Macroecon
What is Investment spending? What are the 3 components of Investment spending?
(Ans. 1) addition to existing capital stock, 2) construction activity on both residential and commercial construction, 3) inventory changes)
During a recession, are all industries equally impacted? And vice versa, during a business expansion, are all industries equally impacted? Are all regions of the country equally impacted during a recession or expansion?
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How does the NBER determine when a recession has ended?
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What is "Inflation?"
A general increase in prices and fall in the purchasing value of money
What is the technical definition of an employed person?
Any person aged 16 and older who is currently working for pay. This includes part-time & temporary workers as well as full-time, permanent workers. It also includes workers who are under-employed and family members who work unpaid in the family business.
What is the technical definition of an "unemployed person?"
Any person aged 16 and older who is willing and able to work, and has actively been seeking employment during the last 4 weeks.
What are the 4 spending groups that demand and purchase the output of a modern market economy?
Consumers, private domestic firms, government and foreigners. These are represented as consumption, investment, government purchases and net exports)
Spending Approach Formula
Consumers...................................CONSUMPTION SPENDING (C) Private Domestic Firms..............GROSS INVESTMENT SPENDING (IG) Government (all levels)..............GOVERNMENT PURCHASES (G) Foreigners....................................NET EXPORTS (X - M) _____________________________________________________ Total Spending = C + IG + G + (X - M)
What is an under-employed person?
Example: An experienced aerospace engineer who is currently employed in a fast-food restaurant is an example of an under-employed worker. He is working far below his skill level and employment potential.
When measuring GDP, why do we get the same value of output regardless of whether we measure GDP from the spending approach or the income approach?
For every dollar spent on year 2016 output of final goods, US resources earned a dollar of income producing those goods. Total Spending (NPA) = Total Income (NIA)
Explain the income approach to measuring GDP
GDP is a measure of the income that was generated by the nation's resources in a given time period. The income generated is tied to PRODUCTION of final goods and services. Therefore, income measured here is EARNED. Income comes in many different formats, depending on the type of resource which earned the income. LAND - landowners, landlords .......................RENTS LABOR - workers, salaried employees...........WAGES, SALARIES, COMMISSIONS CAPITAL - lenders, investors........................... INTEREST EARNINGS, DIVIDENDS, & CAPITAL GAINS ENTREPRENEUR - executives, owners...........PROFITS, FEES, etc. ______________________________________________________________________ RESOURCES...........................................................INCOME EARNED
What is the definition of Gross Domestic Product (GDP)?
GDP is defined as the total market value of all final goods & services produced within the borders of a nation (such as the USA) in a particular time period (such as one year). Read GDP is expressed as a monetary value. Since GDP tells us how much output was produced in a given time period, it is basically the same thing as "total output." rea GDP = real Output
Define the term national income
Gross national income is the sum of a nation's gross domestic product and the net income it receives from overseas
How is a consumer price index computed?
Hint: List the items included in a market basket of consumer goods typically purchased each month by an urban family of tour and note the change in the price of the market basket of consumer goods from one month to the next
What is "hyperinflation?"
Hyperinflation is when the prices of goods and services rise more than 50 percent a month.
How do we calculate the labor force participation rate?
Labor force size / size population aged 16 and older 150 million / 250 million = .60 or 60%
How do we calculate the size of a nation's labor force?
Labor force size = (# of unemployed persons + # employed persons)
Explain the spending approach to measuring GDP.
Measures of US GDP are time specific. When calculating GDP for the year 2016, for example, we are asking: "How much spending was done on this year's (2016) output?" The 4 major spending groups that demand and purchase the nation's output are: Consumers (households) Private domestic firms (businesses) Government (federal, state and local combined, on purchases of final goods/services) Foreigners
What is the difference between nominal income and real income?
Nominal refers to the number of dollars one receives in wages while 'real' is nominal income adjusted for inflation. Real income is a measure of 'purchase power' - it tell us how much output can be purchased with one's nominal income
Define productivity of labor. What does it measure?
Output per worker in a specified period of time
Which source of economic growth is particularly important to high-income countries such as the US, Canada, Japan and Western Europe?
Technological change that boosts the productivity of labor
Which type of price index is used to measure changes in consumers' cost of living?
The CPI
Which price index is the best overall indicator of inflationary pressures within the economy?
The GDP deflator
How does NBER determine when an economy has entered into a recession?
The NBER defines a recession as follows: "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
What is the difference between real GDP and nominal GDP?
The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP
What is the difference between Gross Domestic Product and Net Domestic Product?
The net domestic product (NDP) equals the gross domestic product (GDP) minus depreciation on a country's capital goods. Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.
What is the difference between a "recession" and a "growth recession"?
The term growth recession describes an economy that is not in technical recession but that is not expanding fast enough to keep unemployment from rising.
How do we calculate the rate of unemployment? Is it an accurate or reliable measure of true unemployment? What problems are associated with the way the unemployment rate is computed?
The unemployment rate is determined by dividing the number of unemployed persons by the labor force size. Unemployment rate = # unemployed persons / Labor force size Discouraged workers aren't counted 2. Under-employed workers are counted as "employed." Part-time workers and temporary workers are counted as "employed." Many of them would prefer to work at a full-time permanent job.... if they could find one.
Explain the Rule of 70 and how it is used to calculate how long it will take before output of an economy doubles in size?
To estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable
Income Approach
US LAND - landowners, landlords .......................RENTS US LABOR - workers, salaried employees...........WAGES, SALARIES, COMMISSIONS US CAPITAL - lenders, investors........................... INTEREST EARNINGS, DIVIDENDS & CAPITAL GAINS US E.T. - self-employed, firm owners...................PROFITS, FEES, etc. ___________________________________________________________________ US RESOURCES EMPLOYED IN PRODUCTION.............................US INCOME EARNED US INCOME EARNED = US national income
How do we convert nominal GDP into real GDP?
We divide nominal GDP by the GDP deflator and multiply this ratio by 100
What is a discouraged worker?
What if a person is aged 16 or older, willing and able to work, has spent several months searching for a job and after not finding any work, gives up looking for work? This person would no longer be called "unemployed." Rather, this person would be called a "discouraged worker." A discouraged worker is someone who has been seeking employment but gets discouraged after a while and stops looking for work. The moment an unemployed person stops looking for work, he is no longer considered unemployed and therefore, no longer counted as part of the labor force.
4 phases of the business cycle
expansion, peak, contraction, trough
Explain the discouraged worker effect on the unemployment rate.
once an unemployed person stops looking for work, he is no longer counted as unemployed and therefore, is no longer included in the labor force. Discouraged workers have the effect of making the unemployment rate appear lower than it actually is.
What formula is used to adjust nominal income for inflation?
real income = nominal income / (1 + inflation rate)
What formula is used to adjust nominal savings for inflation?
real savings = [(initial savings deposit) * (1+interest rate)] / (1 + inflation rate)]
Explain what is meant by the catch-up effect.
states that poor or developing economies grow faster compared to economies with a higher per capita income and gradually reach similar high levels of per capita income
Define the term, human capital
the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country
