Macro Study guide test 3

Real GDP per capita

The average value of goods and services produced per person in a country

Real GDP per capita= Real GDP/population

Rule of 70

Number of years to double amount=70/annual % growth rate of amount

Determinants of growth

Institutional factors(Sound financial and legal systems)

Demand Factors(Natural resources, capital, human resources, tech)

Efficiency(be on production possibilities frontier instead of inside of it)

Labor force participation rate

% of the working age population (civilian, non institutionalized, 16 or older) in the labor force. (Working or looking for work)

Labor productivity

Real output per worker per hour

Typically reported as its % change. Good if productivity is growing but not if it is due to hours worked falling more than output falls

Institutional structures of growth

Strong property rights, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, competitive market system

Supply factor(determinants of growth)

Increases in quantit and quality of natural resources, human resources, increases in the supply or stock of capital goods, improvements in tech

Demand factor (determinants of growth)

Households, businesses and government must purchase the economy’s expanding output.

Efficiency factor must achieve economic efficiency and full employment

The business cycle and the 4 stages

Altering increases and decreases in economic activity over time

(Peak, recession, trough, expansion)

Cyclical impact

Durable goods are affected the most: Capital goods, consumer durables

Non durable consumer goods affected the least: Services, food and clothing

Measure of unemployment

Population is divided into 3 groups

• Under 16 and/or institutionalized

• Not in labor force

• Labor force: employed and unemployed

• Unemployment rate= unemployed/labor force X 100

3 types of unemployment

Frictional, structural, and cyclical

Frictional unemployment

Individuals searching for jobs or waiting to take jobs soon

Structural unemployment

Occurs due to changes in the structure of the demand of the labor force

Cyclical unemployment

Caused by the recession phase of the business cycle

Natural rate of unemployment

The baseline rate of unemployment that exists in a healthy economy when aggregate production is at its long run potential. Full employment but still has some people left out of work. Full employment rate of unemployment

Economic cost of unemployment

GDP gap=actual GDP-Potential GDP

Non economic costs

Loss of skills and loss of self respect, plummeting morale, family disintegration, poverty and reduced hope, heightened racial and ethnic tensions, suicide, homicide, fatal heart attacks, mental illness, can lead to violent social and political change

Inflation

General rise in the price level (an overall increase in the economy’s price level)

Inflation reduces the “purchasing power” of money

Demand-pull inflation

Occurs when the demand for goods and services increases faster than businesses can produce them

Cost push inflation

Occurs when the cost of [producing goods and services increases, causing businesses to raise their prices; causes real output to decrease

Core inflation

Excludes food and energy, goods, focuses on more stable prices

Who is hurt by inflation

Fixed income receivers: real income falls

Savers: Value of accumulated savings deteriorates

Creditors:Lenders get paid back in “cheaper dollars”

Real interest rate

Adjusted for inflation

Real interest rate

Adjusted for inflation

Nominal interest rate

Not adjusted for inflation

Why does inflation hurt?

Erodes real income, unfairness, cutting back on purchases, harder on lower income individuals, psychological burden, poor economic health

Deflation

An over all average decline in the economy’s price level

Indexation

Wages, pensions, or other payments automatically increase to keep up with inflation

Consumer price index

A measure index of all the overall costs of goods and services in a “basket” bought by a “typical consumer”

Calculating Consumer price index

The price of the basket is measured relative to the price of the basket in the “base year” currently(1982-1984). Inflation is then measured as the percentage change in the price index from the preceding period

GDP deflator

GDP deflator measures nominal GDP relative to real GDP, which isolates price changes because real GDP is corrected for inflation

Fiscal Policy

When the government uses spending and taxes to influence the economy

Designed to achieve full employment, control inflation, encourage econmic growth

Expansionary Fiscal Policy

Used when the economy is struggling or in a recession to increase AD(increase government spending, decrease taxes, combination of both)

Creates a budget deficit

Contractionary Fiscal Policy

Used when inflation is too high; during demand pull inflation to reduce AD

Decrease government spending, increase taxes, combination of both

Creates a budget surplus

Built in stabilizers

Government policies and programs that automatically help stabilize the economy without government having to pass new laws or take action. Taxes vary directly with GDP, transfers vary inversely with GDP

The US public debt

Owed to the holders of the US government securities. Treasury bills, treasury notes, treasury bonds, US saving bonds

Burden debt to GDP

Debt to GDP ratio excludes portion of public debt owed by one federal agency to another

Includes debt held by individuals or non governmental entities

The US public debt interest charges

Primary burden of the debt, larger than defense spending, rising interest rates are a potential concern

The US public debt false concerns

Bankruptcy, refinancing, taxation, burdening future generations, the size

The US public debt substantive issues

Income distribution, incentives, foreign owned public debt/ external public debt

Crowding out effect

Occurs when the government increases spending by borrowing money which causes interest rates to rise and reduces private investment