Econ unit 2 test vocab

Inflation

rising general level of prices and it reduces the "purchasing power" of money (prices increase, banks dont lend, ppl dont save, investment decrease, GDP decreases (bc/ companies cant expand production much without lending from banks)

Nominal GDP

GDP measured in current prices. It does not account for inflation from year to year

One Year (GDP)

GDP measures annual economic performance

Within a country (GDP)

GDP measures production within the country's borders

Final goods

GDP only counts NEW goods and services

Intermediate Goods (NOT in GDP)

(anything you can get a receipt for) goods inside the final goods don't count ex. price of finished care

Frictional Unemployment

(good unemployment) temporary unemployment or being btwn jobs - individuals are qualified workers w/ transferable skills

Business Investment (4 components of GDP)

16% of U.S. GDP Businesses spending on tools and equipment ex. walmart buys self checkout machines

Labor Force

16+ years old, able and willing to work, not institutionalized (in jails or hospitals), not in military,not in school full time, or retired

Government Spending (4 components of GDP)

17% of U.S. GDP ex. schools, roads, tanks (NOT transfer payments)

Consumer Spending (4 components of GDP)

70 % of U.S. GDP purchases of final goods and services by individuals (everything we spend money on (food etc. )) ex. 5$ sandwhich at subway

rental income

income earned from property owned by individuals

Economic System (?countries^GDP's)

Capitalism promotes innovation and provides incentives to improve productivity

Dollar value

GDP is measured in dollars

Net Exports (4 components of GDP)

Exports (x) - Imports (m) = -3% ex. value of 3 Ford Focuses minus 2 Hondas

GDP (Y)=

GDP (Y)= C+I+G+(X-M)

GDP per capita (per person)

GDP divided by the population. It identifies on average how many products each person makes. (best measure of a nations standard of living)

Real GDP

GDP expressed in constant, or unchanging, dollars. Real GDP adjusts for inflation

Real GDP

GDP is expressed in constant, or unchanging, dollars

The Wealth Effect

Higher price levels reduce the purchasing power of money. This decrease the qauntity of expenditures.

Invenstment (I)

NEVER- when individuals buy assets like stocks and bonds ALWAYS- when businesses buy capital like machines, resources, and tools

Product Quality (problems w/ CPI)

The CPI ignores both improvments and decline in product quality (result: CPI may suggest that prices stay the same through the economic well being has improved significantly)

New Products (problems w/ CPI)

The CPI market basket may not include the newest consumer products (result: CPI measures prices but not the increase in choices)

Technological Unemployment

Type of structural unemployment where automation and machinery replace workers

Foreign Trade Effect

When US price levels rises, foreign buyers purchase fewer goods and Americans buy more foreign goods

Value-added Approach (calculate GDP)

add up all the dollar value at each stage of production process (national income)

Income Approach (calculate GDP)

add up all the income earned from selling all final goods and services in a given year (national income)

Expeditures Approach (calculate GDP)

add up all the spending on final goods and services produced in a given year (national income)

Aggregate

added all together( we combine all prices and quantities)

Income Approach

adds up all the income earned from producing goods and services

Aggregate Demand

all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels ( demand by consumers, businesses, govt., and foreign countries)

Substitution Bias (problems w/ CPI)

as prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket (result: CPI may have higher than what consumers are really paying)

Structural Unemployment

changes in the labor force make some skills obsolete - these workers DO NOT have transferable skills and these jobs will never come back. Workers must learn new skills to get a job (ex. VCR repair man)

Menu costs of inflation

costs money to change listed prices -> businesses must update the menus, signs, etc.

Natural Resources (?countries^GDP's)

countries that have access to more natural resources are more productive

Human Capital (?countries^GDP's)

countries that have better education and training are more productive

Capital Stocks (?countries^GDP's)

countries that have more machines and tools are more productive ( key for economic growth and making more stuff)

Rule of Law (?countries^GDP's)

countries with solid institutions and political stability have historically had more economic growth ( from the yr before - growth)

Deflation (de opposite of in)

decrease in general prices or a negative inflation rate (bad b/c ppl will hoard money and assets - cant sell them for any good price) (prices decrease, people hoard $ and stuff cant sell, consumer spending decreases, GDP decreases)

Services (C= consumer spending)

dental work, repairs, tutoring

Non-durable goods (C= consumer spending)

ex. food, clothes, toilet paper

Durable Goods (C= consumer spending)

ex. washing machines, fridges, cars

Non Production Transactions (NOT in GDP)

financial transactions ( ex. btwn you and a bank) ex. stocks, bonds, real estate( transfer of title of home) (not included in GDP unless it is a BRAND NEW home)

Natural Rate of Unemployment (NRU)

frictional plus structural unemployment. The amount of unemployment that exists when the economy is healthy and growing (economy is great if there is only frictional and structural)

Inventories

goods produced and held in storage in anticipation of later sales - counted in the year they are produced not sold - the change is valuable economic indicator

Government (G)

govt. expeditures tracks the spending made in the "public sector" - includes payments made by the govt. for goods and services ex. the prices of fighter jets and the salaries of the pilots

Subsidies

govt. payments to businesses

Price Indices

index number assigned to each yr. that shows how prices have changed relative to a specific base yr.

interest income

interest earned from loaning money to businesses

Seasonal Unemployment

is a specific type of frictional unemployment which is due to time of year and nature of the job

factor payments

labor earns wages land earns rent capital earns interest entrepeneurship earns profit

GDP deflator

measures the price of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers

profit

money businesses have after paying all their costs

Unit of Account Costs of Inflation

money doesn't measure the value of goods and services -> leads to less efficient use of resources b/c of uncertainty caused by change in currency value

Public Sector

part of the economy that is controlled by the govt.

Private Sector

part of the economy that is run by individuals and businesses

Factor Payments

payment for the factors of production, namely rents, wages, interest and profit.

Borrowers (helped by inflation)

ppl who borrow money a business where the price of the product increases faster than the price of resources

Lenders (hurt by inflation)

ppl who lend money (at fixed interest rates) (savers)

Market Basket

price times quantity

Disinflation!

prices increasing at slower rates

Shoe leather costs of inflation

the costs of transactions increase -> people reduce their real money holding so they must spend time and effort making additional trips to the bank

GDP Gross (total) Domestic (made in the country) product

the dollar value of all final (brand new) goods and services produced within a country in one year

Consumer Price Index (CPI)

the most commonly used measurment of inflation for consumers

The inflation rate

the percent change in prices from year to year

The Unemployment Rate

the percent of people in the labor force who want a job but are not working

nominal interest rate

the percentage increases in money that the borrower pays (not adjusted for inflation) Nominal=real interest rate + expected inflation i.r. that bank is offering (always +)

real interest rate

the percentage increases in purchasing power that a borrower pays (adjusted for inflation) - Real (interest rate) nominal interest rate - expected inflation the i.r. borrower ends up paying @ the end of their loan -> can be +,-, or 0

full employment output (y)

the real GDP created when there is no cyclical unemployment

What does it mean when talking about growth?

the year before

Non-market & illegal activities (NOT in GDP)

things made at home - household production ex. unpaid work, black markets, drugs

Cyclical Unemployment

unemployment caused by a recession ( as demand for goods and services fall, demand for labor falls and workers are laid off) (sometimes called demand deficient unemployment) ex. steel workers laid off during recessions

Real Wage

wage adjusted for inflation

Nominal Wage

wage measured by dollars rather than purchasing power

labor income

wages earned from performing work

Potential GDP

when GDP is where it "should be"

Transfer Payments

when the govt. redistributes income (ex. welfare, social security) (-> unemployment benefits)

Interest Rate Effect

when the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans

Unemployment

workers that are actively looking for a job but aren't working