econ test 3

Business cycle

Alternating periods of economic expansion and economic

recession.

Expansion

The period of a business cycle during which the total production and total employment are increasing.

Recession

The period of a business cycle during which total production and total employment are decreasing.

Economic growth

The ability of an economy to produce increasing quantities of goods and services

Inflation rate

The percentage increase in the price level from one year to the next

Gross domestic product (GDP)

the market value of all final goods and services produced in a country during a period of

time, typically one year

The most common measure used by economists of overall economic activity in an economy is

gross domestic product, or GDP

Final good or service

is a good or service purchased by a final user. These are what are used to calculate GDP

if we counted intermediate goods and services as well, ones that were inputs for another good or service, such as a tire on a truck, then we would end up

double counting

Consumption

is spending by households on goods and services, not including spending on new houses (which are counted instead in investment).

To measure GDP, the Bureau of Economic Analysis (BEA) in the Department of Commerce measures four major categories of expenditures those are:

• Personal consumption expenditures, or consumption (C)

• Gross private domestic investment, or investment (I)

• Government consumption and gross investment, or government purchases (G)

• Net exports of goods and services, or net exports (NX)

GDP can be expressed as the sum of these

Y = C + I + G + NX

Consumption

is spending by households on goods and services, not including spending on new houses (which are counted instead in investment)

In BEA statistics, consumption is further divided into expenditure on

• Services, such as medical care, education, and haircuts

• Nondurable goods, such as food and clothing, and

• Durable goods, such as automobiles and furniture.

Investment

is spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses.

Government purchases

are spending by federal, state, and local governments on goods and services.

Net exports

are exports minus imports.

chapter 12 notes

pg 11, 16

If a country’s exports are larger than its imports, then a country is said to have a

trade surplus

If a country’s exports are less than its imports, then a country is said to have a

trade deficit

Underground economy

Buying and selling of goods and services that are concealed from the government to avoid taxes or regulations, or because the goods and services are illegal.

Underground economies are also called

shadow economies

GDP per capita

is often used to represent differences in standards of living from country to country

Nominal GDP

is the value of final goods and services evaluated at current-year prices.

Real GDP

is the value of final goods and services evaluated at base-year prices.

The formula for the GDP Deflator is:

GDP: Nominal GDP/ Real GDP x 100

Gross national product (GNP)

Production performed by citizens of a nation, including overseas production

National income

GDP minus the consumption of fixed capital; i.e. GDP minus depreciation

Personal income

Income received by households; includes transfer payments but excludes firms’ retained earnings

Disposable personal income

Personal income minus personal tax payments; this measures the amount that households are able to spend or save

Labor force (LF)

the sum of employed and unemployed workers in the economy.

Employed

In government statistics, someone who currently has a job or is temporarily away from his or her job

Unemployed

In government statistics, someone who is not currently at work but who is available for work and who has actively looked for work during the previous month

Unemployment Rate (UR)

the percentage of the labor force that is unemployed

Labor Force Participation Rate (LFPR)

the percentage of the working-age population in the labor force

The working-age population includes

all people in the population aged 16 and over who are not in jail, a hospital, an institution, or in the U.S. Armed Forces.

Calculating Labor Force

employed + unemployed

Calculating Unemployment rate

unemployed / labor force x 100%

Calculating Labor Force Participation Rate

Labor force / working - age population x 100%

Frictional unemployment

Short-term unemployment that arises from the process of matching workers with jobs.

Structural unemployment

Unemployment arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs

Cyclical unemployment

Unemployment caused by a business cycle recession.

Represents the natural adjustment process in a dynamic labor market,

not a symptom of economic weakness

Policy focus

can be improving labor market information to shorten job-search periods.

• job listings, career services, and digital platforms

Seasonal Unemployment

temporary unemployment that occurs when industries slow or shut down during specific

seasons

What are examples of structural unemployment

coal miners losing jobs due to a shift to renewable energy

• the installation of self-checkout kiosks in grocery stores reduces the demand for

cashiers.

• newspaper printing employees become unemployed as news and content shift to

online platforms and, etc.

When does cynical unemployment happen?

a business cycle recession. Covid, great recession

When all unemployment is due to frictional and structural factors, we say that the economy is at

full employment

full employment

This means there will always be some unemployment in the economy.

natural rate of unemployment

The normal rate of unemployment, consisting of frictional unemployment and structural unemployment.

Efficiency wage

An above-market wage that a firm pays to increase workers’ productivity

price level

a measure of the average prices of goods and services in the economy

We refer to the percentage increase in the price level from one year to the next as the

inflation rate

Two commonly-used measures are:

• The consumer price index (CPI)

• the producer price index (PPI)

The consumer price index (CPI)

measures the average price a typical urban family of four pays for the goods and services they purchase.

producer price index (PPI)

is an average of the prices received by producers of goods and services at all stages of the

production process.

Nominal interest rate

the stated interest rate on a loan.

Real interest rate

the nominal rate minus the inflation rate.

If price levels are decreasing, then ___ exists

deflation

menu costs

the cost to firms of changing prices.

What is GDP?

• The percentage increase in the price level from one year to the next

• The market value of all goods and services and produced in a country

• The market value of all final goods and services and produced in a country during a period of time, typically a year

• The ability of an economy to produce increasing quantities of goods and services

Option 3!

Which of the following is a final good?

• Coffee beans purchased by a coffee shop

• A newly built house purchased by a couple

• Shares of stock

• Sugar purchased by a baker

Option 2!

Which formula is the GDP formula?

• Y= C + I + G - NX

• Y= C - I + G - NX

• Y= C + I - G + NX

• Y= C + I + G + NX

Option 4!

Which of the following is not a durable good?

• clothing

• furniture

• automobile

• refrigerator

Option 1!

Which of the following is not directly counted in GDP?

• investment expenditures

• government purchases

• intermediate goods

• consumer goods

Option 3!

Can unemployment rate be at 0%? True or false

False

Why might the BLS estimate of unemployment underestimate the true level of unemployment?

• People might claim to falsely be looking for work

• It excludes discouraged workers

• People may claim not to be working to evade taxes

• Both A and C

Option 2!

If the number of unemployed workers is 200 million, the number of employed workers is 300 million, and the working-age population is 800 million, what is the labor force participation rate?

• 12.5%

• 37.5%

• 40%

• 62.5%

62.5%

If the number of unemployed workers is 200 million, the number of employed workers is 300 million, and the working- age population is 800 million, what is the unemployment rate?

• 40%

• 0.4%

• 4%

• 14%

40%

The unemployment rate is?

• The percentage of the labor force that is employed

• The percentage of the number employed that is unemployed

• The percentage of the working-age population that is unemployed

• The percentage of the labor force that is unemployed

The percentage of the labor force that is unemployed

If the nominal GDP of a country is $6 trillion and the real GDP is $5 trillion, what is the GDP deflator?

• 83.3

• 120

• 100

• 125

120

In a small economy, consumption spending is 6,000, government purchases are $1,200, gross investment is $1,500, exports are $2,000, and imports are $1,000. What is the gross domestic product?

• $9,700

• $9,800

• $10,800

• $11,700

What is meant by “real GDP”

• GDP adjusted for inflation

• GDP measured at current market prices

• The value of all goods and services produced, including imports

• The average GDP over a decade

GDP adjusted for inflation

Which one of the following is not a measure of the price​ level?

A. Consumer Price​ Index: an average of the prices of goods and services a typical family of four would purchase.

B. Producer Price​ Index: an average of prices received by firms for goods and services at all stages of production.

C. GDP​ Deflator: broadest measure of the average price level as it includes prices of every final good and service.

D. Government Price​ Index: an average of the prices paid by the government for goods and services used only by different government agencies.

D

The price index which is used to measure changes in the cost of living is the

A. Retail Price Index.

B. Producer Price Index​ (PPI).

C. GDP Deflator.

D. Consumer Price Index​ (CPI).

D

What index is used to measure the average prices paid by a typical​ family?

An average of the prices of the goods and services purchased by a typical family is​ the:

A. consumer price index​ (CPI).

B. producer price index​ (PPI).

C. aggregate price level index.

D. inflation rate index.

A