econ final

used by the final user

Final goods

real interest rate formula

Nominal interest rate minus inflation rate

What rates of growth are predicted for China in the future?

2-3% per year

When unemployment rises above the natural rate

the economy is producing below potential GDP

what role do institutions seem to play in growth?

They support low corruption, respect for property rights, a fair legal system, capable government agencies, and predictable rules for businesses

How did prices convey information (a term used in class)? Hint: What happened with the price of pasta relative to that of vegetables?

prices acted as signals that told food banks what was scarce and what was abundant

Does Fed Chair Jerome Powell agree with this assessment

He thinks it's too soon to predict, but the economy usually performs better than predicted.

why is the PCE index important to the Fed

They use it for its inflation goal of 2%

growth rate for China

9%

How do banks turn a profit

High interest rate on loans

(i) a manufactured good (ii) owned by businesses that (iii) produce goods and services

Capital

used up or transformed into another good

Intermediate goods

The purchase of capital (K), or Change in inventories (goods to be used or sold later) by a business, or The purchase of a new house or apartment: only investment made by a household

Investment

How to calculate real GDP

quantity goods and services produced in a year * base year prices

How to calculate nominal GDP

current year quantities times current year prices

Components of GDP

C+I+G+NX

constant dollar GDP

Real GDP

current dollar GDP

Nominal GDP

purchases by households

Consumption

newly produced final good or service bought by the government

Government purchases (G)

Net exports (NX)

Exports minus imports

Inventory investment makes up for the difference between

sales to final users and total production

Why are imports subtracted from expenditures

Because GDP only reflects domestic production

what is a trade deficit

When exports are less than imports

There turns out to be little connection between

trade deficits, economic growth, and the unemployment rate

A change in federal expenditures (federal purchases (G) + transfers +interest payments) & / or federal taxes (T)

Fiscal policy

how to calculate GDP deflator

(Nominal GDP/real GDP)*100

measures the "price level" (average price of all final goods and services in an economy)

GDP deflator

CPI

(value of market basket in period t/value of market basket in base period) *100

Three largest expenditure weights of the US CPI

Housing, transportation, food and beverage

economic growth rate formula

(GDP2 - GDP1)/GDP1

personal consumption expenditures, Does not use a fixed market basket (uses "chain weights") , Better adapts to changes in purchases than the CPI, Better than the CPI for comparisons across decades

PCE

what doesn't GDP include

production in the home, production in the underground economy, the value of leisure, pollution, changes in crime, and changes in social problems

inflation without food & energy prices

Core CPI

Inflation rate for headline CPI

((CPI(current)-CPI(past))/CPI(past))

why are real interest rates important

remove inflation by putting into today's values

changes in interest rates & the money supply by a country's "central bank" (typically an independent part of the government)

Monetary policy

What did the Fed do to interest rates in 2020

Dropped them to 0%

Harm from unanticipated inflation

Can reduce real wages, Can reduce real interest rates, Aids, debtors, harms lenders

harm from anticipated inflation

Those on fixed incomes left behind, Menu costs, Value of money declines

why does the Fed have an inflation goal of 2%

To keep stable prices

A financial security that represents a promise to repay a fixed amount of funds

bond

a financial security that represents partial ownership of a firm

Stock

why is it hard to beat the market

Stock prices are based less on their current profitability and more on their expected future profitability

Why isn't economic growth zero sum?

if countries got rich at the expense of others, then real per capita GDP around the world would be constant over the years

What is the relationship between human health and economic growth

If a country has a better performing economy, people are generally healthier

Average annual growth rate formula

(final value/initial value)^(1/difference in years) -1 (multiply by 100)

rule of 70

Years to double= 70/growth rate

explain why small differences in growth rates matter dramatically over long periods.

A small difference in annual growth rates leads to massive differences in income, output, or living standards when compounded over many years because growth builds on itself

explain how real GDP per person is determined by the percent of the population that works and labor productivity

Real GDP per person rises when a larger share of the population works and when each worker produces more

horizontal axis of the per worker production function

K/L

vertical axis of the per worker production function

Y/L

Y/L

A•(K/L).3

What is the best description of why the Soviet Union collapsed?

diminishing returns to capital

In today's world, domestic natural resources don't aid growth; on average, they actually hinder growth.

Curse of resources

government controls all business & directs what they do (markets illegal)

Command economies

no government intervention in markets

Pure market economies

mostly markets, but some intervention

Mixed economy

explain why U.S. economic growth might be slower in the next few decades.

There isn't much more for us to innovate because we've already invented almost everything

labor force

employed + unemployed (or working & job searching)

In government statistics, someone who currently has a job or who is temporarily away from his or her job.

Employment

not working but actively searching

Unemployment

Unemployment rate formula

unemployed/labor force *100

Underemployment rate formula

(unemployed + marginally attached +part-time but want full-time/labor force +marginally attached)

Labor force participation rate

labor force/working age population x 100

those who want to work and looked in the last 13 months but not last month due to (i) non-economic reasons or (ii) think are no jobs for them ("discouraged workers")

Marginally attached

The normal rate of unemployment, consisting of frictional unemployment and structural unemployment.

Natural rate of unemployment

When the economy is at the natural rate of unemployment

It is producing potential GDP

when unemployment falls below the natural rate

the economy is producing above potential GDP

Short-term unemployment that arises from the process of matching workers with jobs.

Frictional unemployment

Unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs.

Structural unemployment

Unemployment caused by a business cycle recession.

Cyclical unemployment

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Recession

5 main causes of recessions

Oil shock, fiscal shock, monetary shock, pandemic, financial shock

impact of the Covid Recession on the labor market

Led to unemployment reaching almost 15%

all spending in an economy for different values of the price level (P)

Aggregate demand

all production

Aggregate supply

Influences on short run aggregate supply

Inputs, K, L

where all spending (AD) equals all production (SRAS).

Equilibrium

Why is the Fed willing to lend to banks in financial difficulty

To avoid a collapse in the economy. In this role, they operate as a "lender of last resort."

Why can banks be vulnerable to runs?

They do not have sufficient liquidity (money) to meet the needs of all the deposit customers

Traditional pension plan that the employer manages & the benefits are based on salary & years of employment

Defined benefit

You select amount of money put into one of these plans every month (employer may match your contribution)

Defined contribution

Which retirement plan is a young worker most likely to be offered and why is this important

Defined contribution and it's important because you select the investment of your contributions

Likelihood of young people receiving social security benefits in their retirement years

80-100%

Nominal GDP (2025 III)

$31.1 trillion

Real GDP (2025 III)

$24 trillion

Economic Growth (2024 III to 2025 III, annual rate)

2.3%

GDP Deflator (2025 III)

129.4

Inflation rate with the GDP deflator (2024 III to 2025 III)

3%

CPI (12/2025)

326

Inflation rate with the CPI (12/2024 to 12/2025)

2.6%

federal expenditures (2025)

$7.3 trillion

federal revenue (or taxes) (2025)

$5.6 trillion

federal deficit (2025)

$1.7 trillion

federal debt (2025)

$28 trillion

What are some of the African countries that have done well in terms of increasing real per capita GDP (or, put another way, real income per person)?

mauritius, botswana, rwanda, ethiopia, ghana

Which have seen little increase?

madagascar, zimbabwe, democratic republic of congo, chad, niger, central african republic

What role do free markets seem to have played in helping African economies grow or not?

open economies have helped the countries grow because they attract investment, create jobs, and diversify beyond agriculture

systems that support a functioning economy

institutions