SECTION 3 ECON
Inflation Rate Formula
(Price index in year 2 - price index in year 1)/(Price index in year 1) x 100
Price Index Formula
(cost of market basket in a given year)/ (cost of market basket in base year) x 100
Inflation Rate Formula
(price level in year 2-price level in year 1)/(price level in year 1) x 100
True
GDP is not a good measure of the economy's growth overtime b/c GDP can grove when the economy grows but it can also grow simply b/c of inflation...if an economy's output doesn't change, GDP will go up if the prices of goods and services the economy produces increase (T/F)
Exports
Goods and Services sold to other countries
Inventories
Goods and raw materials is that firms hold to facilitate their operations
G
Gov purchases of goods and services
government borrowing
Government borrows funds to pay for gov spending not covered by tax revenue and firms borrow funds to finance investment spending
True
Government uses tax payments received from households and firms to finance most of its spending (T/F)
Changes in government policy
Governments can directly affect a supply in two ways. One is by offering producers a subsidy-cash payment aimed at helping a producer to continue to operate. Second, is excise tax-tax on the manufacture or sale of a good
True
Household income that is not spent on consumption becomes the households saving since its not spent, it LEAKS out of the circular flow (T/F)
Consumer Price Index (CPI)
Intended to show how the cost of all purchases by a typical urban family has changed overtime
I
Investment spending firms
How is CPI measured?
It is calculated by surveying market prices for a market basket that is constructed to represent the consumption of a typical family of four living in a typical American household
True
Jobs are easier to find for more experiences workers and for workers during their prime working years (T/F)
national accounts
Keep track of the spending of consumers, sales of producers, business investment spending, government purchases, and a variety of other flows of money among different sectors of the economy
Producer Price Index (PPI)
Known as a wholesale index..it is the producer price index measures the cost of a typical basket of goods and services purchased by consumers
Stagflation
Lowest rate of unemployment that an economy can sustain in long term (Frictional + Structural)
tax revenue
Refers to the funds that the gov receives from taxes
PPI
Responds to inflationary or deflationary pressure more quickly than CPI b/c producers are relatively quick to raise prices when they perceive a change in the overall demand for their good
False
Retired and special needs is considered being unemployed (T/F)
circular flow diagram
Simplified representation of the macroeconomy that shows the flows of money, goods and services, and the factors of production
True
Some economists believe that the consumer price index overstates the actual rate of inflation (T/F)
X
Spending by foreigner
true
Stronger dollar means stronger imports (T/F)
True
Technological advances have made menu costs less and less important, since prices can be changed electronically and fewer merchants attach price stickers to merchandise (T/F)
changes in labor market institutions
Temporary employment agencies reduce frictional unemployment by matching workers to jobs -internet websites have reduced frictional unemployment
Interest rate
The amount the borrower must pay to the lender in addition to the repayment of the loan itself
NX (X-M) Net exports
The difference between the value of exports and the value of imports
True
The economy is more productive if workers take the time to find jobs that are well matched for their skills (T/F)
structural unemployment
The existence of frictional unemployment doesn't mean there is a surplus of labor...sometimes there is a persistent surplus of job seekers in a particular labor market..this mismatch can be due to worker lacking the skills required for available job
Expansion
Unemployment rate usually falls during a ________
Recession
Unemployment rate usually rises during a ___________
True
Unemployment rate varies greatly among demographic groups (T/F)
True
Unemployment rate will be overstated if someone who says they are looking for job to qualify for benefits when really they aren't looking at all (T/F)
Changes in Labor Force Characteristics
Unemployment rates tend to be lower for experienced workers than inexperienced workers -experienced workers have lower frictional unemployment -older workers have stronger incentive to find and keep jobs
Hyperinflation
Very high and accelerating rates of inflation
Market basket
a hypothetical set of consumer purchases of goods and services(consumption bundle)
price level
a measure of the average prices of goods and services in the economy
Stagflation
a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
Households
_____ derive the bulk of the income from wages earned by selling their labor, receive income in the form of rent, interest, and profit as well as wages -ultimately own and receive income from all the factors
price index
A measure of the overall price level compared to prices in the base year
Income Approach
A method of computing GDP that adds up the total factor income earned by households from firms in the economy including rent, wages, and interest and profit
Expenditure approach
A method of computing GDP that measures the total amount spent(aggregate spending) on all final goods and services during a given period.
Real GDP
A modified version of GDP that is adjusted for price changes
causes of stagflation
Central banks expand money supply at the same time it constrains supply
Financial markets
Channel private savings into government borrowing and investment spending
Changes in the Natural Rate of Unemployment
Characteristics of labor force, change in labor markets, and changes in government policy
Labor unions
Collective bargaining..unions can often win higher wages from employers than workers would've obtained by bargaining individually -exercise bargaining power by threatening firms with a labor strike -these workers can earn higher wages and more generous benefits from non-union workers with similar skills -push the wage that workers receive above the equilibrium wage
Households
Consists of either an individual or group of people who share their income
True
Country with high GDP can afford stuff for health, education, and other goods (T/F)
True
Difference between marginally attached workers and discouraged workers is that marginally attached workers needed their job search for a reason other than a belief there was no job available for them (T/F)
True
Economic expansions aren't always periods of falling unemployment...this can be explained by the fact that even though the economy was growing as measured by real GDP, it was not growing fast enough to reduce the unemployment rate (T/F)
True
Economists summarize the effect of inflation on borrowers and lenders by distinguishing between nominal interest rates and real interest rates (T/F)
How are price levels measured?
Economists track changes in the cost of buying a given market basket to measure the overall price level...these changes are calculated relative to a base year
True
Efficiency wages can lead to structural unemployment as they can result in a pool of workers who's want jobs but cannot find them (T/F)
True
Efficiency wages, minimum wages, and labor unions are believed to be examples of why we have structural unemployment (T/F)
efficiency wages
Employers can elicit more work by paying above market wages: employees receiving these higher wages are more likely to work harder to ensure they aren't fired, which would cause them to higher wages
True
Even at equilibrium wage rate there will still be some frictional unemployment but there wouldn't be any structural unemployment caused by a surplus or labor (T/F)
intermediate goods and services
goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services
Imports
goods and services purchased from other countries
final goods and services
goods and services sold to the final, or end, user
Phillips Curve
indicates a short-run inverse relationship between inflation and unemployment rates
Unit of Account Cost
inflation makes money a less reliable unit of measurement
labor force participation rate formula
labor force/working age population x 100
unemployment rate formula
number of unemployed/labor force x 100
Disinflation
the process of bringing the inflation rate down
Menu costs
the real costs of changing listed prices
frictional unemployment
the time period between jobs when a worker is searching for, or transitioning from one job to anothers
GDP
the total market value of all final goods and services produced annually in an economy
Aggregate output
the total quantity of final goods and services produced within an economy -necessary to measure the economy's growth with accuracy
Disposable income
total amount of household income available to spend on consumption and to save
What Real GDP Doesn't Measure
-Real GDP per capita has well known limitations such as a measure of a country's living standards -real GDP does not contribute to happiness such as leisure time, volunteerism, housework, and natural beauty
Value-Added Approach
-add up the contribution of each firm along the way to the total value of the final good or service -to avoid double counting, only count the value added by each producer -the difference between the values of its sales + the value of its input it purchases from other businesses -at each stage of production process we subtract the cost of inputs-intermediate goods
The Expanded Circular-Flow Diagram
-flows to to and from the government are added -gov injects funds into the circular flow diagram though government spending, and funds leak out of the circular flow through taxing
GDP does not include
-intermediate goods, inputs, used goods, financial assets (stocks +bonds) -goods +services produced in other countries
GDP includes
-investment by firms in new capital goods (business investment) -new construction of structures -changes in inventories -domestically produced final goods and services
3 Reasons Consumers may not pay a certain percentage represented by CPI
-substitution bias: consumers frequently altar the mix of goods and services they buy, reducing purchases of products that have become relatively more expensive and increasing purchases of products that have become relatively cheaper -second comes from product improvements... multiple products come out "new and improved" -third reason inflation rate estimates may be misleading is innovation.... as every new year brings new items innovation makes a given amount of money worth more
What does GDP tell us?
-the most important use of GDP is a measure of the size of the economy, providing us a scale at which to compare the economic performance of other years or countries
reasons for job loss
-worker is either fired or quit voluntarily -structural change in the economy..industries fall +rise as new technologies emerge and as consumers tastes change
Three approaches to GDP
1. Expenditure Approach 2. Income Approach 3. Value-Added Approach
Expanded Circular Flow Diagram Adds
1. Financial markets 2. Government 3. Rest of World
Circular Flow Demonstrates
1. Flow of Money 2. Flow of Goods and Services 3. Flow of the Factors of Production
GDP Deflator
100 x (nominal GDP/real GDP) in that year
Nominal GDP
A GDP number that has not yet been adjusted for changes in prices, or GDP at current prices
Increase
A _______ in GDP over time represents increases in the prices of goods and services rather than an increase in output
True
A certain amount of frictional unemployment is inevitable b/c of the constant process of job creation and destruction as workers are always entering the market (T/F)
Phillips Curve (short run)
A curve that shows the relationship between inflation and unemployment in the short run- as the level of one falls, the level of the other rises
Phillips Curve (long run)
A curve vertical at the NRU showing that in the long run there is no trade-off between the price level and level of unemployment in an economy.
Aggregate price level (price level)
A single number that represents the overall level of price
Income Approach
Adds up all the income earned by the factors of production -wages earned by labor, interest earned by those who lend their savings to firms + gives -rent earned by those who lease their land or structures to firms -profit earned by the owners of the firms physical capital
Firm
An organization that produces goods or services for sales-and that employs members of households
Real
By tracking _______ GDP overtime, we avoid the problem of changes in prices distorting the value of changes in production overtime
True
CPI has an immediate and direct impact b/c many of the payments are tied or "indeed" to the CPI-the amount paid for goods and services rises or falls when CPI rises or falls (T/F)
structural unemployment
Can also occur when there are more people seeking jobs in labor market than there are jobs available
structural unemployment
Caused by a mismatch between the skills that workers into the economy offers na d the skill's demanded of the workers by employers -or there are more people seeking jobs in a labor market than there are jobs available at the current wage rage
True
Factors that can lead to a wage rate in excess of equilibrium wage rate include minimum wages, labor unions, and efficiency wages (T/F)
True
Firms must pay taxes on the consumer and gov spending they receive though the product market....the funds remaining after taxes are then allocated to pay wages, rents interest, and profits to households thorough the factor markets (T/F)
foreign lending
Foreigners can participate in US financial markets
GDP per capita
GDP divided by population (average GDP per person) -used to eliminate the effect of differences in population size when comparing GDP across countries
C
Household spending
Consumer spending
Household spending for goods and services -produces a flow of goods and services to the households and a return flow of money to the firms
True
If nominal GDP doubles, but real GDP does not change, the GDP deflator indicates that the aggregate price level has double (T/F)
Circular flow diagram
Illustrates an economy that only contains two groups: households and firms
Minimum wages
Imposed to ensure that people who work can earn enough income to afford a minimally comfortable lifestyle -is a government mandated floor on the price of labor -lead to structural unemployment -can sometimes be increased without any loss of jobs
True
In circular flow diagram there are two types of flow: physical thing such as goods and services, labor or raw materials flow in one direction, and payments for these things flow in the opposite direction (T/F)
example of Menu costs
In the face of inflation, firms are forced to change prices more often than they would if the price level was more or less stable -higher costs for the economy as a whole
Real income
Income divided by the price level to adjust for the effects of inflation or deflation
True
Income tax brackets-the bands of income levels that determine a taxpayers income tax rate-are indexed to CPI (T/F)
Shoe-leather cost
Increased costs of transactions caused by inflation Ex: due to inflation people convert dollars to other assets. Need to go get more money when inflation occurs
Efficiency wages theory
Increased wages can lead to increased labor productivity
True
Increases in inventories of finished goods are counted as investment spending as well as spending on additional inventory (T/F)
Discouraged workers
Individuals who want to work but aren't currently searching b/c they see little prospect of finding a job given the state of the job market
Unit of Account Cost Ex
Inflation can distort the measure of income on which taxes are collected
True
Inflation raises nominal GDP but not real GDP, causing the GADP deflator to rise (T/F)
True
Inflow of money into each market or sector must equal the outflow of money coming from that market or sector (T/F)
collective bargaining
Negotiations between representatives of labor unions and management to determine pay and acceptable working conditions.
real interest rate formula
Nominal inflation rate-inflation rate
Taxes
Payments that firms and households are required to make government
government transfers
Payments that gov makes to households or firms without expecting a good or service in return
Unemployed
People who have been actively looking for work but are currently unemployed
Marginally attached workers
People who say they would like to have a job and have looked for work in the recent past but are not currently looking for work
Unemployment rate
Percentage of total number of people unemployed
True
Public policy cant keep the unemployment rate persistently below the natural rate without leading to accelerating inflation (T/F)
True
Real GDP increases with expenditures on some things that make people unhappy: disease, divorce, crime, and natural disasters (T/F)
True
Real GDP is a measure of economy's average aggregate output per person-an indication of the economy's potential for certain achievements (T/F)
inflation rate
The percentage increase in the overall level of prices per year
labor force participation rate
The share of the working age population that is in the labor force
cyclical unemployment
The share of unemployment that arises from the business cycle
Labor force
The sum of the employed and unemployed workers in a country's economy
Real GDP
The total value of all final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year in order to remove the effects of price changes
natural rate of unemployment
The unemployment rate that arises from, the effects of structural unemployment -lowest rate unemployment that the economy can sustain in long term (Frictional + Structural)
real wage
The wage rate divided by the price level to adjust for the effects of inflation of deflation
Price index
There is a huge variety of goods and services produced and consumed in the economy so how can we summarize this single number.....the concept of a ______ ______
Factor
To the left of the circular flow diagram is _______ markets, in which firms buy the factors of production they need to produce goods and services from households
Product
To the right of circular flow diagram is _______ markets, in which households buy the products they want from firms
True
Unemployment benefit payments vary from state to state and are 1/2 your normal pay (T/F)
True
Unemployment rate is a good indicator of how easy or difficult it is to find a job given the current state of the economy (T/F)
Winners VS Losers Ex
When a borrower and lender enter into a loan contract, that contract normally specifies a nominal interest rate...but each party has an expectation about the future rate of inflation creating an expectation on the real interest rate on the loan. If the actual inflation rate is higher than expected, borrowers gain at the expense of their lenders as borrowers will repay their loans with funds that have a lower real value than expected-since the funds can purchases fewer goods and services than expected due to high inflation rate (this also happens vice versa with low inflation rate)
Underemployment
Workers who are currently employed but would like to work more hours or are overqualified for their jobs
Frictional unemployment
Workers who lose their jobs involuntarily or due to destruction or chose not take the first new job offered
GDP Formula
Y = C + I + G + NX
Employed
You are _____ if an only if you have a job
actual unemployment formula
actual unemployment = natural unemployment + cyclical unemployment
National accounts
almost all countries calculate a set of numbers known as the national income and product accounts
Value-added approach
calculating GDP is to survey firms and add up their contributions to the value of final goods and services
Investment spending
spending on new productive physical capital, such as machinery and structures, and on changes in inventories
consumption bundle
the combination of goods and services consumed by an individual used to measure price changes for consumer goods and services
Private Savings
the income that households have left after paying for taxes and consumption that is frequently held by financial institutions that inject it back into the circular flow diagram in the form of loans
Real interest rate
the interest rate corrected for the effects of inflation
nominal interest rate
the interest rate that is actually paid for a loan, unadjusted for the effects of inflation
Chain linking
the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves -relates to cyclical trends in growth and production that occur within business cycle (Most Dangerous)
Efficiency wages
wages that employers set above the equilibrium wage rate as an incentive for better employee performance
base year
year serving as point of comparison for other years in a price index