Macro EXAM 2

recession

underproducing where we should be (under potential GDP)

expansion

overproducing where we should be (over potential GDP) increasing economic activity, higher employment rates, and rising GDP.

what does GDP measure?

the overall production in a country

final goods

what we get when we buy a good from the store. (products that are purchased for consumption and are not used to produce other goods)

intermediate goods

all the things we use to make a final good. They’re excluded from GDP

goods and services

anything we pay money for (goods- ipad, tangible) (services- study edge membership, haircut, legal advice, etc)

GDP Formula

Y= C(onsumption) + I(nvestment) + G(overnment spending) + NX (net exports)

used goods

goods that have already been bought; not counted in GDP

fixed business investment (business spending)

new factories for a company, new machinery, new equipment, new inventory (includes any money that firms spend to maintain or expand)

residential investment

new homes (if a home is resold, it doesn’t count towards GDP)

Government spending

almost all money the government spends. Includes local, state, and federal spending. MUST receive something in return for what they are paying.

transfer payments

money that the government distributes to people but gets nothing in return (social security, unemployment benefits, etc)

net exports

value of all of a country’s exports - what they import.

trade surplus

when exports are greater than imports

trade defecit

when exports are less than imports

what are limitations of GDP as a method for measuring production?

does not account for underground economy, black market, household production

Gross National Product (GNP)

Who makes it?. Values all goods and services produced by U.S. companies

nominal

uses current prices and quantities (to that time period )

Real GDP

accounts for price changes over time. Uses a base year

economic growth

the sustainable expansion of production possibilities

per capita

per person.

rule of 70

time it takes GDP or GDP per capita to double

income approach

all money that’s spent on the production of final goods and services + all the money that is MADE on the sale of all final goods and services in the economy

statistical discrepancy

something went wrong in calculations of GDP

consumer price index

measures the change in price of goods for a family 4 in an urban area

COLA: cost of living adjustment

the government uses this to adjust social security and government salaries. It increases benefits to counteract inflation.

interest rates

interest rate on loans are impacted by the percentage of price change

real interest rate

nominal interest rate - inflation rate

substitution bias

when prices of goods go up, we tend to buy other products

quality bias

many goods increase in quality over time

outlet bias

people change where they buy from, (ex: Amazon vs local store)

chain weighted CPI

mathematical manipuliation to remove biases in the CPI

what are biases of the CPI?

Substitution bias, quality bias, and outlet bias

working age population

anyone aged 16 and over, who can physically work (people in jail, nursing home, not included).

employed

someone who has worked for pay within the last week

unemployed

someone who does not have a job but wants a job. ex: Has applied for a job in the last 4 weeks, has signed a contract to start a job in the next 30 days, waiting to be rehired.

discouraged workers

someone who initially wants to work but gave up

who is NOT part of labor force?

discouraged workers, stay at home parents, and students