EXAM CARDS

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within U.S. borders in one year.

Scope of GDP

Includes goods and services produced inside the country, even by foreign companies, and excludes production outside U.S. borders.

NIPA system developer

Simon Kuznets, an economist who developed the National Income and Product Accounts to help understand the economy during the Great Depression.

Dollar value in NIPA

The common unit of measurement used to compare different goods in GDP.

Types of services in GDP

Services that are recorded in business records, such as healthcare and education, are included.

Unreported services in GDP

Services not recorded, like household chores, which are missed in GDP calculations.

Transfer payments in NIPA

Excluded from GDP as they do not represent new production.

Underground economy in NIPA

Legal or illegal transactions not reported, leading to an understatement of actual economic activity.

Household production issue in GDP

Productive activities done for oneself, like cleaning or cooking, are not counted in GDP.

Timing problem solution in NIPA

The product is counted in the first year's GDP as 'Changes in Inventory' in the Investment category.

Resale of secondhand goods in NIPA

Excluded from GDP, as they were already counted in the year they were originally produced.

Quality changes in NIPA

No precise method exists to adjust GDP for quality changes, leading to potential under or overstatement.

Environmental damage in GDP

Not deducted from GDP, which can inflate the measure of economic activity.

Double counting solution in NIPA

Count only the value of final goods and services or use the Value-Added Approach.

Final Good

A good sold to its end user, such as a finished car.

Intermediate Good

A good used as an input to produce another good.

Value-Added Approach

A method to avoid double counting by summing the value added at each stage of production.

Price Level

A macro measure of the average prices across all goods and services.

Nominal GDP

Measures production using current-year prices without adjustment.

Real GDP

Measures production using prices from a fixed base year to remove inflation effects.

Base Year

The reference year for prices in calculating Real GDP, where Nominal GDP equals Real GDP.

Adjustment of Nominal GDP to Real GDP

Inflating prices before the base year and deflating after the base year.

Understated GDP problems

Issues like underground economy and household production lead to GDP being understated.

Overstated GDP/well-being problems

Environmental damage and declines in product quality can cause overstatement.

Exclusion from GDP

Transfer payments and purely financial transactions are excluded.

International GDP comparisons problem

Complex due to different accounting systems and definitions among countries.

Four Components of GDP (Expenditures Approach)

GDP = C + IG + G + (X - M), where consumption is about 70%.

Subcategories of Personal Consumption (C)

Includes services (largest), non-durable goods, and durable goods.

Durable Good

A good expected to last at least 3 years.

Non-Durable Good

A good that lasts less than 3 years.

Good

A tangible item, like a book.

Service

An intangible action performed, like a haircut.

Subcategories of Gross Private Domestic Investment (IG)

Includes nonresidential construction, machinery, and residential construction.

Positive Change in Inventory

Can inflate GDP temporarily but may indicate future production slowdown.

Negative Change in Inventory

Indicates decreasing inventories and potential future production increases.

New Housing in Investment (IG)

Residential construction is treated as a long-term asset, providing shelter.

Government Purchases (G)

Includes government spending on new goods and services.

Government Transfers

Excluded from G as they do not represent new production.

Net Exports (X-M)

The value of exports minus imports, with exports being domestically produced goods sold abroad.

Trade Deficit

Currently negative, meaning the U.S. imports more than it exports.

GDP Expenditures Approach Identity (Formula)

GDP = C + IG + G + (X - M).

Three Types of Unemployment

Frictional, Structural, and Cyclical unemployment.

Frictional Unemployment

Short-term unemployment from transitioning between jobs.

Structural Unemployment

Long-term unemployment due to a mismatch between skills and jobs.

Cyclical Unemployment

Unemployment caused by a downturn in the business cycle.

Full Employment

A situation where only frictional and structural unemployment exist.

Natural Rate of Unemployment (NAIRU)

The equilibrium unemployment rate excluding cyclical unemployment.

Actual vs. Natural Unemployment Rate

Comparison determines cyclical unemployment presence and economy health.

Bureau of Labor Statistics (BLS)

Agency that collects labor force statistics in the U.S.

Household Survey

Surveys about 60,000 households for unemployment rate/labor force data.

Establishment Survey

Surveys around 600,000 job sites for jobs, wages, and hours.

Unemployed Definition (BLS Statistics)

A person who actively looked for work in the past 4 weeks.

Labor Force Definition

Labor Force = Employed + Unemployed, including those seeking employment.

Excluded from Labor Force

Includes those not working and not seeking work, like students and retirees.

Marginally Attached Worker

Individuals not in the labor force but wanting and available for work.

Discouraged Worker

Marginally attached workers who stopped looking due to perceived lack of jobs.

Official Unemployment Rate Understatement

True joblessness is understated by excluding certain workers.

Jobless Recovery

Real GDP increases without a decrease in unemployment.

Unemployment Rate Formula

Unemployment Rate = (Number of Unemployed / Labor Force) x 100.

Labor Force Participation Rate Formula

LFPR = (Labor Force / Working-Age Population) x 100.

Inflation Rate Formula using CPI

Inflation Rate = ((CPI Later - CPI Earlier) / CPI Earlier) x 100.

GDP Deflator Formula

GDP Deflator = (Nominal GDP / Real GDP) x 100.