Exam 2
Net Exports (Xn)
-add exported goods -subtract imported goods -Xn=exports(X) - imports (M)
GDP
-avoids multiple counting -ignores intermediate goods -counts value added -domestic output only
modern economic growth
-began with the Industrial Revolution in late 1700s -ongoing increases in living standards -time for leisure -social change -democracy -human lifespan doubled -began in Britain (power during Industrial Revolution) -has spread slowly -starting date main cause of worldwide differences in living standards
income approach
-count income derived from production -wages, rental income, interest income, profit
expenditure approach
-count sum of money spent buying the final goods -who buys the goods?
Personal Consumption Expenditures (C)
-durable goods -nondurable goods -consumer expenditures for services -domestic plus foreign goods produced
Government Purchases (G)
-expenditures for goods and services -expenditures for publicly owned capital -excludes transfer payments
-extraordinary rapid in -adverse effec
-extraordinary rapid in -adverse effects -examples: Germany after WWI and Japan after WWII -causation -motivation -termination
Gross Private Domestic Investment (Ig)
-plant, machinery, and equipment -residential construction -research and development -creation of new works of art, music, etc. -changes in inventions
growth as a goal
-widely held economic goal -growth lessens the burden of scarcity
-under 16 and/or institutionalized: jail, hospitalized -not in labor force: retired, disabled, stay at home mom -employed -unemployed
4 sections of unemployment
1) Long-run economic growth -higher output and higher standard of living in the long-run 2) short-run fluctuations in output and employment -business cycles (recession) -real GDP -normal GDP -unemployment (labor) -inflation
Macroeconomic is primarily concerned with what two topics?
the economy as a whole.
Macroeconomics is mostly focused on
financial transactions are excluded -public transfer payments -private transfer payments -stock market transactions secondhand sales are excluded
For GDP how are transactions treated?
total real output.
For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic growth would be changes in
coin-operated laundry machines
For which of the following goods and services are prices most sticky?
consumption, investment, government purchases, and net exports.
GDP can be calculated by summing
value added
GDP counts only final goods and services
The Antigrowth View: -environmental and resource issues In defense of economic growth -higher standard of living -human imagination can solve environmental and resource issues -growth is the path to greater material abundance -increases leisure time -allows for the expansion and application of human knowledge
Is growth desirable and sustainable?
invent technologies
Leader countries in modern economic growth do what?
increases in the value of a product to each user, including existing users, as the total number of users rises.
Network effects are
increased the opportunity cost of staying at home.
Rising real wages for women in the U.S. workforce since the 1960s have
1. Increasing its inputs of resources: move people, immigration, land, infrastructure, money 2. Raising the productivity of those inputs
Society can increase its real output and income in 2 fundamental ways
people are more likely to invest if they don't fear that others can take their returns on investment without compensation.
Strong property rights are important for modern economic growth because
the Great Divergence in Standards of Living
The uneven Distribution of Growth
people who save money in financial institutions.
Unanticipated inflation tends to penalize
Product quality has improved.
Under what circumstances do rates of economic growth understate the growth of economic well-being?
a person cannot get a job but is willing to work and is actively seeking work.
Unemployment describes the condition where
-occupation -age -race and ethnicity -gender -education -duration
Unequal Burdens
business cycle
a pattern of alternating rises and declines in the rate of economic activity
Shocks to the economy occur when
actual economic events do not match what people expected.
nominal GDP
based on prices that prevailed when output was produced
-economic shocks -prices are "stick" downwards -economic response entails decreases in output and employment
business cycle fluctuations
cyclical unemployment
caused by the recession phase of the business cycle
-political events -financial instability -irregular innovation -productivity changes -monetary factors
causes of shocks
price of the most recent market basket in the particular year/price estimate of the market basket in 1982-1984 * 100
consumer price index (CPI)
consumer expenditures for services
consumer wants example: getting nails done, or a haircut
-without food and energy goods -focuses on more stable prices
core inflation
-due to a rise in per-unit input costs -supply shocks
cost-push inflation
assets
creation of new capital example: coat, car
-involuntary part-time workers counted as part-time -discouraged workers are not counted as employed
criticism or unemployment
durable goods are affected the most: -capital goods: large purchases by businesses -consumer durables nondurable consumer goods affected less: -productivity changes -monetary factors
cyclical impact
-price falls if demand is low -sales unchanged
demand shocks and flexible prices
-maintain inventory -sales change -business cycles
demand shocks and sticky prices
-excess spending relative to output -central bank issues too much money
demand-pull inflation
Production Possibilities Analysis
economic growth and the Production Possibilities Curve
covid relief, retirement payments
example of public transfer payments
consumers and firms
example of sticky prices:
shocks
expect one thing to happen but something else does
-the effects on current behavior
expectations are important because:
consumption expenditures by households + investment expenditures by businesses + government purchases of goods and services + expenditures by foreigners
expenditures, or output approach
frictional unemployment
in between jobs, college students who just graduated ex: individuals searching for jobs or wait to take jobs soon
Sum of: compensation of employees rents interests proprietors income corporate profits taxes and imports EQUALS: national income less: net foreign factor income plus: consumption of fixed capital plus: statistical discrepancy EQUALS: GDP
income approach
wages + rents + interest + profits + statistical adjustments
income, or allocations, approach
inflation
increase in prices
economic growth
increase in real GDP or real GDP per capita over some time period
purchasing power
inflation reduces the _________ of money over time
sticky prices
inflexible prices
Income Approach
items that make up National Income -compensation of employees - largest share of national income -rents-income received by households and businesses that supply property resources -interest-money paid by private businesses to the supplies of loans used to purchase capital -proprietors' income (or profits) -income received by proprietorships, partnerships and other incorporated businesses -income received by corporations
national income accounting
measures the economy's overall performance
-loss of skills and loss of self-respect -plummeting morale -family disintegration -poverty and reduced hope -heightened racial and ethnic tensions -suicide, homicide, fatal heart attacks, mental illness -can lead to violent social and political change
noneconomic costs
-taxes on production and imports -corporate income taxes -social security contributions -undistributed corporate profits +transfer payments =personal income (PI)
other national accounts
total input cost/units of output
per-unit production cost
price of market basket in specific year/price in same basket in base year * 100
price index in given year
bank loans, money from grandparents
private transfer payments
flexible prices
product prices that freely more upward or downward when product supply or demand changes
sticky prices
product prices that remain in place (at least for a while) though supply and demand has changed
nominal GDP/price index (in hundredths)
real GDP
real GDP/ population
real GDP per capita
real GDP
reflects changes in the price level; uses base year price
structural unemployment
robots will impact manufactures, truck drivers will lose jobs ex: occurs due to changes in the structure of the demand for labor
arithmetic of growth
rule of 70
-vary substantially in duration and intensity -each cycle has similar stages but no two are identical -phases of the business cycle -peak -recession -trough -expansion
the business cycle
GDP
the total market value of all final goods and final services produced annually within the boundaries of a nation
saving
trade-off current for future consumption
no cyclical unemployment.
"Full employment" refers to the situation when there is
4 only.
1. Improvements in technology. 2. Increases in the supply (stock) of capital goods. 3. Purchases of expanding output. 4. Obtaining the optimal combination of goods, each at least-cost production. 5. Increases in the quantity and quality of natural resources. 6. Increases in the quantity and quality of human resources. Use the accompanying list to answer the following question. As distinct from the supply factors and demand factor of economic growth, the efficiency factor(s) of economic growth is (are)
approximate number of years required to double real GDP
70/annual percentage rate of growth
cyclical
A headline states, "Real GDP falls again as the economy slumps." This condition is most likely to produce what type of unemployment?
6 percent
A nation has a population of 260 million people. Of these, 60 million are retired, in the military, institutionalized, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate?
28 years.
A nation's average annual real GDP growth rate is 2.5 percent. Based on the rule of 70, the approximate number of years that it would take for this nation's real GDP to double is
is the dollar value of all final output produced within the borders of the nation during a specific period of time.
A nation's gross domestic product (GDP)
a comparison of the current price of a market basket to a fixed point of reference.
A price index is
real GDP that lasts six months or longer.
A recession is a decline in
Labor Inputs versus Labor Productivity -accounting for the growth of U.S. Real GDP
Accounting for Frowth
-technological advance (40%0 -quantity of capital (30%0 -education and training (15%) -economies of scale and resource allocation (15%)
Accounting for Growth
the multiplier effect.
All of the following are sources of increasing returns and economies of scale except
firms adjust to unexpected, but permanent changes in demand
All prices are flexible in the long-run
unemployment
BLS divides the total U.S. population into four groups
promote economic growth by helping to direct household savings to businesses that want to invest.
Banks and other financial institutions
-access health of economy -track long-run course -formulate policy
Bureau of Economic Analysis complies National income and product accounts
land by the U.S. Department of Interior.
Computation of GDP by the expenditures method would include the purchase of
argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.
Critics of economic growth
natural rate of unemployment (NRU) -full employment level of unemployment -can vary over time due to: -demographic changes -changing job search methods -public policy changes -actual unemployment can be above or fall below the NRU
Definition of full employment
5. households, businesses, and government must purchase the economy's expanding output
Determinant of Growth: Demand Factor
6. must achieve economic efficiency and full employment
Determinant of Growth: Efficiency Factor
1. increases in in quantity and quality of natural resources 2. increases in quantity and quality of human resources 3. increases in the supply (or stock) of capital goods 4. improvements in technology
Determinant of Growth: Supply Factors
1. increases in in quantity and quality of natural resources 2. increases in quantity and quality of human resources 3. increases in the supply (or stock) of capital goods 4. improvements in technology 5. households, businesses, and government must purchase the economy's expanding output 6. must achieve economic efficiency and full employment
Determinants of Growth
the construction industry.
During a severe recession, we would expect output to fall the most in
GDP Gap -GDP gap=actual GDP- potential GDP -can be negative or positive Okun's law: every 1% of cyclical unemployment causes a 2% GDP gap
Economic Cost of Unemployment
steam engine
Economic historians identify which invention as a major factor that started the Industrial Revolution in Britain?
Sum of: personal consumption expenditures gross private domestic investment government purchases net exports
Expenditures Approach
government consumption goods and public capital goods.
Government purchases include government spending on
government construction of new highways and dams.
Gross domestic private investment, as defined in national income accounts, would include the following, except
real gross domestic product
Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.
increased nominal GDP from last year, but real GDP was unaffected.
Harry's Pizza Parlor produced 10,000 large pizzas last year that sold for $10 each. This year Harry's produced 11,000 large pizzas (identical to last year's pizzas) but sold them for $12 each. Based on this information, we can conclude that Harry's production of large pizzas
sacrifice current consumption.
If an economy wants to increase its current level of investment, it must
two percentage points.
If the negative GDP gap were equal to 4 percent of the potential GDP, Okun's law suggests that the actual unemployment rate would exceed the natural rate of unemployment by
an increase in the overall level of prices.
Inflation is defined as
-strong property rights: physical assets of homes and resources; gvmt can't take something you own -patents and copyrights -efficient financial institutions: banking institutions -literacy and widespread education -free trade -competitive market system
Institutional Structures of Growth
every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, a 2 percent GDP gap is generated.
Okun's law indicates that for
value of final goods and services produced within the borders of a country, corrected for price changes.
Real GDP measures the
-size of employed labor force -average hours of work
Supply Determinant of Real Output
1. Personal Consumption Expenditures (C) 2. Gross Private Domestic Investment (Ig) 3. Government Purchases (G) 4. Net Exports (Xn)
The Expenditures Approach
potential GDP exceeds actual GDP.
The GDP gap measures the amount by which
actual GDP and potential GDP.
The GDP gap measures the difference between
the average human lifespan more than doubling.
The Industrial Revolution and modern economic growth resulted in
-high debt levels -overcapacity -free internet apps -slowdown in technological progress
The Recent Productivity Slowdown
is in the process of voluntarily switching jobs.
The best example of a "frictionally unemployed" worker is one who
short-run fluctuations in output and employment.
The business cycle depicts
debasement of the environment.
The following factors tend to make the real GDP growth rate understate the growth of economic well-being, except
increased the average productivity of labor.
The historical reallocation of labor from agriculture to manufacturing in the United States has
technological advance.
The largest contributor to increases in the productivity of American labor is
-standard of living measured by output by person -no growth in living standards prior to Industrial Revolution -Modern Economic Growth -output per person rise -but not experienced by all countries
The miracle of Modern Economic Growth
is equal to the total of frictional and structural unemployment.
The natural rate of unemployment
full-employment unemployment rate.
The natural rate of unemployment is the
-nonmarket activities not included -leisure and psychic income -improved product quality -the underground economy (drugs, weapons, prostitution, paying someone in cash) -GDP and the environment -composition and distribution output -noneconomic sources of well-being
What are the shortcoming of GDP?
-income approach -expenditure approach
What are the two approached to calculating GDP?
demand and supply shocks
What are the two types of shocks?
Real GDP will decrease, inflation will increase, and unemployment will increase.
What effect will a negative supply shock have on the main measures of economic performance?
shocks
What happens when expectations are unmet?
Real GDP will decrease, inflation will decrease, and unemployment will increase.
What impact will a negative demand shock have on the main measures of economic performance?
resources are devoted to increasing future output.
When economists refer to "investment," they are describing a situation where
may be either positive or negative.
When gross investment is positive, net investment
G
When local police and fire departments buy new cars for their operations, these are counted as part of
goods and services produced in the underground economy
Which of the following activities is excluded from GDP, causing GDP to understate a nation's production?
the child-care services provided by stay-at-home parents
Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being?
A dramatic increase in energy prices increases production costs for firms in the economy.
Which of the following is an example of a supply shock?
fees received by stockbrokers
Which of the following is included in GDP?
negative real growth in output
Which of the following is most closely related to recessions?
aggregate expenditures of households, businesses, and government
Which of the following is not a supply factor in economic growth?
the purchase of 100 shares of AT&T by a retired business executive
Which of the following is not economic investment?
purchases of mutual funds by consumers
Which of the following is not included in personal consumption expenditures?
GDP per person
Which of the following is used to measure directly the average standard of living across countries?
Firms respond to shorter-term demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels.
Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices?
Prices tend to be sticky in the short run but become more flexible over time.
Which of the following statements best describes price flexibility in the economy?
If prices were fully flexible, there would be no short-run economic fluctuations.
Which of the following statements is true?
demand-pull inflation
Which of the following would most likely occur during the expansionary phase of the business cycle?
-fixed-income receivers: real incomes fall -savers: value of accumulated savings deteriorates -creditors: lenders get paid back in "cheaper dollars"
Who is hurt by inflation?
flexible-income receivers -COLAS -Social Security recipients -union members debtors: pay back the loan with "cheaper dollars"
Who is unaffected by inflation?
Inflation lowers the standard of living for people whose income does not increase as fast as the price level.
Why are economists concerned about inflation?
There is lost output that could have been produced if the unemployed had been working.
Why are high rates of unemployment of concern to economists?
-consumers prefer stable prices -firms want to avoid price wars
Why are prices sticky in the short-run?
investment
financial investment -typical use of the phrase economic investment -expansion of the economy's productive capacity
inflation
flexible prices allow us to deal with __________
durable goods
goods that last 3 years or long washers, dryers
nondurable goods
goods that last a short period of time, such as food, light bulbs, and sneakers
-demand-pull continues as long as the excess spending continues -cost-push ends in recession
types of inflation differ in sustainability
demand shocks
unexpected changes to the demand of goods and services Ex: toilet paper, bread, face masks
supply shocks
unexpected changes to the supply of goods and services Ex: field froze over which meant less corn, meat packing plants
price index
use __________ to determine real GDP