market basket)/ (Price of market basket in one year) x 100 1997 Market Basket: Movie is $6 & Pizza is $14 Total = $20 (Index of Base Year = 100) 2009 Market Basket: Movie is $8 & Pizza is $17 Total = $25 (Index of) 125 •This means inflation increased 25% b/w '97 & '09 •Items that cost $100 in '97 cost $125 in '09

The Business Cycle

The national economy fluctuates resulting in periods of boom and bust.

Unemployment Rate

The percent of people in the labor force who want a job but are not working.

Full employment means we have...

We are at full employment if we have only the natural rate of unemployment. •This is the normal amount of unemployment that we SHOULD have. •The number of jobs seekers equals the number of jobs vacancies. Full employment means NO Cyclical unemployment! Economists generally agree that an unemployment rate of around 4 to 6 percent is normal. 4-6% Unemployment = Full Employment

Hyperinflation

When prices rise at a rate of 50% per month or higher

Structural Unemployment

•Changes in the structure of the labor force make some skills obsolete. •Workers DO NOT have transferable skills and these jobs will never come back. •Workers must learn new skills to get a job. •The permanent loss of these jobs is called "creative destruction." (Why?) Examples: •VCR repairmen •Carriage makers ** ALSO: Technological Unemployment

Which two out of three unemployment types are unavoidable?

•Frictional unemployment •Structural unemployment •Together they make up the natural rate of unemployment (NRU).

Why does the economy fluctuate?

•Retailer and Producers send misleading information about consumer demand. •Advances in tech, productivity, or resources. •Outside influences (wars, supply shocks, panic).

Depreciation

•The loss of value of a country's currency with respect to a foreign currency •More units of dollars are needed to buy a single unit of the other currency. •The dollar is said to be "Weaker"

Technological Unemployment

•Type of structural unemployment where automation and machinery replace workers causing unemployment Examples: •Auto assemblers fired as robots take over production • Producers of Capital Goods (tractors) fire assemblers

Cyclical Unemployment

•Unemployment that results from economic downturns (recessions). •As demand for goods and services falls, demand for labor falls and workers are fired. Examples: •Steel workers laid off during recessions. •Restaurant owners fire waiters after months of poor sales due to recession.