Economic Indicators and the Business Cycle Flashcards

Flashcards for Macroeconomics Unit 2 Review

National income and product accounts/national accounts

Track spending by consumers/sales of producers, business investment spending, government purchases, and other flows of money among different sectors of the economy.

Household

Individual or a group of people who share their income

Firm

Organization that produces goods and services and employs members of households

Product markets

Markets for goods and services

Factor markets

Markets in which firms buy resources needed to produce goods and services

Value-Added Approach

Adding up the value of all final goods and services produced in the economy; excludes intermediate goods

Expenditure Approach

Adding up aggregate spending on domestically produced final goods and services (GDP=C+I+G+Xn)

Income Approach

Adding up the income earned by factors of production in the economy (WAGES, RENT, INTEREST, and PROFIT) GDP=W+R+I+P

Consumer Spending (C)

Individual spending includes costs passed along from firms (indirect business taxes)

Investment (Gross Investment * Ig)

Includes all final purchases of machinery, equipment, and tools used by businesses, all construction, and changes in inventories

Net Exports

Exports minus Imports (X-M=Xn); since we only count what is produced in America, we need to add exports (what we sold from home) and subtract imports (what we bought from abroad)

Income Approach Formula

National Income + Indirect Business Taxes + Consumption of Fixed Capital + Net Foreign Factor Income = GDP

Indirect Business Taxes

Includes sales taxes, business property taxes, etc; since these get passed off to the consumer in sales, they are counted in the expenditures model; since they do not get paid in income, we must reconcile accounts by adding them to the NI

Consumption of Fixed Capital

Use of capital extends beyond the year it was purchased; some of it gets “used up” in production and this cost is passed along to consumers; it is counted in expenditures, but does not represent income flowing to individuals; it must be added to NI to reconcile accounts

Net Foreign Factor Income

An addition of Wages, Rent, Interest, and Profit counts the National Income which measures income of all American-owned resources; so we must add income from domestically produced output by non-citizens and subtract income from American produced output abroad

What isn’t counted in the GDP?

Intermediate goods, Second-hand goods (used goods), Purely financial transactions (stocks and bonds), Transfer payments (social security, child support), Non-market production (do-it-yourself work), and Underground or black market activity

GDP Per Capita

Divide GDP by the population (allows us to see the real effect of GDP on standard of living – and to compare across countries or across time)

Shortcomings of GDP Measuring Total Output

Non-market Transactions, Improved Product Quality, Underground Economy

Shortcomings of GDP Measuring Well-Being

Leisure or the psychic income, Environmental impact, What is being produced or how it’s distributed, and Non-economic sources of well-being

Discouraged Workers

Individuals who want to work but have given up the job hunt

Underemployed

Workers who are currently employed but would like to work more hours or are overqualified for their jobs

Frictional Unemployment

Unemployment due to the time workers spend in the job search

Structural Unemployment

Unemployment resulting from a mismatch between the characteristics of job seekers and the types of jobs available

Natural Rate of Unemployment

The rate of unemployment that arises from the effects of frictional and structural unemployment; it is the minimum feasible unemployment rate

Cyclical

Overall unemployment resulting from downturns in business cycle

Business Cycle

Fluctuations in economic activity that an economy experiences over a period of time; defined in terms of EXPANSION (economic upturn, recovery) or RECESSION (economic downturn); measured by indicators including employment and aggregate output

Recession

Period of contracting employment and output

Expansion/Depression

Period of rising output and employment; a very deep and prolonged downturn

Aggregate Output

The economy’s total production of goods and services for a given time (usually a year)

Cyclical Unemployment

The deviation of the actual rate of unemployment from the natural rate of unemployment (Natural Unemployment = Frictional + Structural; Actual Unemployment = Natural Unemployment + Cyclical)

Changes in the NRU

Changes in Labor Force Statistics (Age of workers, experience levels, etc.), Changes in Labor Market Institutions (Policy interventions and organizations within labor markets. Ex: Labor Unions, temporary employment agencies, social media platforms for job searches), and Changes in Government Policies (Minimum wage, unemployment benefits, job training, employment subsidies)

Employment

Total number of people currently working for pay

Unemployment

Total number of people who are actively looking for work, but aren’t currently employed

Labor Force

Sum of employment and unemployment

Unemployment Rate

Percentage of the labor force that is unemployed ( unemployed/labor force X [100])

Not in the Labor Force

Retired, full-time students, stay-at-home-parents, military, discouraged workers, people with disabilities

Discouraged Workers

Those who have given up the job hunt

Output Gap

Difference between actual output and potential output

Potential Output

Full employment level of output; Also the level of GDP with the natural rate of unemployment (NRU)

Inflation

An increase in the general prices of goods and services/a decrease in the purchasing power of a dollar

Inflation

Rise in overall price level/decrease in buying power; Makes people not want to hold onto cash because it loses its value

Deflation

Fall in overall price level/increase in buying power; Makes people want to hold onto cash because its value is high; discourages consumption and investment spending on productive assets which can deepen a recession

Disinflation

A declining rate of inflation; economists’ goal

Hyperinflation

Rapid/out of control inflation from a human-made disaster; Caused by government printing money or by consumers losing confidence in a currency

Shoe-Leather Costs

Increased cost of transactions caused by inflation

Menu Costs

Real cost of changing listed prices

Unit-Of-Account Costs

Costs arising from the way inflation makes money a less reliable unit of measurement

Costs of Inflation

In general, lenders, savers, and people with fixed incomes are hurt by inflation; However, borrowers are helped by inflation

Price Indexes

Help measure inflation by summarizing the prices of goods and services with a single number; Any number

Market Basket

A hypothetical consumption bundle of consumer goods and services

Producer Price Index

Tracks changes in producers’ selling prices; not widely used in this class, but another example of a price index

Consumer Price Index (CPI)

An index that measures the cost of a market basket of goods and services purchased by a typical urban household; May be inaccurate with substitution bias; Most commonly used formula; U.S. base year - 1982-1984

GDP Deflator

An index with a market basket of ALL of the domestically-produced goods and services in an economy; much broader measurement of inflation than CPI

Price Index

A measure of the price of a specified market basket in a given year as compared to the price of an identical market basket in a base year; helps measure inflation

Real Income Formula

(nominal income/CPI) x 100

Real GDP (rGDP)

GDP adjusted for inflation