AP MACRO UNIT 2
% change in prices
(year 1-year 2/ year 1) *100
Country X's Macroeconomic Data in 2017 Consumption Spending= 13 Employee Compensation (Wages)= 12 Government Spending=3 Interest Payments=1 Investment Spending=4 Net Exports=−1 Profit=5
19 billion dollars
The nation of Kona cultivates coffee beans and cassava, from which all their consumer goods are produced. In 2010, 100 cups of Mocha Coffee cost $2.00 per cup, 50 quarts of sweet pudding cost $1.5 per quart, and 25 packages of Cassava Leaf salad cost $1.00 per package. In 2015, 100 cups of MC cost $2.5 a cup, 50 quarts of SP cost $2.2 a quart, and 25 packages of CLS cost $1.2 a package. 1. Calculate the cost of the marker basket of goods in 2010 and 2015.
2010: $200 +$75 +$25= $300 2015: $250 + $110+ $30=$390
2. (with Kona question) Use 2010 as the base year to calculate the price indices for 2010 and 2015 for the marker basket of goods in the table
2010: CPI=100, b/c base year is always 100 2015: CPI = 130, b/c $390/$300 *100
POPULATION
Norway and Argentina have similar nominal GDP, but the population of Norway is much smaller than Argentina
Government gives welfare to someone
Not counted in GDP b/c is transfer of money
Limitations of GDP
PIES
P
Population
Entrepreneurship
Profit
Factor Payments
Rent, Wages, Interest, Profit
example of discouraged worker
Sara has been unable to find a job and has abandoned her job search
S
Shadow Economy
INEQUALITY
Standard of living depends on income-income distribution doesn't factor into GDP
Natural Rate of Unemployment
The amount of unemployment that normally exists. There will always be structural and frictional unemployment
Consumer price index
The key measure of inflation- the change in the cost of buying a fixed basket of goods and services. Base is 100. Each year is given an index number as well
Which statement is true about the circular flow diagram of an economy?
The market for factors of production connects spending by firms to household income
Nominal GDP
The market value of all financial goods and services produced within a country in a year
Public Sector
The part of the economy ran by the government
Cyclical Unemployment
The result of an economic depression or recession. As demand for goods and services falls, the demand for labour falls and workers are laid off
Labour
Wages
Labour unions negotiated a 3-year contract with employers in the automobile industry. THey agreed to a 3% per year increase in pay over the three years. How would each group be affected by an actual inflation rate of 4% next year?
Workers would be worse off, and the employers would be better off
Does not contribute to GDP
a baker buys eggs that will be used in a cake
National Spending Approach
approach that takes all the goods and services that go into GDP and splits them into consumption, environment, government purchases, and Exports-imports (Net Exports)
Imports
are not included in GDP b/c produced in other country
GDP Deflator
broad measure of price levels in the economy (The index number shows how much prices have changed since base year)
Part-Time workers
count in the employment rate
Slowdown in the rate of increase in the consumer price index
disinflation
Exports
do count in GDP b/c were produced in home country
Limitations of the unemployment rate
does not account for discouraged or the underemployed
What is true about the approaches used to measure the value of a nations GDP
expenditure approach to calculating GDP sums consumption spending, investment spending, gov. spending, and net exports
Capital Goods
goods used to make other goods but are still considered final goods
Goods not on the market
home production, free goods and services, charitable work
Private Sector
households and businesses
To find Nominal GDP
multiple the price times quantity, and add up
to find real GDP
multiply price in base year * quantity in current year
The percent change in nominal income to have the same standard of living in previous years
needs to match inflation rate
Difference between nominal gross domestic product and real gdp
nominal GDP uses current prices to measure the value of final output while real gdp uses constant prices
Discouraged workers
not counted in the unemployment rate b/c they left the labour force
Old house on the market
not included in GDP b/c was already sold before
circular flow matrix
shows how products, resources, and money flows around the economy
Which type of unemployment describes the situation of factory workers displaced by an automation?
structural
If The actual rate of unemployment is below the NRU,
the actual real output is greater than real output
As a measure of economic performance, the US GDP accounts for what?
the cleanup of an oil spill
The output gap is measured by which of the following
the difference between actual and potential gdp
The lower the unemployment,
the higher the real output.
Inflation rate
the percent change in over a year or period of time
When an economy is at the trough of the business cycle, which of the following is true then about the state of the economy?
there is a recessionary gap
What will happen when the actual inflation rate exceeds the expected inflation rate
this will harm lenders with fixed interest rate loans
Labour Force
# of people actively looking for a job or have a job, must be over 16 and not institutionalised
LFPR
(# in labour force/ working age population) *100
Unemployment Rate=
(# of unemployed/# in labour force) * 100
Produced goods
Goods produced this year
Intermediate goods
Goods that will produce a final good
Calculate the size of the labour force (underemployed are always counted in labour force)
Labour force=employed + unemployed
Structural Unemployment
Changes in the structure of the labour force makes some skills obsolete. Workers do not have transferable skills and their jobs will not come back
Four Factors of Production
Land, Labour, Capital, Entrepreneurship
Nominal GDP:
GDP NOT adjusted for inflation
Frictional Unemployment
Workers are temporally unemployed or in-between jobs. Individuals are qualified workers with transferable skills but are not working
Real GDP formula
real gdp=nominal gdp/gdp deflator
E
Enviroment
I
Inequality
Land
Rent
to find Cyclical unemployment
actual-NRU
Final Good
will not be sold again in the form of another good
CPI:
(Price of market basket/price of market basket in base year) *100
GDP Deflator formula
(nominal GDP/Real GDP) *100
Suppose Miguel wants to know the value of real gross domestic product (GDP) for 2011 in terms of the base year 1984 dollars. In 1984 nominal GDP was $10 billion. In 2011 nominal GDP was $15 billion and the price deflator was 200. Real GDP in 1984 dollars would be equal to which of the following?
7.5 billion
Investment by a company that contributes to GDP
A company buys a tractor that will contribute to producing wheat-the tractor will not be resold, even if it is a part of making other goods
Inflation
A general and progressive increase in prices, tracked by the government
Unemployment rate only counts those:
Actively looking for work
Suppose that discouraged workers reenter the labour force and find employment. Will the actual rate of unemployment increase, decrease, or stay the same?
Actual rate of unemployment will decrease
National spending approach equation
C + I+ G+ X-N =GDP
What is true about GDP
Calculations of GDP include the unsold inventories of goods produced within the borders of a country
Factor Income Approach
Employee compensation + rent+ interest+ profit : money received from spending-GDI
NRU
Frictional and Structural enployment
Transfer Payment
Government payments to businesses or households designed to meet a specific objective
SHADOW ECONOMY
Homemade goods do not count into GDP, such as a homemade pie
Does contribute to GDP
If a consumer buys an egg that they will make into an omlet for personal consumption
Goods not included in GDP
If the good isn't bought within a market, than it is not counted within GDP
In order for a citizen of Kona to maintain the same standard of living between 2010 and 2015, what percentage change in nominal income would be needed?
Inflation rate: 390-300/300 *100 =30% Nominal income must rise by the inflation rate in order to maintain the same standard of living.
Capital
Interest
Jan works a 30-hour week for a minimum wage of $10 an hour. Suppose that last year is the base year for the Consumer Price Index (CPI). Which of the following is true about Jan's real wage if at the end of this year the CPI is 125 ?
Jan's real wage is $8 an hour at the end
Number of People (millions) Civilian non-institutional population=250 Employed=135 Unemployed=15 Given the labor market data above, what are the labor-force participation rate (LFPR) and the unemployment rate (UR) ?
LFPR is 60% and UR is 10%
Labour force participation rate
Labour force/ population *100
2 most common ways of calculating GDP
Measure by spending and measure by income
Last year, Myron purchased a $10,000 certificate of deposit with a 3% rate of interest from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction?
Myron gains, while bank loses
price indices
index numbers assigned each year that show how much prices have changed relative to the prior year
2 ways to look inflation
inflation rate and price indices
Suppose the consumer price index (CPI) was 100 on January 1st, 2017 and 110 on January 1st, 2018 with no changes in nominal wages. Which of the following is definitely true about the economy between January of 2017 and January of 2018?
inflation rate was 10%
Government buys a tank
is counted in GDP b/c a product is involved
What is a limitation of GDP
it does not account for the distribution of income in a nation or income inequality