Econ Sec 3

The average output per person in the US economy in 2008 was over _____________

$43,000

If an economy sells 100 t-shirts (sold at $5 each) and 25 pairs of shorts (sold at $10 each), then what is the GDP?

(100 x 5) + (25 x 10) = 500 + 250 = $750 The higher the market price, the more it contributes to GDP. If it has a higher value then it contributes to more output.

What happens when the unemployment rate is high?

- It becomes harder to find work - People that have jobs find it harder to earn promotions or increase their pay

What categories are investments divided into?

1) Business fixed investment - business purchases of factories, offices, machinery 2) Residential fixed investment - purchase of new houses and apartments 3) Inventories - consists of additional unsold goods to company inventories; spending on final goods and services

What are 3 limitations to GDP?

1) Difficulty to determine what constitutes a final good and an intermediate good. 2) Exclusion of goods that are not bought and sold in markets 3) Activities that depletes a country's stock of natural resources or pollutes is not included.

What 3 types of unemployment is there? Explain each one.

1) Frictional unemployment. Refers to the portion of the unemployed who are currently not working because of the natural process of matching employers and employees. Happens when people leave their jobs voluntarily (quit) or involuntarily (fired/ laid off). Also comes from new workers entering the labor force for the first time or workers transferring. 2) Structural unemployment. This portion is attributed to a mismatch of between job-openings and job seekers. This may be because of a difference in skills, characteristics, or location. Can be caused by technological replacement. Ex. In 1980s, the steel industry was contracting while the computer industry was expanding. Laidoff steel workers lacked skills to pursue other jobs in the Sunbelt. 3) Cyclical unemployment. During recessions layoffs increase, new hires decline, and job seekers find it harder to find work (which causes them a longer time to search). 4)* Seasonal unemployment. Depends on the time of year. Ex agricultural jobs or during the holiday season

In United States the labor force participation rate have increased modestly in the last century because of what 2 things?

1) More women entering the work force 2) Lower birth rates reduces the share of children in the population. This increases the relative size of the working age population. The trend has been offset by earlier retirement and longer education. But virtually all increases in output per person is explained by an increased average labor productivity.

Would it be considered in GDP or not?: A twenty-year old house is sold this year for $150,000. A real estate sells the twenty-year old house and receives a 6% commission ($9000).

1) No. The house was not made this year. The year the good/service was sold in does not matter. 2) Yes. This is considered the real estate agent's service and it was produced this year.

What factors affects average labor productivity? Explain each one.

1) Physical capital. Workers that are better equipped with more and better tools, machinery, and up-to-date factories will be more efficient. Recall that this is a factor of production. It is an input in the past and output in the production process. Increasing capital stock in the future requires us to give up consumption in the present. 2) Human capital. This includes skills and experience acquired through education, training, and on-the-job experience. It also requires us to sacrifice current consumption like physical capital. Students and trainees must give up time spent on productive activities while they are learning. 3) Natural resources. Some countries/regions are abundant in natural resources like iron ore, petroleum, or natural gas reserves. This contributes to the wealth of citizens. Saudi Arabia and Kuwait have a high standard of living because they are located on top of large pools of oil. These are not essential for a high standard of living though. Countries like Japan were able to achieve high levels per capita income by importing raw materials. 4) Technological knowledge (aka technology). The definition is knowledge about techniques by which inputs are transformed into goods and services that households desire. Advances in this is the most important of them all to raise average labor productivity. Advances include the invention of integrated circuits, lasers, and genetic engineering or the development of better methods of organization, like Henry Ford's assembly line (this it TECHNICAL knowledge, Demidec scammed us) 5) Political and legal environment. Some technological knowledge are protected as patents while others are kept as trade secrets. High levels of productivity in advanced countries like the US is available to be learned and copied. Rapid growth of living standards in Japan, South Korea, and China illustrates that countries can catch up quickly if they successfully borrow and adapt these techniques. Yet poverty of some hinders successful borrowing. One explanation for dysfunction political and legal systems prevent many countries from fully exploiting the potential of modern manufacturing techniques. An example is Korea. Both North and South Korea had similar populations, standards of living, and resources after WW2, but today the South enjoys a standard of living comparable to developed countries while the North suffers from poverty and starvation (this is because differences in government institutions).

The CPI will typically overstate the true increase in the cost of living for what 3 reasons?

1) Substitution bias (most likely to) 2) Unmeasured quality change 3) Introduction of new goods and services

What 2 questions is macroeconomics concerned with?

1) What factors determine the long-run growth in the growth of economies, the standard of living, and the price level? 2) What are the causes and consequences of short run fluctuations in the level of economic activity, unemployment, and inflation?

In 1996 the Boskin Commission, headed by economist Michael Boskin, carefully reviewed the methods used to calculate the CPI and concluded that the combined effects of substitution bias, quality improvement, and the introduction of new goods meant that the CPI overstated the rate of price inflation by _____ percent per year.

1.3

There was a notable decline in output between ____________

1929 and 1933 (Great Depression)

The conceptual basis for the measurement of GDP was developed in the ___________

1930s

Since 1900, the total real output of the US economy increased by a factor of nearly _________

32 There were ups and downs, but it mostly expanded

Since 1900, the US population has increased by a factor of ________

4

Despite having a population _____ times as large as the US, China's total production is still only a fraction of that of the US, and total output is only ___________ the size of the US, and its per capita production is only ____% as large as the US'.

5; 1/5; 5

The participation rate is about ___________

66% Of those in the labor force, roughly 140 million had jobs and 15 million were unemployed. This resulted in a 9.7 % overall unemployment rate.

The average GDP per capita has increased by nearly a factor of ____

8

Inflation

A general increase in prices and a reduction in the purchasing power of money. This is bad. Macroeconomic policy tries to prevent this.

Business cycle

Alteration of periods of expansions and recessions These fluctuations is what macroeconomics seeks to explain

What periods are usually considered for GDP?

Annually or quarterly (every 3 months).

Macroeconomics

Branch of economics that studies the performance of national economies.

To measure inflation, the US _________________________ calculates the Consumer Price Index (CPI), which measures the cost of purchasing a market basket of goods and services intended to be a representative of the consumption of a typical consumer.

Bureau of Labor Statistics (BLS). They conduct periodic surveys of consumer expenditures in which a sample households collects careful records of all their expenditures.

What is the formula for CPI?

CPI in year t = 100 x (cost of bundle in year t/ cost of bundle in base year) The quantities of each item in the bundle determines the overall impact of the item's price change on the overall index. Ex. Consumers purchase 3 shirts and 1 pair of shoes. The change in the price of shirts will cause a larger change in the CPI than an equivalent dollar increase in the price of shoes.

What is an example of an introduction to new goods/services that caused CPI to overstate the true rate of inflation?

Cellphones. Prior to mid-1970s they did not exist, so cellphones were removed from the market basket of good for CPI. In early years of development, prices for cellphones fell rapidly and the quality of service vastly improved. Only after cellphones had a large market penetration were they added to CPI.

Aggregation

Combination of many different things into a single economic variable This helps us see the big picture

Circular flow model

Conceptual model of the economy to show the flow of dollars between sets of economic actors (households, firms, government) goods and services are represented by arrows markets are depicted as ovals When the government collects sales and income taxes money is leaked from this.

Labor force

Consists of all working-age adults who are either employed or actively seeking work.

Give examples of services

Education, insurance, legal or financial services

How is the term "investments" in economics different than the term used in everyday language?

Everyday- Purchase of financial assets These transfer ownerships of an existing physical or financial asset but new assets are not created In economics, "investments" are reserved for purchase of new capital goods

T/F? The rate of inflation has been consistently rising.

False. The rate of inflation has varied over time. Inflation was high during World War I and II. During the early 1980s, inflation was low. Since World War II, prices rose consistently, but before 1940 there were several periods of decline in inflation.

T/F? The Boskin Commission is reponsible for measuring the unemployment rate.

False; the BLS is responsible for the unemployment and inflation rate They survey approximately 60,000 households every month. Based on a series of questions they classify those 16+ in one of the three categories: 1) Employed. Works part- or full-time during the previous week or is on sick leave or vacation. 2) Unemployed. If they have not worked in the past week but has been made some effort to find work the past 4 weeks (month). 3) Out of the labor force. If that person did not work the past week or looked for work the past 4 weeks.

What identity can you make about GDP?

GDP = Production = Expenditures = Income When a good is sold, revenue is distributed between owners of capital and workers. Income of labor and capital = expenditures

Nominal GDP

GDP calculated with current year prices

Aggregate economic indicators used to describe the performance of the aggregate economy

GDP, cost of living, unemployment rate

Explain the "domestic" in GDP.

Goods are only counted if they are produced within borders of the country in discussion. Ex. US GDP would include all automobiles manufactured in the US, whether if it is an American or Japanese auto manufacturer.

Consumer nondurables

Goods that are used up more quickly than durable goods Ex. food, clothing

Intermediate goods

Goods used in the production of final goods

Consumption expenditures (Consumption)

Household purchases subdivided between consumer durables, consumer nondurables, and services

What 4 categories, or sectors are consumers divided into?

Households, firms, government, and foreign sector

Government purchases

Includes all goods and services purchased by the federal, state, and local governments Ex. Wages paid to firefighters and teachers or purchases for the military

What does GDP mean by final goods?

Intermediate goods are NOT included in GDP to avoid double counting. Ex. A steel producer sells $200,000 worth of steel to an automanufacturer, which is used to produce $1 million worth of automobiles. Steel would not be counted. The automobiles would be counted. When some intermediate goods can be final goods (like tomatoes by itself or in sauce), we only count the portion sold to final users.

Consumer durables

Long-lived consumer goods Ex. cars, washing machine, furniture, appliances *Purchasing a new house is an investment

Real GDP

Measure of total quantity of goods and services produced in the economy, adjusted to remove inflation effects

GDP per capita

Output per person

Unemployment rate

Percentage of labor force that would like to work, but cannot find employment Unemployed/ labor force X 100% Generally this goes up during recessions and down during expansions.

Expansion

Period between a trough (lowest point) and a peak (highest point) in economic activity

Recession

Period between peak and a trough in economic activity

Economic growth

Phenomenon associated with an improvement in living standards Started a little more than 2 centuries ago in the US and Western Europe then spread to Japan and Latin America

Real GDP uses _____________ to value production in each year.

Price from a single year (called base year) This isolates the effects of inflation/ changes in prices

GDP Deflator

Provides a slightly different perspective on inflation from the relationship between nominal and real GDP Nominal GDP = (GDP Deflator/100) x Real GDP GDP Deflator = 100 x (Nominal GDP/ Real GDP)

Labor force participation rate

Ratio of those in the labor force to working-age population; the percentage of civilian population out of all who could be in it Number of people in labor force/ Working Age Population OR unemployed+employed/unemployed+employed+out of labor force

Real GDP per capita

Real GDP per worker x fraction of population employed GDP /pop (or real GDP) = (GDP/labor force) x (labor force/pop) This expression tells us that the average quantity of goods and services available for each person to consume depends on average amount each person can produced (or average labor productivity)

Depression

Severe recession. 1929 - 1933 was the most severe episode.

One of the earliest known efforts to measure national output was undertaken by ___________________ in the mid-1600s as part of the British government's effort to assess the ability to tax the Irish.

Sir William Petty

Each year, ____________________ payments are adjusted to reflect the changes in the ______________ as reflected in the CPI

Social security benefits; cost of living CPI is also informally considered when considering adjustments in the wage rates.

Which group of people was the unemployment rate the highest among?

Teenagers. Close to every 1 in 4 teens were unemployed. There were also significant differences in the unemployment rate by race, ethnicity, and gender.

How has the CPI and GDP deflator differed since the 1960s?

The GDP deflator is less volatile. It rises less at peaks and decelerates less at lower points. Over the entire period, the GDP deflator has risen somewhat less than the CPI. This is because of 2 reasons. 1) The GDP deflator reflects only the prices of domestically produced goods. Foreign produced goods have a larger role in the CPI. The CPI rose much more than the deflator at the beginning and end of the 1970s because of the rising oil prices, which was mainly produced overseas. 2) CPI and the GDP deflator weighs prices of different goods and services. CPI uses prices from a fixed market basket of goods while the deflator uses prices from the current levels of production. As a result, the basket of goods used to weigh prices in the GDP deflator adjusts to changes in consumption patterns over time.

Why was the system of GDP created in 1932? By who? Which event provided an additional impetus for perfecting techniques of measuring output and establishing necessary data collection tools to produce ongoing estimates of GDP?

The US Department of Commerce commissioned economist Simon Kuznets to develop a system of national output after the lack of comprehensive data on national economic activity that hampered efforts to respond to the Great Depression; World War II In 1971, Kuznets received a Nobel Prize in Economic Science for his contribution. His concept was refined by scholars

List 3 places with advanced economies

The United States, Japan, Western Europe There are still many people living in poverty nevertheless.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country during a specified period of time; a measure of the quantity of goods and services produced in a country This allows us to add up total output

Suppose Sylvia grows tomatoes. One year she produces $200 worth of tomatoes. She sells $100 worth at the farmers market and turns the other $100 worth into sauce, which she sells for $200 worth of sauce. What does she contribute to GDP?

The tomatoes in sauce is an intermediate good, not included. $100 tomato + $200 tomato sauce. = $300.

How has the unemployment rate been since the 1900s?

There is no indication of the unemployment rate increasing in the long term.

Intermediary

Third party that acts as a link between two others (such as savers and borrowers) Two most important intermediaries are mutual funds and banks

What is the goal of the CPI?

To measure how changes in prices affect the ability of households to maintain the level of well-being they enjoyed in the base year It actually measures how price changes affect the cost of a fixed bundle of goods and services

Average labor productivity

Total output/total number of workers employed; measure of how much the typical worker can produce

Which government purchase is not included in GDP?

Transfer payments like Social Security

How do you calculate real GDP?

Use base year prices and multiply by the current year's quantity. Ex. 400 shirts (costing $10 each) and 1000 pairs of socks (costing $2 each) were produced in 2002. In 2008, 600 shirts (costing $12 each) and 1200 pairs of socks (costing $3 each) were produced. Calculate real GDP using 2002 as the base year. (600 x 10) + (1200 x 2) = 6000 + 2400 = $8400

Trade surplus

When exports exceed imports

Trade deficit

When imports exceed exports

What has happened to the labor force over the past 60 years?

Women have been increasingly entering the labor force. This increases GDP but does not reflect an increase in total production.

The US output increased during ___________ from _______________

World War II; 1941 to 1945

GDP: expenditures = production What is the equation for this approach?

Y = C + I + G + NX Y - Output or GDP C - Consumption I - Investments G - Government spending NX - Net exports

Are capital goods (factory buildings, machinery, etc.) included in GDP?

Yes

Is housekeeping and childcare included in GDP?

Yes and no. No if it is done by a family member. Yes if it is purchased over a market.

As relative price changes, households will shift their consumption __________________________

away from expensive goods and services and toward less expensive ones. By adjusting consumption toward less expensive goods, households can achieve the same level of well-being at a cost that is lower than the cost of buying a fixed basket of goods and services. Ex of substitution bias- As the price of beef increases, families will consume more chicken When the price of airline tickets decline, consumers will fly more and drive less

The arrow from financial markets to the market for goods and services represents borrowing from both households and firms, which is used to purchase _______________

consumer durable goods and capital equipment

Net exports

difference between the value of domestically produced goods sold to foreigners and the value of foreign produced goods purchased by domestic buyers; exports - imports

Periods of recessions are often associated with declining ______________________ and slower ____________

employment opportunities; wage growth A central focus of macroeconomic policy is to find ways to reduce the severity and duration of such periods.

Up until the late 1950s, the US generally (imported/exported) more than it (imported/exported). Since the 1970s, the relationship has shifted and (imports/exports) exceed (imports/exports).

exported; imported imports; exports So it is easier to read: Up until the late 1950s, the US generally exported more than it imported. Since the 1970s, the relationship has shifted and imports exceed exports.

Households receive income by providing ______________

factors of production (labor, capital, land) Although many firms own capital goods, they are owned indirectly by households through the ownership of firms Can also be thought of rent for capital, which is indirect ownership of capital although many firms purchase capital Arrow goes to factor market so firms can produce goods

Households use their income to purchase goods and services, pax taxes, and save through __________________

financial markets

One reason for the rising level of production historically has been _______________________

growth in population More people = more output

Different market baskets are calculated for different consumers at different __________ levels and for those living in different parts of the country to reflect differences in consumption patterns.

income

Because of ____________, the US is relatively less dependent on trade.

its size; this is compared to smaller countries The level of transactions between the US and other countries have been increasing.

Employed + unemployed

labor force

Individuals employed and unemployed makes up the ______________

labor force

Every _____________ BLS employees visit stores, checks websites, and otherwise collects price information, (including/excluding) temporary discounts offered by retailers, then combines the price data with quantities in the market basket of goods determined by the Consumer Expenditure Survey.

month; including

Simon Kuznets pointed out that __________ might equally be as well viewed as an intermediate good because it allows citizens of a country to enjoy other goods and services.

national defense; Include this is GDP though (we didn't listen to Kuznets on this). You'll see why later

The countries with some of the lowest levels of production per person is Africa. In Ghana, for example, ____________ averages $458.

output per person; This is slightly over 1% a single person's output per person in the US and averages at less than $2 per person a day. The poorest citizen of Japan is richer than the average Ghanian.

Per capita is latin for

per head

Quality improvements would be expected to raise the price of a good, so a simple comparison of prices between one year and the next will overstate the _________ and understate any __________

price; decline in prices Goods over time get better due to technological change such a more powerful personal computers because of increased processor speeds, greater storage, and better software. Another improvement is in the automobile with the addition of anti-lock brakes, airbags, satellite radio, and GPS systems. BLS statisticians try to account for these quality changes, but they are difficult to remove completely from the CPI.

Firms receive ______________ from the sale of goods and services and use this income to pay for the ____________________ that they must hire to produce the goods and services they sell.

revenue; factors of production

The government receives income from households in the form of ____________ and governments borrow from _____________

taxes; financial markets They use this income to purchase goods and services

Between the years 2000 and 2005, GDP ___________

tripled; it rose from $750 to $2250 Because the prices of t-shirts increased by 50%, the output of shirts and shorts (volume of production) doubled while GDP tripled *see figure 38 pg 74

(Unemployed/Labor force) x 100

unemployment rate

The 3 categories (employed, unemployed, out of the labor force) comprises of the _______________

working age population

The BLS in August 2009 found that approximately 236 million ___________________ persons were in the US. Of these 154.6 million were in the ___________________.

working-age; labor force

The unemployment rate is never _________

zero. People are always searching for work. This reflects the continual entry of new job seekers into the labor market and shifting fortunes of different industries, regions, and businesses. During expansions, some businesses are closing while others are opening. During the Great Depression, some were expanding while many employers were laying off workers.