econ exam 2

economic growth

sustained expansion of the PPF measured as the increase in rGDP over a given period

growth rate equation

current year gdp - previous year gdp/previous year gdp x 100

rule of 70

takes approximately 70/growth rate years for initial rGDP to double assuming

standard of living = rGDP per capita equation

rGDP/population

fir standard of living to grow…

rGDP growth rate>population growth rate

rGDP is a …. trend

upward

treadline

potential GDP(pGDP) —> rGDP if all FOP are fully employed

rGDP fluctuates around …. trend

pGDP

components of a business cycle

peak—>recession—>trough—>expansion—>peak—>

fluctuations

business cycles—> markets change at the micro level thus rGDP outperforms or falls short of trend

pGDP is determined by what function

production function: y=f(FOP)—>y=f(L)

production function is..

increasing

subject to diminishing returns (increases at a decreasing returns)

at optimal level of inputs (L) we find rGDP=pGDP

catch up effect

due to diminishing returns of production function poorer/developing countries grow faster than richer/developed countries

recall

economic growth is expansion of optimal output (quantity) level pGDP - rGDP

working age population

ages 15-64

not in labor force

not working or actively searching for a job (students, homemakers, retirees)

labor force

• employed: has a job

• unemployed: no job, but 1. searched in past 4 weeks 2. waiting to be called back to a previous job 3. starting new job in next 30 days

labor market indicators

employment to population ratio

labor force participation rate

employment rate

unemployment rate

employment to population ratio

EMP/WAP x 100 utilization of WAP

labor force participation rate (LFP rate)

LF/WAP x 100 the willingness to work in the population

employment rate

EMP/LF x 100. expresses L* as

unemployment rate

(UR)

Unemp/LF x 100 most broadly used for utilization of LF

potential short comings

• discounts marginally attached workers would want to work but not looking because e.g. discouraged

• parttime workers wanting to work full time

• unemployment insurance applicants, not necessarily wanting to work

only given employment rate

LF - emp/LF x 100

what are the 2 types of unemployment

natural and cynical

natural unemployment

1. frictional: due to normal labor market turnover. natural process of creation/destruction of jobs and matching (free to do so)

2. structural: due to technological/industrial changes. natural process of structural economic evolution

cynical unemployment

due to expansive and recessive periods of business cycles —>unpredictable, worrisome

when only NU is present, economy is at…

full employment

determinants of NUR

• age distribution of population: 25-54

• scale structural econ change

• real wage rate: purchasing power of salaries

• minimum wage, unions, other policies: might create unemployment by disturbing market equilibrium

• unemployment benefits: higher benefits might decrease propensity to work

pGDP:

rGDP at full employment (NU only) —> find pGDP

measuring deviations:output gap

OG=rGDP-pGDP