ECON 2105 Exam Two

Chp 10, 11, 12, 15

What is GDP

The market value of all final goods and services produced within a country in a given period of time, also total income + total spending

Market Value

Market price and quantities produced

Final goods

Goods that are completely processed, not including intermediate goods

Examples of secondary markets that are not counted for GDP

Garage sales, thrift stores, used cars

What production counts toward GDP

Domestic

What are the four components of GDP

Consumption, Investment, Government Spending, Net Exports

Consumption

Purchases for final goods and services by households, does not include housing

Investment

Purchases of capital goods, to be used to produce more goods and services, not including stocks and bonds

Investments is the sum of

business and residential capital and inventories

Government spending

Includes public official salaries, land purchases, public works spending, military purchases

What does government spending not include

Social security, unemployment insurance, interest payments on debt

Net Exports

Exports minus imports

Why are imports subtracted

Only domestic production should be counted and the purchase of imports are already counted in household consumption

Nominal GDP

Measures a country's economic output without adjusting for inflation. It represents the total value of all goods and services produced within a country's borders in a specific period.

GDP Deflater

A measure that adjusts the nominal GDP to reflect changes in price levels, providing a more accurate representation of real economic growth.

Formula for GDP Deflater

(Nominal GDP/Real GDP) * 100

How do total income and total expenditure relate

They should be equal

Why is GDP not the perfect measure of well-being

Leaves out human need for leisure and the quality of the environment

If an American college student moves to Japan to teach English, her salary is included in

only Japan’s GDP

An American buys a pair of shoes made in Italy. How does the U.S. national income accounts treat the transaction

Net exports fall, while GDP does not change

What is the largest component of GDP

Consumption

Consumer Price Index (CPI)

The overall cost of goods and services for a representative basket of goods and services at a given time consumed by the average household

What goes in the basket?

Food and beverage, transportation, housing, education, clothing, medical care, etc

CPI formula

(Price of basket of goods and services in current year)/(Price of basket in base year) * 100

Formula for Inflation Rate

(CPI Y2 - CPI Y1)/(CPI Y1) * 100

If Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S> Army, it price hikes will increase

the GDP deflator but not the CPI

Because consumers can sometimes substitute cheaper goods for those that have risen in price

the CPI overstates inflation

Problems with CPI as a measure of inflation

Substitution bias, new goods, and unmeasured quality. change

Benefit of economic growth

Increases standard of living, often caused by increase in education

Productivity

Quantity of goods and services per unit of labor input

What determines productivity?

Physical capital, human capital, natural resources, and technology

What is the benefit of a larger stock of capital goods?

Greater amount of possible future production

Diminishing-Returns

As a nation’s stock of capital increases, each additional unit of capital produces less additional output

Catch-Up effect

Diminishing marginal product of capital, less developed nations have relatively higher growth compared to more developed nations

Foreign Direct Investment

Owner of domestic capital by a foreign entity- can be beneficial to growth, example: Ford production facilities in Mexico

Potential Output

The economy’s maximum sustainable output, and occurs at the natural rate of unemployment

Actual Output

The economy’s actual production, can be greater or less than potential output

Aspects of the Business Cycle

X-Axis: Real GDP, Y-Axis: Time, business peaks, recessionary troughs, contraction, expansion

An increase in the amount of human capital in the economy tends to ______ real incomes because they increase the _______ of labor

Increase; productivity

Because capital is subject to diminishing returns, higher saving and investment do not lead to higher

Growth in the long run

What qualifies unemployment status

Not employed, available for work, and actively searching for work in the last four weeks

Labor force participation rate

The labor force participation rate is the percentage of the working-age population that is either employed or actively seeking employment.

Labor force participation rate formula

(Labor force / total working-age population) * 100

Formula for unemployment rate

(Number of unemployed individuals / Labor Force) * 100

Employment/population ratio

(Employed individuals / total population) * 100

What is the natural rate of unemployment

The level of unemployment that exists when the economy is in a state of equilibrium, with no cyclical unemployment.

Frictional Unemployment

Imperfect information in labor markets

Example of frictional

When a college graduate just graduated and is actively looking for work

Structural Unemployment

When labor supplies exceed labor demand

Example of Structural

A local business has several vacancies but there are too few locals with skills for the positions

Cyclical Unemployment

Unemployment resulting from the business cycle

How does recessions relate to employment

Decrease household consumption means less demand for labor and then layoffs.

Price floors

Minimum price set, that the market price cannot fall beneath

What is an example of a price floor

Minimum wage laws

Efficiency Wages

When firms pay higher than market clearing wages to improve productivity

A Minnesota farmer buys a new tractor (a capital good) that was produced domestically in Iowa by a German company. What affect would this expenditure have on GDP for the US/Germany

US GDP increases, but German GDP is unaffected

New residential housing is included in GDP as what type of expenditure

Gross private domestic investment

Why is buying a used car not counted in that year’s GDP

It was counted in the year it was originally sold in

When computing the consumer price index, a base year is chosen. Which of the following statements about the base year CPI is correct

The CPI is always 100 for the base year

A sales associate receives a $100-per-month raise in 2024. He figures that even with his increased monthly earnings, he will be unable to buy as many goods and services as he could 12 months ago. Why is this?

His nominal income has increased, but because of inflation, his real income has fallen.

Suppose Volvo (a Swedish car company) produces a new car at a factory in Cleveland, Ohio. Volvo then imports that car to Sweden to sell locally. Which country’s GDP will the car be counted in?

The US, because it was produced in Ohio