Econ 5-8

Worlds biggest city

Pearl River Delta

Gross Domestic Product (GDP)

total value of goods and services produced in a country

Real GDP

• Corrects GDP for annual price changes

• a measure of the economy’s overall output

Microeconomics focuses on:

how decisions are made by individuals and firms and consequences of those decisions

macroeconomics focuses on:

overall behavior in the economy

“The whole is greater than the sum of its parts”

Paradox of thrift

When families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending (depresses the economy)

A widespread downturn in which output and employment in many industries fall is called:

a recession (contraction)

When the economy isn’t in a recession, when most economic numbers are following their normal upward trend, the economy is:

in an expansion (recovery)

Economists measure the state of economy (recession or expansion) by looking at:

employment and real GDP

business cycle peak

the point in Time at which the economy shifts from expansion to recession

business cycle trough

the point at which the economy shifts from recession to expansion

Modern macroeconomics came into being as a response to the 1929-33 recession that ushered in ____

the Great Depression

John Maynard Keynes

The General Theory of Employment, Interest, and Money (transformed macroeconomics)

According to Keynesian economics:

• a depressed economy is the result of inadequate spending

• Government intervention can help a depressed economy through monetary and fiscal policy

Monetary policy

Uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending

fiscal policy

Uses changes in taxes and government spending to affect overall spending

Real GDP and employment move ____ over the business cycle. They ___ during recessions and ___ during expansions

closely together; fall; rise

long-run economic growth

the sustained rise in the quantity if goods and services the economy produces

inflation

a rise in the overall level of prices

deflation

a fall in the overall level of prices

Inflation ___ people from holding onto cash

discourages

price stability

overall level of prices is changing, only slowly

A dollar today doesn’t buy what it did in 1980 because:

the prices of most goods have risen

Open economy

an economy that trades goods and services with other countries

trade deficit

the value of the goods and services US residents bought from the rest of the world was a lot larger than the value of the goods and services US producers sold to customers abroad

trade surplus

the surplus that results when the value of goods and services bought from foreigners is less than the value of the goods and services sold to them.

comparative advantage

countries export goods they’re relatively good at producing and import goods they’re not as goos at producing

____ can explain why an open economy exports some goods and services and imports others, but it can’t explain why a country imports more than it exports, or vice versa

comparative advantage

national income and product accounts (national accounts)

method of calculating and keeping track of consumer spending, sales of producers, business investment spending

government purchases of goods and services

• government buys things for its own use

• total purchases by federal, state, and local governments on goods and services (education/defense)

four types of buyers

• governments at the local, state, federal levels

• households

• firms

• rest of the world

Households engage in consumer spending by:

Purchasing goods and services through the markets for goods and services from firms or imports from the rest of the world

Investment spending

spending on productive physical capital- such as machinery and construction of buildings- and on changes to inventories

final goods and services

goods and services sold to the final, or end, user

intermediate goods and services

goods and services- brought from one firm by another firm— that are inputs for production of final goods and services

GDP

total value of all final goods and services produced in an economy during a given period, usually a year

3 methods for calculating gdp

1. survey/ add up total value of all final goods nd services produced

2. add up aggregate spending on all domestically produced goods and services in the economu

3. Add up the total factor income earned by households from firms in the economy

aggregate spending

• the total flow of funds into markets for domestically produced final goods and serices

• the sum of consumer spending, govt purchases of goods and services, and exports minus imports

GDP measures FINAL production

Sale of used goods: NOT
included.
• The sale of financial assets, such
as stocks and bonds, are NOT
included.
• Production of intermediate goods
(like steel): NOT included

Add up all spending on domestically produced final goods
and services, this results in

the equation GDP = C + I + G + X – IM
C = consumer spending
I = investment spending
G = government purchases of goods and services
X = sales to foreigners, and
IM = imports (purchases here of foreign goods... or income
that has leaked across national borders)

net exports

the difference between the value of exports (X) and the value of imports (IM)

Before the 1930s, economists tended to regard the economy as

self-regulating

Economic decisions that affect billions of people (in the US economy and global economy) are largely based on two economic statistics:

The US unemployment rate and the US inflation rate

American Rescue Plan Act

• Spending bill (March 2021) that provided funds for vaccinations, school re-openings, and other measures directly related to the COVID pandemic, but also provided more than 1 trillion in financial aid to families, unemployed workers, and state and local governments

Employmenty

the total number of people currently employed, either full time or part time

Unemployment

The total number of people who are actively looking for work but aren’t currently employed

A country’s labor force is the sum of:

employment and unemployment (people who are currently working and people who are actively looking for work but aren’t currently employed)

Labor force participation rate

Percentage of working age population that’s in the labor force

(labor force/pop age 16 and older) x 100

Unemployment rate

(Number of unemployed workers/ labor force)x 100

Disccouraged workers

Individuals who want to work but who have stated to government researchers that they aren’t currently searching for a job because they see little prospect of finding one given the state of the job market

The unemployment rate counts discouraged workers, marginally attached workers, and underemployed (T/F)

F

marginally attached workers

People who say they would like to have a job and have looked for work in the recent past but aren’t looking for work

Underemployed

Workers who would like to find full-time jobs but are currently working part time “for economic reasons”— that is, they can’t find a full time job

The federal agency that calculates the official unemployment rate is called:

The Bureau of Labor Statistics

(T/F) The economic expansions aren’t always periods of falling unemployment

True

reasons for job loss

• structural change in the economy industries rise and fall as new technologies emerge and consumers tastes change

• Poor management performance/ bad luck at individual companies

Frictional unemployment

Unemployment due to the time workers spend in job search

(T/F) A certain amount of frictional unemployment is inevitable due to the constant process of economic change

true

Structural unemployment

unemployment that results when there are more people seeking jobs in a particular labor market than there are jobs available at the current wage rate

Minimum wage

Government mandated floor on the wage rate

unions

organizations of workers that bargain collectively with employers to raise wages and improve living standards of their members

efficiency wages

wages that employers set above the equilibrium wage rate as an incentive for their workers to perform better

natural rate of unemployment

• normal unemployment rate around which the actual unemployment rate fluctuates

• Rate of unemployment that arises from the effects of frictional plus structural unemployment

Cyclical unemployment

deviation of the actual rate of unemployment from the natural rate difference between the actual and natural rates of unemployment)

Natural unemployment equation

Natural unemployment= frictional unemployment+ structural unemployment

actual unemployment formula

actual employment= natural unemployment+cyclical unemployment

1. the natural rate of unemployment ___

2. It can b e affected by ___

1. changes over time

2. government policies

what causes the natural rate of unemployment to change

1. changes in labor force characteristics

2. changes in labor market institutions

3. changes in government policies

Real wage

wage rate/the price level

Real income

income divided by the price level

inflation rate formula

inflation rate= ((Price level in year 2- price level in year 1)/ price level in year 1) *100

Shoe-leather costs

the increased costs of transactions caused by inflation (Since cash loses its value quickly during high inflation, people waste more time running around to spend it as fast as they can)

Menu costs

the real cost of changing a listed price

Unit-of-account costs

• Costs arising from the way inflation makes money a less reliable unit of measurement

• Calculations are hard when inflation is high.

Interest rate

the price (calculated as a percentage of the amount borrowed) that a lender charges for the use of his or her savings for one year

Nominal interest rate:

the interest rate expressed in dollar terms

Real interest rate

the nominal interest rate minus the rate of inflation

Aggregate price level

a measure of the overall level of prices in the economy

To measure the aggregate price level, economists
calculate the cost of purchasing a ___

market basket

Market basket

a hypothetical set of consumer purchases of goods and services

Price index

the cost of purchasing a given market basket in a given year, where that cost is normalized
so that it is equal to 100 in the selected base year

The CPI, PPI, and the GDP Deflator all move ____ together

closely

Producer price index (PPI)

measures changes in the prices of goods purchased by producers

GDP deflator measures the price level by

calculating the ratio of nominal to real GDP

The GDP deflator for a given year is ___ times the ratio of nominal GDP to real GDP in that year

100

rule of 70s

number of years for variable to double= (70/ Annual growth rate of variable

Labor productivity (often referred to simply as
productivity)

output per worker

Physical capita

human-made resources, such as
buildings and machines

Human capital

the improvement in labor created by the education and knowledge embodied in the
workforce

Technological progress

an advance in technology means of production in goods and services

Productivity function

a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker, as well as the state of technology

additional amounts of physical capital are ___
productive when the amount of human capital per worker and the technology are held fixed.(assumes all other things equal)

less

Total factor productivity

the amount of output that can
be produced with a given amount of factor inputs

Sustainable long-run economic growth

long-run growth that can continue in the face of the limited supply of natural resources and the impact of growth on the
environment

Climate change

the change in the earth’s climate due to
human activities

WHAT FASTER-GROWING COUNTRIES DO

1) Rapidly add to their physical capital through high
savings and investment spending.
2) Increase their human capital through upgrading their
educational level.
3) Make fast technological progress.

Very high savings rates allow businesses to

borrow and add more physical capital per worker

Very good basic education has permitted a

rapid improvement in human capital

Economic growth can be especially fast:

a) for countries playing catch-up with countries that
already have high real GDP per capita.
b) for relatively poor countries if the convergence
hypothesis holds true.
c) if the country is able to benefit from adopting the
technological advances already used in advanced
countries.

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

Unit-of-account