Macroeconomics Ch. 6-9

price index

A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called consumer price index. Description: The calculation involved in the estimation of CPI is quite rigorous.

Consumer Price Index (CPI)

A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.

Apply production possibilities analysis; increasing opportunity costs; and economic growth.

An economy that is fully employed and thus operating on its production possibilities curve must sacrifice the output of some types of goods and services to increase the production of others. The gain of one type of good is always accompanied by an opportunity cost in the form of the loss of some of the other type of good. Because resources are not equally productive in all possible uses, shifting resources from one use to another creates increasing opportunity costs. The production of additional units of one product requires the sacrifice of increasing amount of the other product. The optimal (best) point on the production possibilities curve represents the most desirable mix of goods and is determined by expanding the production of each good until marginal benefit equals marginal cost.

Describe "growth accounting" and the specific factors accounting for economic growth in the United States.

Growth accounting attributes increases in real GDP either to increases in the amount of labor being employed or to increases in the productivity of the labor being employed. Increases in U.S. real GDP are mostly the result of increases in labor productivity. The increases in labor productivity can be attributed to technological progress, increases in the quantity of capital per worker, improvements in the education and training of workers, the exploitation of economies of scale, and improvements in the allocation of labor across different industries.

Explain how inflation is measured and distinguish between cost-push inflation and demand-pull inflation.

Inflation is a rise in the general price level and is measure in the United States by the Consumer Price Index (CPI). When inflation occurs, each dollar of income will buy fewer goods and services than before. That is, inflation reduces the purchasing power of money. Deflation is a decline in the general price level. Unemployment rates and inflation rates vary widely globally. Unemployment rates differ because nations have different natural rates of unemployment and often are in different phases of their business cycles. Inflation and unemployment rates in the United States recentlyhave been in the middle to the low range compared with rates in other industrial nations. Economists discern both demand-pull and cost-push (supply-side) inflation. Demand-pull inflation results from an excess of total spending relative to the economy's capacity to produce. The main source of cost-push inflation is abrupt and rapid increases in the prices of key resources. These supply shocks push up per-unit production costs and ultimately raise the prices of consumer goods.

Discuss the nature and function of a GDP price index; and describe the difference between nominal GDP and real GDP

Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular period by the prices of the same market basket in a base period and multiplying the result by 100. The GDP price index is used to adjust nominal GDP for inflation or deflation and thereby obtain real GDP. Nominal (current-dollar) GDP measures each year's output valued in terms of the prices prevailing in that year. Real (constant-dollar) GDP measures each year's output in terms of the prices that prevailed in a selected base year. Because real GDP is adjusted for price-level changes, differences in real GDP are due only to differences in production activity.

Explain why the greater flexibility of prices as time passes causes economists to utilize different macroeconomic models for different time horizons.

Price stickiness moderate over time. As a result, economists have found it sensible to build separate economic models to different time horizons. For instance, some models are designed o reflect the high degree of price inflexibility that occurs in the immediate short run, while other models reflect the high degree of price flexibility that occurs in the long run. The different modes allow economists to have a better sense for how various government policies will affect the economy in the short run when prices are inflexible versus the long run when prices are flexible.

natural rate of unemployment (NRU)

The Natural Rate of Unemployment is the rate of Unemployment when the labour market is in equilibrium. It is the difference between those who would like a job at the current wage rate and those who are willing and able to take a job.

Okun's law

The Okun's law is the relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%.

Describe the business cycle and its primary phases.

The United States and other industrial economies have gone through periods of fluctuations in real GDP, employment, and the price level. Although they have certain phases in common- peak, recession, trough, expansion- business cycles vary greatly in duration and intensity. Although economist explain the business cycle in terms of underlying causal factors such as major innovations, productivity shocks, money creation, and financial crises, they generally agree that changes in the level of total spending are the immediate causes of fluctuating real output and employment. The business cycle affects all sectors of the economy, though in varying ways and degrees. The cycle has greater effects on output and employment in the capital goods and durable consumer goods industries than in the series and nondurable goods industries.

Topic: The Economic Perspective

The economic perspective focuses largely on marginal analysis—comparisons of marginal benefits and marginal costs, usually for decision making. To economists, "mar- ginal" means "extra," "additional," or "a change in."

Relate how unanticipated inflation can redistribute real income.

Unanticipated inflation arbitrarily redistributes real income at the expense of fixed-income receivers, creditors, and savers. If inflation is anticipated, individuals and businesses may be able to take steps to lessen or eliminate adverse redistribution effects. When inflation is anticipated, lenders add an inflation premium to the interest rate charged on loans. The nominal interest rate thus reflects the real interest rate plus the inflation premium ( the expected rate of inflation)

demand factor

is the ratio of the sum of the maximum demand of a system (or part of a system) to the total connected load on the system (or part of the system) under consideration. Demand factor is always less than one.

what does inflation mean

is the rise of general level of prices. example for understanding is when this occurs each dollar of income will buy few goods and services than before this occurred. it reduces the "purchasing power" of money. It does not mean that ll prices are rising.

unemployment rate

measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate.

durable goods

or a hard good is a good that does not quickly wear out, or more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be considered perfectly durable goods, because they should theoretically never wear out.

nondurable goods

or soft goods (consumables) are the opposite of durable goods. They may be defined either as goods that are immediately consumed in one use or ones that have a lifespan of less than 3 years.

discouraged workers

people who stop looking for work

what is an alternate method to calculate GDP other than the income calculation.

price index= nominal GDP/real GDP

inflexible prices "sticky prices"

product prices that remain in place even though supply or demand has changed; stuck prices or sticky prices

Topic: Performance and Policy

the business cycle affects the performance and policy of the economy. The factors that affect business cycle to go to recession or expansion is the value of final goods and services produced (GDP) , unemployment rate, and inflation rate

Identify the general supply; demand; and efficiency forces that give rise to economic growth.

the determinants of economic growth to which we can attribute changes in growth rates include four supply factors (changes in the quantity and quality of natural resources, changes in the quantity and quality of human resources, changes in the stock of capital goods, and improvements in technology); one demand factor (changes in total spending); and one efficiency factor (changes in how well an economy achieves allocative and productive efficiency). The growth of a nations's capacity to produce output can be illustrated graphically by an outward shift of tis production possibilities curve.

unemployment

the failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.

business cycle

the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession.

peak

the highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall.

modern economic growth

the historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita

Define "modern economic growth" and explain the institutional structures needed for an economy to experience it.

the historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita. institutional structures that encourage savings, investment, and the development of new technologies promote growth that include strong proper rights, patents, efficient financial institutions, education, and competitive market system.

How do you measure inflation

the main measure of inflation in the United States is the Consumer Price Index (CPI)

financial investment

the purchase of assets like stocks, bonds, and real estate in hope of reaping a financial gain

national income

the total value a country's final output of all new goods and services produced in one year. Understanding how national income is created is the starting point for macroeconomics.

what is the equation for per-unit production cost

total input cost/ units of output

structural unemployment

unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.

supply shocks

unexpected events that affect aggregate supply, sometimes only temporarily

what are the types of inflation

There are two types of inflation. Demand-Pull Inflation is caused by excess of total spending beyond the economy's capacity to produce. Cost-push inflation is when the rising prices in terms of factors that raise per-unit production costs

Topic: Economic Growth

define and measure economic growth as (a). increase in real GDP occurring over some time period (b) increase in real GDP per capita occurring over some time period. it has growth as a goal of course

cyclical unemployment

defined as workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions over time.

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.

Topic: Production Possibilities Analysis

indicates the various maximum combinations of products an economy can produce with fixed quantity and quality of natural, human, and capital resources and its stock of technological knowledge. an improvement in any of the supply factors will push the production possibilities curve outward.

core inflation

the underlying increases in the CPI after volatile food and energy prices are removed

base year

the year used for comparison for the level of a particular economic index. The arbitrary level of 100 is selected so that percentage changes (either rising or falling) can be easily depicted.

Topic: Accounting for Growth, what is it and what ways does it grow.

to asses the relative importance of the supply-side elements that contribute to changes in real GDP; labor input v. labor productivity, technological advances, quantity of capital, education and training, and economic scale of resource allocations.

Topic: nominal GDP versus Real GDP

A GDP based on the prices that prevailed when the output was produced is called "unadjusted GDP" or nominal GDP. Real GDP that has been deflated or inflated to reflect changes in price level is called adjusted GDP or real GDP.

List two ways that economic growth is measured.

A nations's economic growth can be measured either as an increase in real GDP over time or as an increase in real GDP per capita over time.

recession

A period of declining real GDP, accompanied by lower real income and higher unemployment.

Topic: Shortcomings of GDP

Changes in quality and the inclusion of new goods - higher quality and/or new products often replace older products. Leisure/human costs - GDP does not take into account leisure time, nor is consideration given to how hard people work to produce output. Underground economy - Barter and cash transactions that take place outside of recorded marketplaces are referred to as the underground economy and are not included in GDP statistics. Harmful Side Effects - Economic "bads", such as pollution, are not included in GDP statistics. Non-Market Production - Goods and services produced but not exchanged for money, known as "nonmarket production", are not measured, even though they have value. For instance, if you grow your own food, the value of that food will not be included in GDP. If you decide to watch TV instead of growing your own food and now have to purchase it, then the value of your food will be included in GDP.

Explain why the trend rate of U.S. productivity growth has increased since the earlier 1973-1995 period.

Over long time periods, the growth of labor productivity underlies an economy's growth of real wages and its standard of living. U.S. productivity rose by 2.4 percent annually between 1995 and 2012, compared to 1.5 percent annually between 1973 and 1995. The post 1995 increase in the average rate of productivity growth is based on (a) rapid technological change in the form of the microchip and information technology, (b) increasing returns and lower per-units, and (c) heightened global competition that holds down prices. The maine sources of increasing returns in recent years are (a) the use of more specialized inputs as firms grow, (b) the spreading of development costs, (c) simultaneous consumption by consumers, (d) network effects, and (e) learning by doing. Increasing returns mean higher productivity and lower per-unit production costs.

potential output

(also referred to as "natural gross domestic product") refers to the highest level of real gross domestic product (output) that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints.

inflation

A rise in the general level of prices in an economy.

scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Explain how gross domestic product (GDP) is defined and measured.

GDP a basic measure of an economy's economic performance, is the market value of all final goods and services produced within the borders of a nation in a year. Final goods are those purchased by end users, whereas intermediate goods are those purchased for resale or for further processing or manufacturing. Intermediate goods, non production transactions, and secondhand sales are purposely excluded in calculating GDP.

investment

In economics, spending for the production and accumulation of capital and additions to inventories.

Topic: Production Possibilities Model

Letter E is unattainable where as ABC are optimal output combination and going from D to the line is economic growth

How do you measure the number of years required to double real GDP?

Rule of 70. Years to double= 70/ Growth rate

GDP gap

The GDP gap or the output gap is the difference between actual GDP or actual output and potential GDP. The calculation for the output gap is Y-Y* where Y is actual output and Y* is potential output.

PPC (Production Possibilities Curve)

a curve showing the different combinations of two goods or services that can be produced in a full employment, full production economy where the available supplies of resources and technology are fixed.

Describe why economist believe that "shocks' and "sticky prices" are responsible for short-run fluctuations in output and employment

consider a negative demand shock in which demand is unexpectedly low. Because prices are fixed, the lower-than- expected demand will result in unexpectedly slow sales. This will cause inventories to increase. If demand remains low for an extended period of time, inventory levels will become too high and firms will have to cut output and lay off workers. Thus, when prices are inflexible the economy adjusts to unexpectedly low demand through changes in output and employment rather than through changes in prices (which are not possible when prices are inflexible)

inventory

goods that have been produced but remains unsold

real GDP

gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.

economic investment

has to do with the creation and expansion of business enterprises. only includes money spent purchasing newly created capital goods such as machines, tools, ect

Topic: Redistribution Effects of Inflation

inflation redistribution helps some people, hurts some people, and some unaffected. there is a difference between money (nominal) income and real income. nominal income is the number of dollars received as wages, rent, interest, or profit. real income is a measure of the amount of goods and services nominal income can buy. to calculate real income = nominal income/ price index (in hundredths). when inflation occurs you take the percentage change in real income is about equal to percentage change in nominal income - percentage change in price level

Identify why saving and investment are key factors in promoting rising living standards.

investment increase the economy's future potential output level but must be funded b saving which only possible if reduce consumption. banks and other financial institutions help to convert saving into investment by taking the savings generated by households and lending it to businesses that wish to make investment.

real GDP per capita

is a measure of average income per person in a country. GDP stands for Gross domestic product. This measure National income / National Output and National expenditure. GDP per capita divides the GDP by the population.

Topic: Assessing the Economys Performance, what is it and how is the economy's performance assessed.

national income accounting operates in much the same way for the economy as a whole. Including in the assessment of the economy are GDP, monetary measure of GDP, avoiding multiple counting, GDP excludes non production transactions, looking at GDP in spending and income.

How do you find Real GDP when only given nominal GDP and the price index

nominal GDP/ price index

Characterize the degree to which various prices in the economy are sticky.

prices are inflexible in the short run for various reasons. Firms often attempt to set and maintain stable prices to please customers who like predictable prices because they make for easy planning. a firm with just a few competitors may be reluctant to cut its prices due to fear of starting a price war, a situation in which its competitors retaliate by cutting their prices as well- thereby leaving the firm worse off than it was to begin with.

Topic: How Sticky Are Prices?

product prices are particularly sticky in response to widespread macroeconomic and monetary disturbances

flexible prices

product prices that freely move upward or downward when product demand or supply changes

Topic: Institutional structures that promote growth

strong property rights, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, and a competitive market system.

demand shocks

sudden, unexpected changes in demand

shocks

sudden, unexpected changes in demand or supply

nominal GDP

the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

saving

the accumulation of funds that results when people in an economy spend less (consume less) than their incomes during a given time period; example is a stock

what is deflation

when price levels decline

Define economics and the features of the economic perspective

Economics is the social science that examines how individuals, institutions, and society make optimal choices under conditions of scarcity. The economic perspective includes three elements: scarcity and choice, purposeful behavior, and marginal analysis. it sees individuals making rational decisions based on comparisons of marginal costs and marginal benefits.

Illustrate how unemployment is measured and explain the different types of unemployment.

Economists distinguish between frictional, structural, and cyclical unemployment. The full-employment or natural rate of unemployment, which is made up of frictional and structural unemployment, is currently between 5 and 6 percent. The presence of part-time and discouraged workers makes it difficult to measure unemployment accurately. The GDP gap, which can be either a positive or a negative value, is found by subtracting potential GDP from actual GDP. The economic cost of unemployment, as measured by the GDP gap, consists of the goods and services forgone by society when its resources are involuntarily idle. Okun's law suggests that every 1% point increase in unemployment above the natural rate causes an additional 2% negative GDP gap.

List and explain some limitations of the GDP measure.

GDP is a reasonably accurate and very useful indicator of a nation's economic performance, but has its limitations. it fails to account for non market and illegal transactions, changes in leisure and in product quality, the composition and distributions of ouput, and the environmental effects of production. GDP should not be interpreted as a complete measure of well-being.

Describe how expenditures on goods and services can be summed to determine GDP.

GDP may be calculated by summing total expenditures on all final output or by summing the income derived from the production of that output. By the expenditures approach, GDP is determined by adding consumer purchases of goods and servcies, gross investment spending by businesses, government purchases, and net exports : GDP = C+Ig+G+Xn. Personal consumption expenditures consist of expenditures on durable goods and nondurable goods and services. Gross investment is divided into (replacement investment) required to maintain the nation's stock of capital at its existing level. and (net investment) the net increase in the stock of capital. In most years, net investment is positive and therefore the economy's stock of capital and production capacity increase.

recession

Period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer. Marked by high unemployment, stagnant wages, and fall in retail sales, a recession generally does not last longer than one year and is much milder than a depression.

what is the equation for CPI

Price index = price of the most recent market basket in the particular year/ price estimate of the market basket in base year x 100.

per-unit production costs

Production cost is a cost incurred by a business when manufacturing a good or producing a service. Production costs combine raw material and labor. To figure out the cost of production per unit, the cost of production is divided by the number of units produced.

nominal income

Real values are a measure of purchasing power net of any price changes over time. For example, nominal income is often restated as real income, thus removing that part of income changes that merely reflect inflation (a general increase in prices).

opportunity cost

The amount of other products that must be forgone or sacrificed to produce a unit of a product.

trough

a low turning point or a local minimum of a business cycle. The time evolution of many variables of economics exhibit a wave like behavior with local maxima (peaks) followed by local minima (troughs). A business cycle may be defined as the period between two consecutive peaks.

core inflation

a measure of inflation that excludes certain items that face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation.

What is price index

a measure of the price of a specified collection of goods called a "market basket" in a given year as compared to the price of an identical or highly similar collection of goods and services in a reference year. PI = price of market basket in specific year/ price of same market basket in base year x 100.

labor productivity

a measurement of economic growth of a country. Labor productivity measures the amount of goods and services produced by one hour of labor. More specifically, labor productivity measures the amount of real GDP produced by an hour of labor.

inflation

a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services.

frictional unemployment

the unemployment which exists in any economy due to people being in the process of moving from one job to another.

economies of scale

are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

deflation

can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.

Topic: Categorizing Macroeconomic Models Using Price Stickiness

price stickiness moderates over time. remember fixed is inflexible cannot change it is for the long run. flexible can change in the short run. changes in demand for flexible model the price changes change in demanded for fixed model price is the same. sticky prices trend up and down not as fast as flexible prices.

cost-push inflation

inflation caused by an increase in prices of inputs like labour, raw material, etc. Definition: Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.

expenditures approach

is a method for calculating GDP that totals consumption, investment, government spending and net exports. Although GDP can be calculated through other methods, the expenditure method is the most common. The formula for its calculation is often expressed as.

rule of 70

is a way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order 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.

economic growth

is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation.

demand-pull inflation

is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods".

income approach

is one of three major groups of methodologies, called valuation approaches, used by appraisers. It is particularly common in commercial real estate appraisal and in business appraisal. The fundamental math is similar to the methods used for financial valuation, securities analysis, or bond pricing.

full employment rate of employment

is the level of employment rates where there is no cyclical or deficient-demand unemployment. It is defined by the majority of mainstream economists as being an acceptable level of unemployment somewhere above 0%.

national income accounting

measures the economy's overall performance

labor force

people actively working

Explain why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy.

real GDP measures the value of all final goods and services produced in a country during a specific period of time, unemployment measures the percentage of all workers who are not able to find paid employment despite being willing and able to work at currently available wages, and inflation measures the extent to which the overall level of prices is rising in the economy.

what is the equation for finding real GDP per capita

real GDP per capita= real GDP / Population

business cycle

recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.

supply factors

refers to the amount of a product that producers and firms are willing to sell at a given price when all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.

labor force participation rate

refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate.

expectations

the anticipations of consumers, firms, and others about future economic conditions.