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1

Circular Flow

the pattern in which goods, services and resources flow in the marketplace

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2

GDP

the total market value of all final NEW goods and services produced annually in an economy

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3

Nominal GDP

GDP measured in current prices

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4

Limitations of GDP

Nonmarket Activities

Underground Economy

Negative externalities

Quality of life

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5

Labor Force

the total number of workers, including both the employed and the unemployed

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6

Unemployment Rate

the percentage of the labor force that is unemployed

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7

Labor Force Participation Rate

the percentage of the adult population that is in the labor force

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8

Types of Unemployment

frictional structural cyclical

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9

Frictional Unemployment

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

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10

Structural Unemployment

*unemployment resulting from industrial reorganization, *typically caused by technological change

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11

limitations of unemployment rate

does not give a good indication of how many people are discouraged(not looking for work) or underemployed.

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12

Natural Rate of Unemployment

frictional plus structural unemployment *typically 5- 7%

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13

Calculate Unemployment Rate

unemployed/labor force x 100

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14

Calculate Labor Force

employed + unemployed

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15

Calculate Labor Force Participation Rate

labor force/adult population x 100

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16

CPI (Consumer Price Index)

a measure of the overall cost of the goods and services bought by a typical consumer

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17

Inflation

A general increase in prices

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18

Deflation

A situation in which prices are declining

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19

Disinflation

a reduction in the rate of inflation

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20

Real Variables

variables measured in physical units

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21

Calculate Inflation Rate

CPI this year - CPI last year / CPI last year x 100

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22

Limitations of CPI as a measure of inflation

*Does not factor in change in quality or substitutes

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23

Calculate CPI

(cost of basket in current year/cost of basket in base year) x 100

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24

Real GDP formula

Nominal GDP/GDP Deflator x 100

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25

GDP formula

C+I+G+(X-M)

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26

GDP deflator formula

Nominal GDP/Real GDP x 100

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27

Not included in GDP

Intermediate goods

Household production

Non-market (illegal) activities

Used goods and services

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28

Real GDP per capita

real GDP divided by the total population

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29

circular flow leakages

1)Savings 2)Imports

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30

Phases of the business cycle

expansion-> peak-> contraction-> trough->recovery

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31

Business Cycle Graph

a period of macroeconomic expansion followed by a period of contraction

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32

recessionary gap

when aggregate output is below potential output

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33

inflationary gap

when aggregate output is above potential output

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