Econ - Unit 2

Product Market

Households purchase goods and services

Factor Market

Firms buy resources (labor)

Expanded Circular Flow

Government activity

Transfer Payments

Nothing received in exchange

Private Savings

Flow into government borrowing and investment spending

GDP

Measure of final output

Size and Scale

From which to compare economic performance

Unemployed

Actively looking but not currently employed

Labor Force

All working age individuals willing and able to work

Labor Force Participation Rate

Percent of the working age population in the labor force

Discouraged Workers

Not actively seeking employment

Underemployed

Working part time or below their skill set

Frictional Unemployment

Time spent between jobs

Structural Unemployment

Mismatch in characteristics of job seekers and jobs available (technology, location, skills)

Natural Rate of Unemployment

Arises from the effects of frictional plus structural unemployment (normal)

Cyclical Unemployment

Deviation from actual and natural, arises from downturns in the business cycle

Change in Government Policies

High minimum wage = structural unemployment; generous benefits = less incentive to work

Inflation

Rise in the overall level of prices

Deflation

Fall in the overall level of prices

Price Stability

Price level is changing slowly if at all, avoids uncertainty

Real Wage

Wage rate divided by the price level to adjust for the effects of inflation or deflation

Real income

Income divided by the price level to adjust for the effects of inflation or deflation

Inflation rate

Percent increase in the overall price level per year

Aggregate price level

Single measure of overall level of prices in the economy

Market Basket

Hypothetical set of consumer purchases of goods and services (consumption bundle)

Price index

Measures the cost of purchasing a given market basket in a given year

Consumer price index drawbacks

Substitution bias, product improvements, innovation

Shoe Leather Costs

Increases costs of transactions caused by inflation

Menu Costs

Changing a listed price as a result of inflation

Unit of Account Costs

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

Nominal Interest rate

Interest rate that is paid

Real interest rate

Nominal interest rate minus inflation

Disinflation

Process of bringing inflation down

Aggregate Output

Total quantity of final goods and services produced in an economy

Real GDP

GDP adjusted for inflation

Recession

Occasional downturns; declines spread over a few months in many sectors

Trough

Lowest point of the downturn

Expansion

Output and employment rise (recovery)

Peak

Highest point of expansion

Economic Growth

Increase in the maximum amount of goods and services produced

Full Employment Output

Level of real GDP when all resources are fully employed (potential GDP)

Output Gap

Actual output vs potential output

Labor Force Participation Rate Formula

(labor force/16 and older)(100)

Unemployment Rate Formula

(# of unemployed/labor force)(100)

Inflation Rate Formula

((price index year 2 - price index year 1)/price index year 1)(100)

Price Index Formula

(cost of market basket in a given year/cost of market basket in base year)(100)

GDP Deflator Formula

(nominal GDP/real GDP)(100)

Real GDP Formula

(nominal GDP/GDP deflator)(100)

Real GDP Per Capita Formula

GDP/population