ECO Exam (Ch 7 - 8)

GDP

single number that measures the size of the economy

National Income Accounting Identity

Production = Spending = Income

The Spending Approach

GDP = C + I + G + X - IM

C

consumer spending on final goods and services bought by households

I

investment spending of purchases of new capital goods made by firms for future production

G

government spending on goods and services bought by federal, state, and local governments

X

exports of foreign spending on domestically produced goods and services

IM

imports of domestic spending on goods and services produced abroad

Nominal GDP

prices in given year x quantity in given year

*changes in prices, quantities, or both

Real GDP

price in base year x quantity in given year

*changes in quantities

CPI

price changes for fixed baskets bought by consumers

GDP Deflator

prices changes for all goods and services produced domestically

real wage

purchasing power of wage

real interest rate

adjusted for inflation

deflation

price levels of goods and services drop

employed

people with jobs (full + part-time)

unemployed

people who are without jobs and have been actively looking in the past month

labor force

number of employed + number of unemployed

NOT INCLUDED: working age people who are neither employed or unemployed

discouraged workers

nonworking adults who have given up looking for work

NOT IN labor force

frictional unemployment

unemployment due to time workers spend in job search (college grads, relocation, better positions)

structural unemployment

more job seekers than available jobs in a particular market

Causes

• minimum wage, labor unions, efficiency wages

• generous unemployment benefits

• changes in available jobs

cyclical unemployment

fluctutations in business cycle

in recession, cyclical unemp is larger

in expansion, cyclical unemp is smaller

full employment

when actual unemployment equals its natural rate

*no cyclical unemployment