Unit 3 (Macroeconomics)

gov. means government

Gross Domestic Product (GDP)

the total monetary value of all final goods/services produced within a country's borders during a specific time period

How is GDP calculated?

C + I + G + (Ex - Im)

What does C stand for in the GDP formula?

consumption

What does I stand for in the GDP formula?

investments

What does G stand for in the GDP formula?

government spending

What does (Ex - Im) stand for in the GDP formula?

exports - imports, or net exports

GDP per capita

a country's total economic output divided by its total population (GDP/population)

Final good

a finished product that is ready for use by an end consumer or business without needing any more processing; it will not be sold anymore and will not be used for a service being sold either

Intermediate goods

products or raw materials sold business-to-business to make other products or finished consumer goods; it will be sold again or will be used in a service being sold

Is shampoo bought and used by a hair stylist a final or intermediate good?

intermediate

Is flour used in a cake being sold at a bakery a final or intermediate good?

intermediate

Is flour being used to make a birthday cake by a mom (not to sell) a final or intermediate good?

final

Is pencils bought by a student to use on their homework a final or intermediate good?

final

Things NOT included in GDP

• stuff made in pervious years (includes buying stuff second hand)

• stock market transactions

• underground markets (illegal activity)

• transfer payments

• intermediate goods

Is a shirt bought from goodwill counted in GDP?

no

are unemployment checks counted in GDP?

no

is buying a bond counted in GDP?

no

is a new car made this year counted in GDP?

yes

what part of GDP is schools?

government spending

what part of GDP is groceries?

consumption

what part of GDP is new fruit and vegetable warehouses?

investments

Inflation

the general increase in the prices; reduces the purchasing power of money

Hyper Inflation

out of control, rapid increase in prices

Deflation

a general decrease in the prices of goods/services across an economy, NEGATIVE inflation

Disinflation

slowing in the rate of price inflation; inflation/prices still go up, but their prices rise at a slower pace/rate

Stagflation

the rare and difficult economic condition where high inflation, slowing economic growth, and high unemployment happen at the same time (depressions)

Consumer Price Index (CPI)

measures average price change for a consumer’s market basket

Market Basket

a category of common goods/services

What are the 8 market baskets that economist look at?

1) apparel (clothes)

2) housing

3) food/beverages

4) medical care

5) recreation (sports, games, etc.)

6) other goods/services

7) education and communication (books, phones, etc.)

8) transportation

Inflation rate

the % change in price per year

Formula to calculate CPI

CPI = (price of market basket / price of market basket in base year) x 100

Formula to calculate inflation

Inflation = ((CPI2 - CPI1) / CPI1) x 100

Substitution bias

as price increases for a basket, consumers buy less products from said basket and more substitutions from other baskets; makes CPI higher than may actually be

Why are new products an issue for CPI calcualtion?

CPI doesn’t always include the newest product

Cost of Living Adjustments (COLA)

salaries mirror inflation; if prices go up then so do salaries

Who is hurt, and who is helped by inflation?

Lenders are hurt by inflation while borrowers are helped by inflation