HW #4
Frictional Unemployment
Refers to workers who have lost their jobs because of changing market (demand) conditions and who have transferable skills. Unemployment due to the natural "frictions" of the economy. A person is frictionally unemployed when he or she in unemployed because of changing market conditions and has transferable skills.
Structural Unemployment
Refers to workers who have lost their jobs because of changing market (demand) conditions and whose skills do not match the requirements of available jobs
Indirect Business Tax
Taxes that increase a business firm's costs of production and, therefore, the prices charged to consumers. Examples are sales, excise, and property taxes.
Which of the following items is included in gross private domestic investment?
an increase in business inventories
Changes in nominal GDP
are due to changes in output and price while changes in real GDP are attributed to movements in output only.
An increase in government spending does not
automatically mean: inflation, or increase in the money supply. This was in-class clicker question. The answer was none of the above.
To be officially unemployed a person must
be in the labor force
The main cause of the 2001 recession in the United States was a large decline in:
investment spending.
Value Added Approach
measures the amount of value that is added to GDP in each stage of the production process. ***Value added approach is the same as counting only the value of the final products.
Anne Kasperson works in her own home as a full-time caretaker and homemaker. Officially, she is:
not in the labor force
Which of the following would not be included in GDP?
Used Car Sales
The amount by which the value of a firm's output exceeds the value of the goods and services the firm purchases from other firms is called
Value Added
All of the following are included in gross domestic income except
WELFARE PAYMENTS. NOT NET INTEREST.
Inflation means that:
prices in the aggregate are rising, although some particular prices may be falling.
In the calculation of GDP, the value of a new house is included in
private investment. Why?
The value of gross domestic product (GDP) differs from the value of gross national product(GNP) when
production in one country employs factors of production owned by residents of other countries ***Stupid question. Vague.
Consumption of fixed capital (depreciation) can be determined by:
subtracting NDP from GDP.
The natural rate of unemployment is
that rate of unemployment occurring when the economy is at its potential output.
If we add up all the values added at every stage of production for a good, we will get
the final value of the good. ***stupid question.
Net foreign factor income
the income approach to GDP subtracts ______________________ Income earned by domestic factors of production - income earned by foreign factors of production
Expenditure Approach
the national income accounting method that measures GDP by adding all the spending for final goods during a period of time Y=C+I+G+NX
Final Goods
Goods that have been purchased for final use and not for resale or further processing or manufacturing
Income Approach
A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services.
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
Second-Hand Sales
Final goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced.
Real GDP
GDP adjusted for inflation, GDP in a year divided by the GDP price index for that year, the index expressed as a decimal
For a homeowner, the rental value of the home is estimated and included in GDP.
True (Consumption)
Nominal GDP
(unadjusted GDP) -- Total production at current prices
Which of the following best measures improvements in the standard of living of a nation? Which of the following is the best indicator of a nation's overall economic performance?
1) growth of real GDP per capita 2) Real GDP
GDP Deflator
100 X (nominal GDP/real GDP)
Rule of 72
72/R=$ double investment money
Exports - Imports
= Net Exports (regardless of (-) or (+)
Cyclical Unemployment
A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise. Also associated with recessions and called deficient-demand unemployment
Keynes
A school of economic thought that tends to favor active federal government policy-making to stabilize economy-wide fluctuations, usually by implementing discretionary fiscal (not monetary) policy. An economic theory based on the ideas of twentieth-century British economist John Maynard Keynes. According to Keynesian economics, governments can spend their economies out of a depression by using deficit-spending to encourage employment and stimulate economic growth. Body of economic thought originated by the British economist, John Maynard Keynes. Keynes believed that active government intervention in the marketplace was the only method of ensuring economic growth and stability. He held that insufficient demand causes unemployment and that excessive demand results in inflation; and that government should manipulate the level of demand by adjusting levels of government expenditure and taxation
Value Added Tax (VAT)
A tax on increased value of a product at each stage of production and distribution rather than just at the point of sale
GDP differs from NDP in that:
A) GDP is based on gross exports, while NDP is based on net exports. B) GDP includes, but NDP excludes, indirect business taxes. C) net investment is used in calculating GDP and gross investment is used in calculating NDP. D) gross investment is used in calculating GDP and net investment is used in calculating NDP. Answer: D
As defined in national income accounting, investment includes:
A) business expenditures on machinery and equipment. B) all consumption. C) imports, but not exports. D) all nonfood items. Answer: A
If real GDP falls from one period to another, we can conclude that:
A) deflation occurred. C) nominal GDP fell. B) inflation occurred. D) none of the above necessarily occurred. Answer: D
The unemployment rate is the
A) ratio of unemployed to employed workers. B) number of employed workers minus the number of workers who are not in the labor force. C) percentage of the labor force that is out of work. D) percentage of the total population that is out of work. Answer: C
Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as:
A) structurally unemployed. B) frictionally unemployed. C) not in the labor force. D) employed. Answer: D
Which of the following is not economic investment?
A) the purchase of a drill press by the Ajax Manufacturing Company B) the purchase of 100 shares of AT&T by a retired business executive C) construction of a suburban housing project D) the piling up of inventories on a grocer's shelf Answer: B
Which of the following do national income accountants consider to be investment?
A) the purchase of an automobile for private, non-business use B) the purchase of a new house C) the purchase of corporate bonds D) the purchase of gold coins Answer: B
Which of the following is true of the circular flow model?
ALL of these are True: Personal consumption spending flows from households to firms. The production of goods and services generates income to households. Consumers finance their personal consumption spending by supplying factors of production to firms
Price index (GDP Deflator)
An index that traces the relative changes in the price of an individual good (or a market basket of goods) over time
Which of the following items would not be a part of private investment?
An old shopping center acquired by a merger. WHY??????
Stock and Flow - GDP
Any metric that is measured "over a period" is flow. Any metric that is measured "at a point of time" is stock. GDP is indeed calculated over a period, typically an year. Hence it is a flow measure. A stock metric in economics will be government debt as it is the outstanding amount at a point of time, say at the end of a fiscal year.
GDP increases if you purchase General Motors stock.
False. Why? Financial transactions: trading existing assets, such as stock or bond purchases are not included in GDP.
Which of the following constitute the unemployment occurring at the natural rate of unemployment?
B) structural and frictional unemployment
transfer payment
Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.
Gross Private Domestic Investment
Gross private domestic investment provides an indicator of the future productive capacity of the economy. It traditionally amounts to 14% of GDP and is by far the least stable component. 3 Types: 1. Non residential investment: Expenditures by firms on capital such as commercial real estate, tools, machinery, and factories. 2. Residential Investment: Expenditures on residential structures and residential equipment that is owned by landlords and rented to tenants. 3. Change in inventories: The change of firm inventories in a given period.
Why not to buy stocks?
In-Class Clicker - Low risk...When you own common stock, you're entitled to certain voting rights to elect the company's board of directors.
Value Added
Is the difference between a product's price and the total cost of the inputs that went into making it. It is the extra worth created in the production process The difference between a good's selling price and the "intermediate goods" used to make the good
Personal Income (PI)
PI = NI - Profits - Payroll Taxes + Transfer Payments Total amount of income going to the consumer sector before individual income taxes are paid
Transfer payments are included in
Personal income (PI)
Personal Disposable Income (PDI)
Personal income that households retain after paying income taxes.
If nominal GDP rises:
Real GDP may either rise or fall.
Statistical Discrepancy
The discrepancy between the expenditure approach and the income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total
Double Counting
The mistake of counting both the value of intermediate and final products in calculating gross domestic product
Gross Domestic Income
The sum of all income (wages, interest, rent, and profits) paid to the four factors of production. I THINK IT DOESN"T INCLUDES WELFARE PAYMENTS.
National Income (NI)
The total income earned by resource owners, including wages, rents, interest, and profits. NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output. NI = GDP - depreciation (consumption of fixed capital). The largest component of NI is compensation of employees (wages)
GNP
The total value of goods & services produced in a year by all a country's businesses, regardless of where they are located as long as they are headquartered in the country (US.)
Underground economy
The unreported or illegal production of goods and services in an economy. The underground economy is not included in the calculation of GDP.
National Income Accounting
a system of statistics and accounts that keeps track of production, consumption, savings and investment to track overall economic performance.
GDP was not designed to be a measure of well being of the society. GDP omits the following:
a. Non-marketable goods and services: tasks that do not involve market transactions, such as baby sitting, house cleaning, lawn mowing etc. Some very useful output is excluded because it is unpaid employment. b. Underground activities: illegal or cash transactions have no record. Government's estimates on these transactions are not accurate. c. Sales of used items: GDP measures only current output. Used car and thrift stores' transactions are not counted. d. Financial transactions: trading existing assets, such as stock or bond purchases. e. Transfer payments: either government or private transfer payments are not included because goods and services are not produced in this process. Examples are social security benefits or kid's allowances. f. Leisure: individuals consume leisure, just as they consume all the other tangible goods, which generate satisfactions. But leisure has no price tag, so it is not included in GDP. g. Social costs: production processes may cause pollution. Polluted air and water may have social costs like bad air quality, and cancer patients. These social costs reduce our economic well being. If money is not spent to clean up the oil spill or to cure the cancer patients, those expenses are not added to the GDP. h. GDP does not measure quality or nature of the product, which contributes to the satisfaction level of the consumers. Nominal GDP simply adds the dollar value of the product; it makes no differences if the product is a weapon, or a book.
If nominal GDP increased, it must mean that
either or both P and Q went up. If real GDP increased, then only Q went up.
The largest component of factor income is
employee compensation, not consumption
Goods that are produced in a particular period but not sold in the current period
end up in inventories and are included in gross private investment. False Answer: are excluded in the current year's GDP and included in GDP in the year they are sold. Why? FINAL GOODS AND SERVICES ARE ONLY COUNTED ONCE, IN THE YEAR IN WHICH THEY WERE PRODUCED.
In the U.S., since the 1950s, the share of employee benefits as a percentage of total employee compensation
has been increasing
Nonmarket transactions
household work or do-it-yourself jobs are missed by GDP accounting.
National Income
the total value of all income in a nation (wages and profits and interest and rents and pension payments) during a given period (usually 1 yr) NI = National Income - all income earned by American-owned resources, whether located here or abroad. NI = Compenstation of Employees + Rent + Interest + Profit
Official unemployment statistics:
understate unemployment because discouraged workers are not counted as unemployed.
Trade Deficit
when a country imports more than it exports