Macro Economics Exam 2
CPI Measurement Challenges
-people make substitutions (people want the cheapest prices which makes CPI overambiguous and overstates inflation) -CPI is updated regularly -Accoutning for quality change
Some scenarios that GDP measures
-spending by consumers on new goods and services, profit earned by buisnesses over a year, production of new computers over a year
Real GDP
-uses specified set of base prices to value production in each year -the government specifies the base year
How to calculate value added:
-value added is value of ouput produced minus value of material of inputs (purchased from other firms -value added is not the same as profit
Price Index
a number that compares a current value to a base year value
Consumer Price Index (CPI)
a number that measures the cost of a basket of goods in a given year relative to the cost of the same basket of goods in a base year. -CPI is always 100 in base year
As prices of good and services rise...
the value of the dollar declines
What are government transfer payments?
these include: food stamps, unemployment compensation and social security.. all of which DO NOT count toward GDP because the government is only collecting tax payments from one indivudal and transferring it to another person who meets certain criteria ie) works pay social security tax=government manages social security system=retired person recieves social security check
a person who has no job and has been searching for a year
unemployed
a person who wants a job and is looking for a job
unemployed
unemployment rate formula
unemployed/labor force x 100
frictional unemployment
unemployment that occurs when people take time to find a job (whether they move and need to change jobs, they lose their job, they enter workforce after going to school)
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. quantity of labor supplied is greater than quantity of labor demanded more workers less jobs
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
marginally attached
want job but not looking
potential GDP
what we are capable of producing given our existing state of technology and factors of production
Calculating Real Value
you do this by calculating the inflation rate of the CPI's between two years. IE) 1960 CPI=29.6 2013 CPI=232.957 29.6/232.957 = 6.87 x100 Inflation Rate=687% This means that something that was $1 dollar in 1960 would equal $6.87
Millions to Billions to Trillions to Thousands and vice versa
- From billions to millions move decimal three places to the right ie) 20,658,2 bil=20,658,200 mil -From millions to thousands move three decimal places to left ie) 327,262,775 bil=327,363.775 thousand=327.363775 mil
The Four Categories of Expenditure (Counts for GDP)
-Consumption (C): when consumers buy goods and services -Investment (I): When firms buy goods/services -Government (G): when state, local, and fed government buy goods/services -Export/Imports: sell goods to foreigners and buy goods from foreigners to sell within our borders
What counts in GDP?
-Final goods and not intermediate goods -New goods and not used goods -Goods count when produced -Goods sold to anyone -Financial transactions do not count (stocks and bonds) -only market transactions count
Limitations of GDP
-GDP does not measure: home production, illegal activities (drugs, weapons), unreported activities (government doesnt know), pollution, crime rates, leisure, infant mortality, literacy rate, life expectancy
What are the two exceptions that do not count toward consumption spending by consumers
-New Houses(counts in special category called residential investment) -Non Market Goods (does not go through an official tax paying buisness)
GDP deflator
-Nominal GDP/Real GDP x 100 (for the base year GDP deflator will always be 100)
What are the three categories of investment spending?
-Nonresidential Investment (spending on capital goods) -residential investment (new houses) -inventory investment (when firms produce in a given time period but don't sell them)
Intermediate
-any "good" that goes into making a final good -not included in GDP ex) the cotton that goes into making a shirt, the plastic that goes into making a straw, tires that come with a new car
Final Goods
-anything that you purchases or that someone sells to you -the government knows about it and its included in GDP ex) car, clothes, anything from a store
Purchases of new goods/services by government include:
-education (paying teachers, books, school buildings) -National defense (paying military people, navy base airforce base funds) -roads -national parks
The Three Methods Used to Measure GDP
-expenditure approach (GDP=C+I+G+EX-IM) -income approach (gov adds up wage/salary income, profit income, rental income and interest income -production approach (firms add value when they buy materials from other firms and use them to produce higher value goods like textbook company buying paper and authors knowledge for their product)
Some scenarios that GDP does NOT measure
-life expectancy, quality of education k-12, access to healthcare, the quality of air
Gross Domestic Product (GDP)
-measures the dollar (market) value of newly produced final goods and services for a give time period in a country's economy (or borders) -counts new goods but yes it does count antique goods (used goods) sold at the current market value -more production of goods= more people employed=more income being paid to workers and owners of businessnes=more income=more spending -ITS A CYCLE
What are the four categories of income
-wages -interest (payment made to financial capital that chooses to lend funds to others for interest payment) -rental income (paid to owners of land, or buildings) -profit ( income earned from a firm when a firms revenue from selling goods or services is greater than the total cost this = profit)
sustained economic growth
-year after year our capacity to produce goods and services increases -meausred by real GDP
What is the target inflation rate?
2%
labor force participation rate is 69.18%. The labor force has 147 people. Find the adult population, rounded to two decimals.
69.18=147/x times 100 69.18=147 times 100 /x 69.18=14700/x 69.18x=14700 x=212.49
years to double equation
70 / growth rate
If the CPI increases from 122 to 132 then the inflation rate is...
8.2% 132/122=1.0819 =8.2 (round)
Cost-of-living adjustment (COLA)
Automatic adjustments of nominal income to the rate of inflation
Why do we need to subtract imports from GDP
Because GDP only accounts for domestic goods and services (those within our borders) that means when government and consumers buy goods PRODUCED abroad this counts already in Consumption, Investment and Goverment categories so we subtract imports so its not accounted for twice in the final GDP
What is the difference between the CPI and the GDP deflator?
Both are used to calculate inflation rate but the CPI measures the change in cost of a FIXED basket of goods/services. GDP deflator measures changes in the prices of goods and services produced in a given year.
GDP=
C+I+G+EX-IM
people in jail
not in the labor force
Example of Nominal GDP
If we produce 10 oranges for 1 dollar each and 12 bananas for 2 dollars each the nominal GDP equals 10 x 1 + 12 x 2= $34
factors of production
Land, labor, and capital; the three groups of resources that are used to make all goods and services
Does buying a used car count in GDP?
Maybe (depends if the government knows about the purchase) ie) buying from a random guy on the street vs a used car dealership
Does mutual fun shares count in GDP?
No because it is a transfer of cash gor mutual fund shares
If nominal GDP increases does this mean we produced more goods and services in the economy?
No because its possible the production did not change at all but the prices only went up
If inventory investment is negative, what does this tell you about spending compared to production?
That not enough of a product/service was provided or given for the amount of consumers they had ie) 100 shirts produced but 105 shirts sold
economic growth is measured by
percent change in real GDP
Example of Value Added
Total revenue from good is $100=value of output Total Cost of good is $90: -wages=$40 -rent=$30 -material inputs $20 Profit is total revenue minus total cost.. 100-90= 10 dollars profit BUT VALUE ADDED is onlt total output minus material inputs so it would be 100-20= $80
Calculating Real Value of new Year
Two years are given. Take nominal value of old x CPI of new year / CPI of old year
the standard of living is measured by
percent change in real GDP per capita
Does buying a new cell phone count in GDP?
Yes (its a final good)
When a dealership does NOT sell some new trucks does this count for GDP still?
Yes because its still inventory
Does the government building new roads count toward GDP
Yes because the government hired workers and purchased materials...
Adult population
aged 16+ and not institutionalized
Real variables are measured in
base year dollars
How do we know the value of production is equal to the value of spending on new final goods/services?
because goods are produced and then sold.. firm produces $100 sweater and consumer buys $100 sweater. Production will ALWAYS be equal to spending because even if a good is produced and not sold due to inventory investment which is a spending category that keeps track of this good produced in domestic expenditures
Market Basket
contains all of the goods and services you buy as an average urban consumer during any given month
CPI formula
cost of basket in current prices / cost of basket in base year x 100
Real GDP equation
current output x base year price
Nominal GDP equation
current year output x current year price
the year-to-year fluctuations in unemployment around its natural rate
cyclical unemployment
a person who wants a job but is not looking for a job
discouraged worker
a person who has a job they don't like
employed
labor force
employed + unemployed
underemployed
employed part time but want full time work
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
frictional unemployment
employed
full and part time workers
Growth rate of real GDP per capita
growth rate of real GDP - growth rate of population
Countries with higher levels of GDP...
have lower rates of lower rates of infant mortality, higher literacy rates, and longer life expectancy (all of these are presumed good things)
labor force participation rate formula
labor force/adult population x 100
technological advances
macroenvironmental factor that has greatly contributed to the improvement of the value of both products and services in the past few decades
Inflation Rate
measures the percentage change in the price index (CPI)
Unemployment Rate
measures the percentage of the labor force that does NOT have a job
the amount of unemployment that the economy normally experiences
natural rate of unemployment
Growth Rate of Real GDP
new value-old value / old value x 100 -note this value can also be negative
Percentage change formula
new-old/old x 100 (You can use the GDP deflator to find the inflation rate between two years (or time periods)
unemployed
no job, available, searching
discouraged workers
no job, not searching because they think no jobs are available but want a job
Real Earnings in Base Year
nominal income x (100/CPI of year evaluating)
Real Earnings in new year
nominal income x (CPI of new year/CPI of old year)
people who are retired but still capable of working
not in labor force
children under the age of 16
not in the adult population
homemakers
not in the labor force
when nominal gdp prices are greater than real gdp prices that means
prices are rising in the economy
Productivity
quantity of goods and services prduced from each unit of labor
Real GDP per capita
real GDP divided by the total population
standard of living is best measured by...
real GDP per capita (the average real income per person)
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
structural unemployment
"Basket Approach"
take prices of goods in first year x their quantities. All all goods together. Do the same for year 2. Find percent change.
Inflation rate is just
the CPI value of new year-CPI of old year / CPI of old year x 100
nominal value
the face value of an amount of money (current year dollars)
Capital Goods
the factories, machines, and technology that people use to make final goods/products to sell
cost of living is best measured by...
the inflation rate
cost of living is measured by
the inflation rate
real interest rate
the nominal interest rate minus the inflation rate
Nominal GDP
the production of goods and services valued at current prices
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
What determines the value of a dollar bill?
the purchasing power
nominal interest rate
the rate you pay on a loan, or the rate you recieve from the bank on your savings
human capital
the skills and knowledge gained by a worker through education and experience
real value
the value of an amount of money in terms of what it can buy (constant dollars)