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