Econ Unit #2: economic indicators and business cycle

private sector

part of economy run by individuals and businesses

public sector

part of economy controlled by government

factor payments

payments for the factors of production: rent, wages, interest, profit

transfer payments 

when the government redistributes income (welfare, social security)

subsidies

government payments to businesses

national income and product accounts

keeps track of the flows of money among different sectors of the economy

household

a person or group of people who share income

factor markets

when resources, especially capital and labor, and bought and sold

government transfers

payments that the government makes to individuals without expecting a good or service in return

consumer spending

household spending on goods and services

product markets

when goods and services are bought and sold

financial markets

markets (banking, stock, and bond) that channel private saving and protein lending into investment spending, government borrowing, and foreign borrowing

investment spending

spending on new productive physical capital, such as machinery and structures, and on changes in inventories

tax revenue

total amount the government receives from taxes

government borrowing

amount of funds borrowed by the government in the financial market

gross domestic product (GDP)

total value of all final goods and services in the economy during a given year

intermediate goods and services

goods and services bought from one firm to be used as inputs into the production of final goods and services

value-added approach

an approach to calculating GDP by surveying firms and adding up their contributions to the value of final goods and services

expenditure approach

an approach to calculating GDP by adding up aggregate spending on domestically produced final goods and services in the economy: the sum of consumer spending (C), investment spending(I), government purchases of goods and services (G), and exports minus imports(net exports: X - M)

aggregate spending 

total spending on domestically produced final goods and services in the economy (found by expenditure approach)

income approach

an approach to calculating GDP by adding up the total factor income earned by households from firms in the economy, including rent, wages, interest, and profit

firm

an organization that produces goods and services for sale

real GDP

GDP calculated using the prices of a selected base year in order to remove the effects of price changes (expressed in constant, or unchanging, dollars; adjusts for inflation)

nominal GDP

GDP calculated with the prices current in the year in which the output is produced (current prices, doesn’t account for inflation from year to year; so it includes inflation, so it is less accurate)

aggregate output

economy’s total production of goods and services for a given time period

GDP per capita

GDP divided by the size of the population; equivalent to the average GDP per person

unemployed

people actively looking for work but aren’t currently employed

labor force

number of people who are either currently holding a job (full time or part time) in the economy or are actively looking for work but aren’t currently employed; employment + unemployment

labor force participation rate

% of population aged 16 or older that is in the labor force (labor force/adult population)

unemployment rate

percentage of labor force that is unemployed (unemployed/labor force)

discouraged workers

nonworking people who are capable of working but have given up looking for a job due to the state of the job market

underemployed

workers who would like to work more hours or who are overqualified for their jobs

real wage

wage rate/price level to adjust for the effects of inflation or deflation (nominal - inflation = real)

real income

income/price level to adjust for the effects of inflation or deflation

inflation rate

% increase in the overall level of prices per year (next year - this year / this year)

shoe-leather costs

increased costs of transactions caused by inflation

menu costs

real costs of changing listed prices

unit-of-account costs

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

nominal interest rate

interest rate actually paid for a loan

real interest rate

nominal interest rate - rate of inflation = real interest rate

disinflation

process of bringing the inflation rate down

aggregate price level

measure of overall level of prices in the economy

market basket

hypothetical set of consumer purchases of goods and services

price index

measures the cost of purchasing a given market basket in a given year; the index value is normalized so that it is equal to 100 in the selected base year

base year

year chosen for a comparison when calculating price index; price level compares the price of the market basket of goods in a given year to its price in the base year

consumer price index (CPI)

measures the cost of the market basket of of a typical urban American family

• $ of market basket current year / $ of basket year 

substitution bias

bias that occurs in the CPI because, over time, items with prices that have risen more receive too much weight (because households substitute away from them), while items with prices that have risen least are given too little weight (because households shift their spending toward them)

producer price index (PPI)

measures the prices of goods and services purchased by producers

GDP deflator

(for a given year) nominal GDP/real GDP x 100

frictional unemployment

unemployment due to the time workers spend in job search

structural unemployment

results when workers lack the skills required for the available jobs, or there are more people seeking jobs in a labor market than there are jobs available at the current wage rate

efficiency wages

wages that exceed the market equilibrium wage rate; employers use efficiency wages to motivate hard work and reduce worker turnover

natural rate of unemployment

frictional + structural unemployment

cyclical unemployment

deviation of the actual rate of unemployment for the natural rate

unanticipated inflation

unpredictable = harmful

anticipated inflation

healthy (2%)

creeping inflation

1-3% a year + healthy (anticipated)

chronic inflation

changes month to month (unanticipated)

hyperinflation

100-500% in 1 month (can crush banks and saving accounts)

• can be caused by natural disasters

demand-pull inflation

increased demand for the product pulls up the price

• EX: natural disasters 

cost-push inflation

increasing in production costs pushes the final price up 

• EX: minimum wage increase

wage-price spiral

an infinite cycle where workers want more money/raises, leading to owners increasing prices to pay for the raises, causing workers to want more raises…

flexible inflation

monthly/yearly changes:

• EX: renters month to month, short term labor contracts

inflexible “sticky” inflation

multiyear contracts:

• EX: unions - teachers, fire, police

fixed contracts / incomes:

• EX: leases, retirees

when do borrowers win in inflation

when the actual inflation rate is higher than expected bc they get to repay their loans with dollars that have a lower real value

when do lenders win in inflation

if the expected inflation rate is lower because the money repaid has a higher real value than expected

rate of change formula

new (CPI/GDP) - old (CPI/GDP) / old (CPI/GDP) x 100