Macro Midterm 2

economic growth rate

%change in rGDP - %change in population -equals change in rGDP because in the short run, population doesn't change

not included in the labor force

-a person who did not work during the previous week and did not actively look for work during the previous 4 weeks -retirees -homemakers (stay at home mom) -full time students -active military personnel -prisoners -people who are unable to work b/c they are disabled or institutionalized -discouraged workers

economic growth rate compounds over time

-a small but consistent growth rate can greatly improve a country's standard of living in the long run -small differences in growth rates result in large differences in standards of living in the long run

when a country experiences economic growth, its people

-can purchase more and better g/s -can devote less time to work and more time to leisure -gain access to better nutrition, health care, education, sanitation, and sometimes pollution reduction -live longer, healthier lives

full employment

-cyclical unemployment drops to 0 as economy moves through expansion phase -unemployment rate can never be 0 because of frictional and structural unemployment -when the only remaining unemployment is structual and frictional

problems with measuring the unemployment rate

-distinguishing between the unemployed and people who are not in the labor force -can't verify responses of people from survey (people who claim to be unemployed to get govt assistance may not be actually looking) -overstates degree of joblessness -working in the underground economy -overstates the degree of joblessness -does not reflect the number of underemployed and discouraged workers h-understates true degree of joblessness

real gdp per capita is not a perfect measure of well being because it

-does not include values of: hh production, free products (google, facebook, etc), leisure -does not measure the quality of services -decreases when investment in brick & mortar stores decreases due to increases in online commerce -measures income but does not consider income distribution

requirement for economic growth

-govt must provide secure rights to private property -establish an independent court system that enforces contracts between private individuals

unemployment insurance

-helps the unemployed maintain their income and spending, which lessens personal hardship of being unemployed and helps reduce the severity of recessions -also makes people more laid back about finding a job, so they stay unemployed a while

the value of the expenditures on the economy's output by buyers

-hh -firms -government -the rest of the world

US and China GDP & GNP? the value of output produced by a US citizen working in China

-is included in US GNP & Chinese GDP

real gdp per capita is not adjusted for

-pollution or other negative effects of production -crime or other social problems

a negative inflation rate indicates that the

-price level is falling -economy is experiencing deflation

a positive inflation rate indicates that the

-price level is rising -economy is experiencing inflation

characteristics of human capital and capital

-productive resources -as they increase, labor productivity increases up to a point -subject to diminishing returns -produced factor of production, so a country can increase its quantity of both -there is an opportunity cost

governments can promote the creation of new technology by

-providing an independent court system to enforce contracts & property rights -protecting intellectual property with patents and copyrights which give firms the exclusive rights to their discoveries for a period of years -subsidizing research and development with grants and or tax benefits -subsidizing education with public schools and grants -increasing hh to save and firms incentive to invest

how to reduce frictional unemployment

-pursuing policies that help speed up the process of matching unemployed workers with unfilled jobs

the value of income received by the hh who supplied and brought together the factors of production that produce the economy's output

-wages for the labor -interest for the use of capital -rent for natural resources -profit for entrepreneurs

why are many low income countries growing so slow

1. failure to enforce the law 2. wars and revolutions 3. poor public education and health 4. low rates of saving and investment

3 types of unemployment

1. frictional 2. structural 3. cyclical

GDP does no include the value of these two things

1. household production 2. production in the underground economy

to become richer

1. increase the quantity of capital per hour worked 2. use the best available technology

when GDP increases from 1 year to the next its because...

1. increases in production of goods and services 2. increases in prices

2 factors determine labor productivity

1. the quantity of capital per hour worked 2. the level of technology

real gdp per capita

Used to measure -annual income of the average person in the country -ability of the average person in the country to purchase g and s -standard of living of the country's population (best measure) -well-being of the country's population - a measurement of the total economic output of a country divided by the number of people and adjusted for inflation -economic growth occurs when a company's rGDPpc increases

GDP equation

Y = C + I + G + NX (Y = GDP) national income accounts identity

final good or service

a good or service purchased by a final user

intermediate good or service

a good or service that is an input into a other good or serivce -values are included in the prices of final good and services

price level

a measure of the average price of some set of goods and services in the economy

GDP deflator

a measure of the price level of the goods and services included in GDP, calculated by dividing nominal gdp by real gdp and multiplying by 100 -holds quantities constant, so changes in the GDP deflator must be due to changed in prices -always 100 in the base year

misery index

adds together the inflation rate and the unemployment rate to give a rough measure of the state of the economy

business cycle

alternating periods of economic expansion and economic recession -generates cyclical unemployment, which causes u to deviate from u*

technological change

an increase in the quantity of output firms can produce using a given quantiy of inputs

GDP per capita

best measure of standard of living

underground economy

buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal

current population survey/household survey

collect data needed to compute the unemployment rate

why can economic growth be seen as bad

concern about effects on the environment and globalization process -increasing pollution, depletion of natural resources (oil) etc

4 categories of expenditures/ 4 components of gdp (BEA)

consumption investment government purchases net exports

how is GDP per capita calculated?

dividing the value of GDP by the country's population

Net exports

exports minus imports

t/f capital isn't subject to diminishing returns

false -if workers currently have very little capital, then giving them an additional unit of capital will increase their productivity a lot, but if workers already have a lot of capital, then giving them an additional unit of capital will not increase their productivity output -capital is a factor of production -need to increase technology

Exports

goods and serviced produced domestically but sold in other countries

imports

goods and services bought domestically but produced in other countries

economic growth is hindered by

government corruption & failure to fully establish the rule of law -political instability, wars & revolutions, which make capital and human capital accumulation, the adoption of new technology & simply conducting business very difficult -poor public education -disease & inadequate nutrition, which make workers less productive -inadequate infrastructure (roads, bridges, railways, sewer systems) -poorly functional financial systems -resistance to globalization

centrally planned economy

government decideds how economic resources will be allocated

brain drain

highly educated and successful individuals leaving developing countries for high income countries

GDP interpretation example

if the GDP deflator equals 117 in the current year, the the price level is 17% higher in the current year than it was in the base year

how to reduce structural unemployment

implementing policies that aid worker retraining

investment

includes the purchase of physical capital (manufactured goods that are used to produce other g/s) and new houses because they are productive resources (housing services) -does not include the purchase of financial capital (stocks and bonds) because it is not a productive resource -financial capital is not included in GDP at all -spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses

as the quantity of capital available to workers increases, labor productivity _____________, up to a point

increases

if prices rise over time, then real GDP will be __________ than nominal GDP in years before the base year

larger

capital

manufactured goods that are used to produce other g and s

Gross national product (GNP)

measures the value of the production by the citizens of a country, regardless of their geographical location -its about who does the producing

GDP in regards to geographical location

measures the value of the production that occurs within the geographical boundaries of a country, regardless of the citizenship of the producers -its about where the production occurs

employment population ratio

meausures the percentage of the working age population that is employed (# of employed)/(working age population) x 100

sustained economic growth is a _________ phenomenon

modern -for much of human history, people everywhere have endured subsistence living, spending their time & energy obtaining merely enough food, clothing and shelter to survive

GDP deflator equation

nGDP/rGDP (current prices)(current quantities)/(base year)(current quantities)

transfer payments

payments by the government to households for which the government does not receive a new good or service in return -not included in governmnet purchases

discouraged workers

people who are available for work but have not looked for a job during the previous 4 weeks because they believe no jobs are available for them

how to increase future labor productivity

produce more capital -opportunity cost of doing so: resources used to produce capital cannot be used to produce g/s for consumption

Venture capital firms

raise funds from institutional investors, such as pension funds and from wealthy individuals

long run success of an economy is best judged by its ability to generate high levels of _____________

real gdp per person

household production

refers to the g and s people produce for themselves, such as meals, cleaning, yard work, child care

to increase future consumption, a country must ___________ some current consumption

sacrifice

frictional unemployment

short-term unemployment that arises from the process of matching workers with jobs -can be unavoidable -can be due to seasonal unemployment -can increase economic efficiency -workers and firms take necessary time to ensure good match between worker and job; increases productivity -some frictional u is good because it implies that people are taking the time necessary to ensure a good match between the attributes of workers & the characteristics of jobs - leads to higher labor productivity & rGDPpc

government purchases

spending by federal, state, and local governemnts on goods and services -included spending on the labor serviced of govt employees -does not include transfer payments

business fixed investment

spending by firms on new factories, office buildings, and machinery to produce other goods

residential investment

spending by households and frims on a new single family and multiunit houses

consumption

spending by housholds on goods and serviced, not including spending on new houses 1. expenditures on services - medical care, education, haircuts 2. expenditures on nondurable goods - food, clothing 3. expenditures on durable goods - excludes houses

in the long run, a country will experience ___________ economic growth only if it experiences continuing improvements in ________________

sustained, technology

improvements in ____________ help countries surpass the productivity limits imposed by diminishing returns to capital and human capital

technology

economic growth

the ability of an economy to produce increasing quantities of goods and services

human capital

the accumulated knowledge and skills workers acquire from education and training or from life experiences -opportunity cost: students in class are not producing g/s so to increase future consumption a country must sacrifice some current consumption

potential gdp

the level of real GDP attained when all firms are producing at capacity -sometimes greater, sometimes less, and sometimes equal to actual real GDP

Gross domestic product (GDP)

the market value of all final goods and services produced in a country during a period of time, typically one year -can be a measure of well being -measures total production in an economy -includes only values of newly produced g/s, not the values of used g/s that are sold -also known as output, production, expenditures, income

natural rate of unemployment (u*)

the normal rate of unemployment consisting of frictional and structural unemployment - Frictional rate unemployment + structural unemployment rate

percentage change for inflation

the percentage change in the GDP deflator is one measure of the inflation rate in an economy [(newer-older)/older value] x 100%

inflation rate

the percentage increase in the price level from 1 year to the next -measures how quickly and in which direction the price level is changing

unemployment rate (u)

the percentage of the labor force that is unemployed (# of unemployed)/(labor force) x 100

labor force participation rate

the percentage of the working age population in the labor force (labor force)/(working age population) x 100 -(working age population is 16 and above)

recession

the period of a business cycle during which total production and total employment are decreasing

expansion

the period of a business cylce during which total production and total employment are increasing

unemployed

the person did not work during the previous week but was available for work & actively looked for work during the previous 4 weeks -includes people on temporary lay off -included people waiting for new job to begi -someone who is not currently at work but who is available for work and who has actively looked for work during the previous month

employed

the person worked during the previous week or was temporarily absent from their job b/c of vacation, illness, strike, or bad weather -includes people working in their own or family business -full time and part time workers -people who are underemployed -someone who currently has a job or who is temporarily away from his job

catch-up

the prediction that the level of GDP per capita in poor countries will grow faster than in rich countries

long run economic growth

the process by which rising productivity increases the average standard of living

globalization

the process of countries becoming more open to foreign trade and investment -globalization and economic growth are positively associated -good for international trade -good for investment - helps the country accumulate capital and human capital and acquire new technology

technology

the processes a firm uses to turn inputs into outputs

labor productivity

the quantity of g and s that can be produced in 1 hour of work -depends on the (physical) capital, human capital, and technology available to workers -a country's standard of living depends on this -increases in real GDP per capita depend on increases in labor productivity

labor force

the sum of employed and unemployed workers in the economy - # of employed + # of unemployed

"the churn"

the us economy creates and destroys millions of jobs every year -because of changes in consumer tastes, technological progress, and the successes and failures of entrepreneurs -effect of structural unemployment

nominal GDP

the value of all final goods and services at current year prices

real GDP

the value of all final goods and services evaluated at base year prices -holds prices constant, so changes in real GDP must be due to changes in quantities/production

T/F holding prices constant means that the purchasing power of a dollar remains the same from one year to the next (it usually decreases)

true

T/F promoting technological change is more important than increases in capital

true

cyclical unemployment (cu)

unemployment caused by a business cycle recession -as production falls, many firms lay off workers -u-u* (unemployment - natural rate of unemployment)

seasonal unemployment

unemployment due to factors such as weather, variations in tourism, and other calendar related events

structural unemployment

unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs -can last for longer periods of time because workers need time to learn new skills

underemployed

working significantly below skill level or working fewer hours than desired