ECO Exam 2

Nominal GDP

total market value of all final goods and services produced in a country measured at current prices.

Real GDP

the total market value of all final goods and services produced in a country adjusted for price changes by using constant prices from a fixed base year.

Expenditure Method for Computing GDP

C + I + G + (X-M)

GDP Limitations

• does not measure intermediate production

• not a direct measure of “quality of life”

• is a measure of production; NOT the quality of production

• does not measure illegal activities

GDP

Gross Domestic Product is the economy’s total productions of final goods and services for a given time period.

Business Cycle

The short run alternation between economic downturns, recessions, and economic upturns and expansion.

Limitations of Using CPI to compute Inflation Rate

There are 4 biases: new product bias, improvement bias, discount bias, substitution bias. These lead to overestimation of CPI and inflation rate.

Why do economists use real GDP as the preferred measure of an economy’s performance rather than nominal GDP?

Real GDP adjusts for inflation, reflecting actual amount of goods and services produced by an economy.

Some economists argue that the official unemployment rate understates the true level of unemployment. Summarize these arguments.

• the official unemployment doesn’t take into consideration discouraged workers, unemployed people who aren’t actively seking employment even though they are able

• there is a shift of employment from full time to part time and there is an increase in underemployment

Describe the major differences between short run unemployment and long run unemployment.

• National unemployment policies are focused on addressing long-run unemployment such as structural and cyclical unemployment

• Short-run unemployment is a part of the normal functions of the market system.

Decsribe the difference between core inflation and headline inflation rate measure.

Headline inflation includes all sectors of the consumer market. Core inflation excludes the food and energy sectors.

Describe the difference between hyper-inflation and stagflation.

Hyperinflation is an extreme increase in prices.

Stagflation is when there is an increase in prices along with a stagnant or stalling economy and extremely high unemployment.

The most important determinant of a household’s consumption spending is:

its disposable income

A decrease in the value of the U.S. dollar relative to other currencies will:

shift the autonomous net export function upward.

An increase in autonomous investment will:

shift the aggregate expenditure line upward.

Explain why consumption will not change at the same rate as income in the consumption function.

Savings is a leakage that reduces current consumption and can increase consumption in the long run.

Explain how a increase in the savings rate impact marginal propensity to consume (MPC).

An increase in savings would increase MPS and lower MPC

In the short run, the more you save, the less consumption spending will occur.

Business Phases

• Peak

• Recovery

• Expansionary

• Contractionary

What is a Business cycle indicator?

Can be a statistic that can be used to predict economic trends

Business Cycle Indicator - Leading

• may predict the beginning of a cycle

• Ex. Avg weekly hrs in MFG, housing permits, initial jobless claims

Business Cycle Indicators - Coincident

• Change with general economic conditions

• Ex. Employment, GDP

Business Cycle Indicators - Lagging

• Can clarify/confirm an economic pattern occurring over time

Ex. Consumer Price Index, Prime Interest Rate

Long Run Economic Scenarios

• Recessionary Gap - Actual Short Run RGDP < the National Rate of Unemployment

• Long Run Equilibrium - Actual Short Run RGDP = the National Rate of Unemployment

• Inflationary Gap - Actual Short Run RGDP > the National Rate of Unemployment

• Gaps are modeled with AD-AS model bc they are LONG RUN