Econ 211 Exam 2 - UNL

2 ways economic growth is measured

Nominal and real GDP

Nominal GDP

often appear higher than real GDP, not adjusted for inflation (GDP17=P17 x Q17)

Real GDP

adjusted for inflation (GDP17=P09 X Q17)

GDP is reported..

Quarterly (Advanced, Premlim and final)

Economic growth is measured as

a % change in real GDP on an annual basis (real GDP2 - real GDP 1 / real GDP 1) x 100

another way to measure economic growth

change in real GDP per capita ( Per capita GDP2 - per capita GDP1 / pre capita GDP1) X 100

Importance of economic growth

- lessens the burden of scarcity

- expand production possibilities

- more resources & incomes

- get more goods & services to meet unlimited wants

Rule of 70

- how many years it will take for an economy to double

- divide average annual % rate of economic growth into 70 (70/1.0% = 70 years to double)

Modern economic growth

After late 1770's, sustained and continual economic growth

History of modern economic growth

before the late 1770's nations experienced limited/sporadic economic growth which lead to living standards not changing much from century to century

- living standards improved

-changes occur w/in less than a human lifetime

Economic growth started when

- industrial revolution in 1776

- James Watt invented the steam engine which lead to new factories, mass production of goods, different forms of transportation, later was replaced by electric power and oil

How can follower nations catch up to leader nations?

- Leader nations invent technology while follower nations adopt technology

- higher long-term growth rates for follower nations

Institutional structures that promote growth (main 6)

- strong property rights

- patents & copyrights

- efficient financial institutions

- literacy & education

- free trade

- competitive market system

other structures that promote growth (2)

- stable politcal system

- positive attitude towards work

What factors contribute to economic growth over time?

- supply factors

- efficiency factors

- demand factors

Supply factors for economic growth

- Natural resources

- human resources

- capital resources

- technology

supply factors can

expand the economy's potential, takes effect in a long time period

Daman factors for economic growth

-full employment of resources (no deficiency in total spending)

- takes effect in a short time period

efficiency factor for economic growth

- productive efficiency (least-cost methods of production)

- allocative efficiency (resources allocated to their best use, production of goods most wanted by society)

Efficiency is

a continual concern & takes time to be effective

Change in real GDP depends on:

-Labor inputs (worker-hours)

-labor productivity

(worker-hours(H) X Labor productivity(P))

worker-hours depends on:

average hours of work, size of work force

Labor productivity

output divided by the # of units of labor input (output/input)

how to increase real GDP

-more worker-hours

-more productivity

factors that contribute to increased productivity

-technological advance (40%)

-quantity of capital (30%)

-education and training (15%)

-economies of scale (7.5%)

-improved resources allocation (7.5%)

critics of growth

-environmental problems

-not solved human problems

-more obsolescence and insecurity

-not sustainable

relationship between productivity growth and standard of living

increased productivity = increased standard of living

supporters of growth

-higher standard of living

-more capable of handling human problems

-improved quantity of labor

-may help environment

Business cycles

-peak: business activity reaches temporary max

-recession: period of decline in total output

-trough: production/output reaches lowest point

-expansion: output increases

recession

last 6 months or more

-great depression: 43 months

business cycle in long run

there will be an upward trend in economic growth

-increase in size of real GDP

-positive rate of economic growth

business cycle in short run

there can be fluctuations in the economy

what causes business cycles?

changing expectations that create shocks which lead to business cycles

type of shocks that lead to business cycles

-irregular innovation/technological change

-unexpected changes in productivity

-uncertainty in political events

-uncertainty about monetary policy

-instability in financial institutions & markets

Immediate cause

unexpected changes in total spending that leads to a demand shock

what happens after a shock occurs?

-fall in profits

-reduced employment

-cut back production

-fall in incomes

inventory in short-run

helps firms adjust to demand shocks

inventory in long-run

changes do not work

"sticky" prices

when in the short-run and prices are mostly fixed or "sticky" b/c of

-consumers prefer stable prices

-firms want to avoid price wars

effects on durable goods

more effect

-less consumer spending on durables (cars)

-less business investment

effects on nondurables

less effect

-spending holds up better (food, clothing)

effects on services

less effect on basic services

Measuring unemployment

BLS measures it

unemployment rate= unemployed/labor force X 100

total population and labor force

-under 16 and/or institutionalized

-not in labor force

-employed (labor force)

-unemployed (labor force)

problems of unemployment rate

-underestimates unemployment

-involuntary part-time workers who want to work full time

-"discouraged" workers who are no longer looking for work

-leads to a declining participation rate

types of unemployment

-frictional

-structural

-cyclical

frictional unemployment

search & wait for new job

structural unemployment

change in composition of work force

cyclical unemployment

downturn in the business cycle

"full employment"

= frictional + structural unemployment

"natural rate of unemployment"

Okun's law

for every 1% the unemployment rate differs from its national rate, a 2% gap is generated between potential & actual GDP (difference X 2)

real GDP Gap

-if unemployment rate= natural rate then potential real GDP = actual real GDP

-if unemployment rate > natural rate then potential real GDP > actual real GDP

-if unemployment rate < natural rate then potential real GDP < actual real GDP

noneconomic costs

-career effects

-health effects

-family effects

-social effects

-political effects

duration of unemployment

mean: 24 weeks

median: 11 weeks

Inflation

the increase in the general level of prices over some time period

consumer price index (CPI)

measures price changes in a fixed market basket

of goods & services

- Q is fixed, P varies with a base period of 100.00

CPI of 115 means

something that used to cost $100 now costs $115, price increased by 15%

calculating % change in prices

= index 2 - index 1 / index 1 X 100 (=inflation rate)

what makes CPI less volatile

removing food & energy prices

nominal income

income in current $ (real income + inflation rate)

real income

income in base year $ (nominal income - inflation rate)

converting nominal to real income

#1- express price index in 100ths for each year (240.9/100=2.409)

#2 divid nominal income by price index for each year (80,000/2.409=33209)

redistributive effects on inflation

-unanticipated inflation

-anticipated inflation

unanticipated inflation

hurst fixed income receivers, savers & lenders

anticipated inflaiton

helps borrowers and flexible income people

demand-pull inflation

excess demand for goods & services given supplies

-"too much $ chasing too few goods"

output effects of demand-pull inflation

-may not be harmful if mild

-gives flexibility to the economic system

cost-push inflation

increase in cost of production from wages and resources, reduces profits and amount firms supple

output effect of cost-push inflation

-reduces output

-reduces income

hyperinflation

-demand-pull inflation is the extreme

-excess $ supply

output effect of hyperinflation

-inflationary expectations create a fear factor

-wastes time & resources trying to protect purchasing power

aggregate demand (AD)

shows the amount of goods and services which will be purchased at each possible price level

reasons for downsloping AD curve

-real balances effect

-interest rate effect

foreign purchase effect

real balance effect

higher price level decreases the real value of financial assets

-decreases household wealth & consumer spending

-decreases real GDP

interest rate effect

higher price level increases the nominal interest rate

-decreases consumer spending on interest-sensitive products and business investment

-decreases real GDP

foreign purchases effecr

higher price level decreases net export spending

-decreases spending on US exports and increases spending on US imports

-decreases real GDP

major AD shifts factors

-consumer spending (C)

-investment spending ( Ig)

-government spending( G)

-net export spending (Xn)

ALL AD factors

-consumer wealth

-consumer expectations

-household indebtedness

-personal taxes

investment spending

-real interest rates

-expected returns (profits)

Net export spending

-national income abroad

-exchange

change in consumer spending that increases AD

-consumer wealth (increases so AD increases)

-consumer expectations (positive so AD increases)

-household borrowing (increases so AD increases)

-personal taxes ( decreases so AD increases)

change in investment spending that increases AD

-real interest rate decreases

-expected returns (profit) increases

-technology improves

-excess capacity decreases

-gov. spending increases

-national income abroad increases

-exchange rates dollar depreciates

Net export

exports-imports

Aggregate supply

shows amount of goods and services (real output) which will be produced at each possible price level

immediate short-run for AS

horizontal

short-run for AS

upsloping (main focus)

long-run for AS

vertical

PUPC

input price/productivity = input price/ (output/input) = (input x input price)/(output) = total input cost / output

Effects that increase AS

-domestic resource prices decreases

-prices of imported resources decreases

-productivity increases

-business taxes decrease

-business subsidies increase

-Gov. regulations decrease