Stimac Test 2

Microeconomics

the study of how households and firms make decisions and how they impact markets

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

What two things does GDP measure at once?

Total income and expenditure of everyone in the economy

Why must income equal expenditure for the economy as a whole?

Because every transaction has a buyer and a seller

GDP

The market value of all final goods and services produced within a country in a given period of time.

Intermediate Good

A good used as a component or ingredient in the production of another good

Final Good

A good intended for the end user

Why does GDP exclude intermediate goods?

To avoid double-counting

Imputed Rent

The estimated value of the housing services enjoyed by homeowners (as if they were renting to themselves), included in GDP.

If a US citizen work in Mexico, does their production count toward US GDP?

No, it counts toward Mexico’s GDP

Standard time interval for measuring GDP

a year or a quarter (3 months)

GPD Identity Equation

Y = C + I + G + NX

Consumption (C)

Spending by households on goods and services, excluding new housing.

Durable Goods

Goods that last a long time, like cars or appliances

Nondurable Goods

goods that are used up quickly, like food or clothing

Investment

spending on capital equipment, structures, and inventories that will be used to produce more goods in the future

Which component of the GDP equation does the purchase of a new house fall into?

Investment

Inventory

when a good is produced but not sold

How are inventories treated in GDP?

added to GDP as “inventory investment” but when it’s sold later it’s subtracted

Government Purchases

spending on goods and services by local, state, and federal governments (including salaries of public workers)

Transfer Payments

payments not made in exchange for a good/service; excluded from GDP

Net Exports

exports minus imports

Largest component of US GDP

Consumption: about 70% of US GDP

Nominal GDP

the productions of goods and services valued at current prices

Real GDP

the production of goods and services valued at constant (base-year) prices; better for measuring economic growth

Base Year

where nominal and real GDP are equal

GDP Deflator

(nominal GDP/real GDP) x 100

GDP Deflator of 100

represents base year

Inflation Rate

(Deflator Year 2 - Deflator Year 1)/Deflator Year 1 x 100

Inflation

a situation in which the economy’s overall price level is rising

Recession

a period of declining real GDP

GNP

gross national product; total income earned by a nation’s permanent residents, regardless of where they are located

NNP

net national product; GNP - depreciation

Depreciation

the wear and tear on the economy’s stock of equipment and structures

Disposable Personal Income

the income households have left after paying taxes and non-tax obligations or the government

Statistical Discrepancy

The difference between the income and expenditure approaches to calculating GDP due to data imperfections.

Things that contribute to well-being but are excluded from GDP

leisure time, environmental quality, and non-market activity (like parenting/volunteering)

High GDP per person

correlated with better life expectancy because wealthier nations can afford better nutrition and healthcare

Illegal Activity

excluded from GDP because it is difficult to measure and not sold in legal markets

Human Capital

the knowledge and skills workers acquire through education, training, and experience

Business Cycle

The short-run fluctuations in economic activity (growth and recessions).

CPI

Consumer price index; a measure of the overall cost of the goods and services bought by a typical consumer

BLS

Bureau of Labor Statistics; the agency within the Department of Labor that calculates and reports the CPI and the unemployment rate

Inflation Rate

the percentage change in the price level from the previous period

Fix the Basket

step 1 of determining CPI; determining which prices are most important to the typical consumer by surveying spending habits

Find the Prices

step 2 of determining CPI; locating the prices of each of the goods and services in the basket at each point in time

Compute the Basket’s Cost

step 3 of determining CPI; Multiplying the fixed quantities by the changing prices of each year to isolate price effects

Choose a Base Year

step 4 of determining CPI; designating one year as the benchmark against which other years are compared

Compute the Index

step 5 of determining CPI; (Price of basket in current year / Price of basket in base year) x 100

Relative Importance

the "weights" given to different categories in the CPI basket based on how much consumers spend on them

PPI

producer price index; a measure of the cost of a basket of goods and services bought by firms (e.g., raw materials

PPI as an indicator

changes in the PPI often predict future changes in the CPI because firms eventually pass on costs to consumers

Core CPI

a measure of the overall cost of consumer goods that excludes food and energy to better show underlying inflation trends

Substitution Bias

a flaw where CPI overstates the cost of living because it ignores consumers switching to cheaper alternatives when prices rise

Introduction of New Goods

a flaw where CPI doesn't reflect the increase in the value of a dollar that occurs when consumers have more variety (choices)

Unmeasured Quality Change

a flaw where the BLS misses that a product has become "better" (higher value), leading to an overstatement of inflationEs

Estimated Magnitude of CPI Bias

most economists believe the CPI overstates inflation by about 0.5 to 1.0 percentage point per year

Imported Consumer Goods

included in the CPI but not GDP deflator

Domestic Capital Goods

included in GDP deflator but not CPI

Purchasing Power

the amount of goods and services that a unit of money can buy

Value Conversion Formula

amount in Year T dollars x (Price level today / Price level in Year T)

Indexation

the automatic correction of a dollar amount for the effects of inflation by law or contract

COLA

cost-of-living allowance; a contractual provision that automatically raises the nominal wage when the CPI rises

Bracket Creep

when inflation pushes taxpayers into higher tax brackets even if their real income hasn't changed (solved by indexing tax brackets)

Regional Price Parities

statistics used to compare the cost of living across different states or cities at the same point in time

Tradable Goods

goods like clothing or electronics that have similar prices across the country because they are easily transported

non-tradable services

services like haircuts that can have vast price differences between states because they cannot be easily transported.

Nominal Interest Rate

the interest rate as usually reported; measures how fast the number of dollars in your account grows

Real Interest Rate

the interest rate corrected for inflation; measures how fast the purchasing power of your account grows

Fisher Equation

real Interest Rate = Nominal Interest Rate - Inflation Rate

Negative Real Interest Rate

occurs when the inflation rate is higher than the nominal interest rate (savers lose purchasing power)

Impact of Deflation on Interest Rates

during deflation (negative inflation), the Real interest rate is higher than the Nominal interest rate

Labor Force

the total number of workers, which includes both the employed and the unemployed

Unemployment Rate

the percentage of the labor force that is unemployed

Labor-Force Participation Rate

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

Employed

people who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business. Includes those temporarily absent

Unemployed

people who were not employed, were available for work, and had tried to find employment during the previous four weeks. Also includes those waiting to be recalled to a job from which they had been laid off.

Not in the Labor oForce

neither employed nor unemployed; includes full-time students, housemakers, retirees, young people

Discouraged Workers

individuals who would like to work but have given up looking for a job; not in the Labor force

Natural Rate of Unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

Cyclical Unemployment

the deviation of unemployment from its natural rate, usually caused by short-term economic downturns (recessions)

Frictional Unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills. This typically explains relatively short spells of unemployment

Job Search

the process of matching workers with appropriate jobs based on their skills and preferences

Sectoral Shifts

changes in the composition of demand among industries or regions (e.g., consumers buying more EVs and fewer gas cars). This causes frictional unemployment as workers transition

Unemployment Insurance

a government program that partially protects workers' incomes when they become unemployed

Impact of unemployment insurance

reduces hardship, it increases frictional unemployment because it reduces the opportunity cost of being unemployed, leading workers to search less intensely

Structural Unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. This happens when the wage is stuck above equilibrium

Minimum-Wage Laws

a legal wage floor. If the minimum wage is above the equilibrium level, it creates a surplus of labor (unemployment), primarily affecting teenagers and low-skilled workers.

Union

a worker association that bargains with employers over wages, benefits, and working conditions

Collective Bargaining

the process by which unions and firms agree on the terms of employment

Strike

the organized withdrawal of Labor from a firm by a union; threat of a strike is what gives unions the power to negotiation above-equilibrium wages

Insiders

those who keep their jobs at the high union wage

Outsiders

those who lose their jobs due to the high wage and are forced to stay unemployed or move to non-union sectors

Efficiency Wages

above-equilibrium wages paid voluntarily by firms to increase worker productivity

Worker Health

high wages allow workers to eat better and stay healthy, which is more relevant in developing nations.

Worker Turnover

high wages give workers a reason to stay, reducing the firm’s costs of hiring and training new employees

Worker Quality

high wages attract a more talented pool of applicants, ensuring the firm hires the most competent people

Worker Effort

high wages make the cost of being fired very high, which motivates workers to put in maximum effort and not “slack off”

Overstatement of Unemployment Rate

can be caused by people claiming to look for job simply to reap unemployment benefits

Understatement of Unemployment Rate

ignoring discouraged workers and part-time workers who want full-time work