Macroeconomics - Proctored Exam #2 Study Set

GDP =

C + Ig + G + Xn

Disposable Income (DI) =

Consumption (C) + Savings (S)

Nominal Gross Domestic Product (GDP)

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation. Compare with real gross domestic product (real GDP).

Net Investment =

Gross Investment - Depreciation

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. Compare with nominal GDP.

Human Capital

The knowledge and skills that make a person productive.

Expenditures Approach

The method that adds all expenditures made for final goods and final services to measure the gross domestic product.

Income Approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.

Unemployment Rate

The percentage of the labor force unemployed at any time.

Labor-Force Participation Rate

The percentage of the working-age population that is actually in the labor force.

Expansion

The phase of the business cycle in which real GDP, income, and employment rise.

Peak

The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. At the peak, the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced annually within the boundaries of a nation.

Full-Employment Rate of Unemployment

The unemployment rate at which there is no cyclical unemployment of the labor force; equal to around 4 percent (rather than zero percent) in the United States because frictional and structural unemployment are unavoidable.

Value Added

The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product.

Base Year

The year with which other years are compared when an index is constructed; for example, the base year for a price index.

When gross investment is less than depreciation

net investment is negative

Price Index

An index number that shows how the weighted-average price of a "market basket" of goods changes over time relative to its price in a specific base year.

Undistributed Corporate Profits

Any after-tax profits that are not distributed to shareholders are saved, or retained, by corporations to pay subsequent investment. Undistributed corporate profits are also called retained earnings.

Who created Okun's Law

Arthur Okun was the first macroeconomist to quantify the inverse relationship between the actual unemployment rate and the GDP gap

Follower Countries

As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries.

Leader Countries

As it relates to economic growth, countries that develop and use the most advanced technologies, which then become available to follower countries.

What were the main reasons for both emerging firms and established firms ability to exploit different sources of increasing returns and economies of scale during the so-called tech booms

More Specialized Inputs, Spreading of Development Costs, Simultaneous Consumption, Network Effects, and Learning by Doing

Information Technology (IT)

New and more efficient methods of delivering and receiving information through the use of computers, wi-fi networks, wireless phones, and the Internet.

Real GDP =

Nominal GDP / Price Index (in hundredths)

Price Index (in hundredths) =

Nominal GDP / Real GDP

What are the different criticisms used in the monthly BLS surveys

Part-Time Employment and Discouraged Workers

Disposable Income (DI)

Personal income less personal taxes; income available for personal consumption expenditures and personal saving.

Labor Force

Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.

What are the biggest factors economists cite for the demand and supply shocks that cause most business cycles

Political Events, Financial Instability, Irregular Innovation, Productivity Changes, and Monetary Factors

Price Index in Given Year =

Price of Market Basket in Specific Year / Price of Same Market Basket in Base Year x 100

Intermediate Goods and Services

Products that are purchased for resale or further processing or manufacturing.

Final Goods and Services

Products that have been purchased for final use (rather than for resale or further processing or manufacturing).

What two types of nonproduction transactions that must be excluded from GDP?

Purely financial transactions and Secondhand sales

Real GDP per Capita =

Real GDP / Population

Increasing Returns

An increase in a firm's output by a larger percentage than the percentage increase in its inputs.

Frictional Unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Economic Growth

(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.

Approximate Number of Years Required to Double Real GDP =

70 / Annual Percentage Rate of Growth

Nondurable Good

A consumer good with an expected life (use) of less than three years.

Durable Good

A consumer good with an expected life (use) of three or more years.

Rule of 70

A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.

Taxes on Production and Imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.

Start-Up Firm

A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.

Recession

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

Cyclical Unemployment

A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.

Learning by Doing

Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.

GDP Gap =

Actual GDP - Potential GDP

When is the GDP Gap considered negative

Actual GDP < Potential GDP

When is the GDP Gap considered positive

Actual GDP > Potential GDP

GDP Gap

Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).

Service

An (intangible) act or use for which a consumer, firm, or government is willing to pay.

Consumption of Fixed Capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.

Patents and Copyrights

Before patents and copyrights were first issued and enforced, inventors and authors usually saw their ideas stolen before they could profit from them.

Dividends

Dividends are the part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They thus flow to households, which are the ultimate owners of all corporations.

Discouraged Workers

Employees who have left the labor force because they have not been able to find employment.

Government Purchases (G)

Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services.

Gross Private Domestic Investment (Ig)

Expenditures that increase the nation's stock of capital, which is the collection of physical objects and intangible ideas that help to produce goods and services. Includes spending on final purchases of plant, machinery, and equipment by business enterprises; residential construction; changes in inventories; expenditures on the research and development (R&D) of new productive technologies; and money spent on the creation of new works of art, music, writing, film, and software.

Net Exports (Xn) =

Exports (X) - Imports (M)

Free Trade

Free trade promotes economic growth by allowing countries to specialize.

What are the three types of unemployment

Frictional, Structural, and Cyclical

NDP =

GDP - Consumption of Fixed Capital (Depreciation)

Net Domestic Product (NDP)

Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock.

Net Private Domestic Investment

Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year.

Real GDP =

Hours of Work x Labor Productivity

Network Effects

Increases in the value of a product to each user, including existing users, as the total number of users rises.

Real GDP per Capita

Inflation-adjusted output per person; real GDP/population.

Secondhand Sales

Secondhand sales contribute nothing to current production and are therefore excluded from GDP. Suppose you sell your 2015 Ford Mustang to a friend. That transaction will not be counted in this year's GCP because it generates no current production.

Strong Property Rights

Strong property rights are essential for promoting rapid and sustained economic growth.

What are the Five Factors that appear to explain Changes in Productivity Growth Rates

Technological Advance, The Amount of Capital per Worker, Education and Training, Economies of Scale, and Resource Allocation

What the reason for the explosion of entrepreneurship and innovation growth between 1995 and 2010

The Microchip or Microprocessor

Growth Accounting

The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.

Financial Asset Transactions

The buying and selling of stocks, bonds, and other financial assets is just a matter of transferring the ownership of existing financial assets from one person to another. Such transactions create nothing int he way of current production and are not included in GDP. Payments for the services provided by a stockbroker are included, however, because their services are currently provided and are thus a part of the economy's current output of goods and service.

Efficiency Factor (in growth)

The capacity of an economy to achieve allocative and productive efficiency and thereby fulfill the potential for growth that the supply factors (of growth) make possible; the capacity of an economy to achieve economic efficiency and thereby reach the optimal point on its production possibilities curve.

Gross Output (GO)

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output.

Personal Income (PI)

The earned and unearned income available to resource suppliers and others before the payment of personal taxes.

Personal Consumption Expenditures (C)

The expenditures of households for both durable and nondurable consumer goods.

Supply Factors (in growth)

The four determinants of an economy's physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve. The four determinants are improvements in technology plus increases in the quantity and quality of natural resources, human resources, and the stock of capital goods.

Natural Rate of Unemployment (NRU)

The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.

Okun's Law

The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).

Modern Economic Growth

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

Infrastructure

The interconnected network of large-scale capital goods (such as roads, sewers, electrical grids, railways, ports, and the Internet) needed to operate a technologically advanced economy.

Trough

The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. At the trough, the economy experiences substantial unemployment and real GDP is less than potential output.

Catch-Up Growth

The rapid increases in real GDP per capita that can be achieved when a poor follower country adopts, rather than reinvents, cutting edge technologies that took leader countries decades to invent and implement.

Demand Factor (in growth)

The requirement that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible.

Economies of Scale

The situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and, hence, its output).

National Income Accounting

The techniques used to measure the overall production of a country's economy as well as other related variables.

Public Transfer Payments

These are the social security payments, welfare payments, and veterans' payments that the government makes directly to households. Because the recipients contribute nothing to current production in return, including such payments in GDP would overstate the years' output.

Efficient Financial Institutions

These institutions channel household savings toward the businesses, entrepreneurs, and investors that do most of society's investing and inventing. Banks, along with stock and bond markets, appear to be crucial to modern economic growth.

Private Transfer Payments

These payments include, for example, allowance money given by parents to children and cash gifts given during the holidays. They produce no output. They simply transfer funds from one private individual to another and consequently do not enter into GDP.

Corporate Income Taxes

These taxes are levied on corporations' profits. They flow to the government.

National Income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes.

Labor Productivity

Total output (GDP) divided by the quantity of labor (hours of work) employed to produce it; the average product of labor, or output per hour of work.

What are the four groups that the BLS (Bureau of Labor Statistics) divides the total U.S. population into

Under 16 and/or Institutionalized, Not in Labor Force, Employed, and Unemployed

A Competitive Market System

Under a market system, prices and profits serve as the signals that tell firms what and how much to make.

Unemployment Rate =

Unemployed / Labor Force x 100

Structural Unemployment

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

When is the economy considered to have full employment

When it is experiencing only frictional and structural unemployment and when there is no cyclical unemployment

Literacy and Widespread Education

Without highly educated scientists and investors, new technologies do not get developed.

Multiple Counting

Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.