Econ 104 midterm

Employed + Unemployed

Labor Force = __________ + __________

Unemployed / Labor Force x 100

Unemployment Rate = __________ / __________ × 100

Labor Force / Civilian Noninstitutionalized Population x 100

Labor Force Participation Rate = __________ / __________ × 100

Employed / Civilian Noninstitutionalized Population x 100

Employment-Population Ratio = __________ / __________ × 100

Which person is officially counted as unemployed?

A worker who has no job, is available to work, and applied to jobs during the last four weeks

What is the best example of Frictional unemployment

A recent graduate is searching for a first full-time job.

What is the best example of Structural unemployment

Factory jobs now require software skills that some displaced workers do not have.

What is the best example of Seasonal unemployment

lifeguard is out of work when the beach closes for winter

What is the best example of Cyclical unemployment

A recession causes firms across the economy to cut jobs because total spending falls.

Hidden unemployment

includes people who want work but are not counted in the official unemployment rate, such as discouraged or marginally attached workers who have stopped searching recently.

Underemployment

includes workers who are employed but cannot get the hours or type of work they want, such as an involuntary part-time worker who wants full-time work.

Which statement best describes the labor market discussed in the last class before the exam?

Unemployment is about 4.2%; the labor market is not collapsing, but hiring is relatively slow and recent graduates face unusual difficulty

What is the first problem with the official unemployment rate

it includes every discouraged worker and every involuntary part-time worker.

What is the second problem with the official unemployment rate

involuntary part-time workers are counted as employed even if they want much more work

How does the BLS address problems with the official unemployment rate

By publishing broader alternative measures that add marginally attached workers and involuntary part-time workers. it also seasonally adjusts data to remove predictable seasonal swings

Economics

Study of how people manage scarce resources to meet needs and improve well-being.

Macroeconomics

Study of the economy as a whole: national output, unemployment, inflation, and growth.

Social science

Systematic study of human behavior and institutions using evidence, models, and interpretation.

Paradigm

A structure of thought that shapes what questions are asked and how evidence is interpreted

True

True / False - Because economics is a social science, two economists using different paradigms can look at the same recession and emphasize different causes or solutions.

Orthodox / neoclassical economics

Mainstream approach emphasizing individual choice, markets, and capitalism.

Political economy / Marxian analysis

Focuses on power relationships, including workers and owners of capital.

Institutional economics

Focuses on major institutions and how technologies and systems develop.

Keynesian economics

Emphasizes aggregate demand and supports intervention when markets fail to maintain full employment.

Adam Smith

Early economist associated with specialization, markets, private property, wage labor, profits, and laissez-faire.

employment, stability, growth.

Traditional goals: high __________ / low unemployment; price __________ / low and predictable inflation; economic __________.

living standards, security, sustainability

Broader modern goals: __________ standards; stability and __________; __________.

The three traditional goals

Economic growth, full employment, price stability

Which statement best answers “How do we measure economic growth, and how big is the U.S. economy?”

Using real GDP. The U.S. economy is on the order of $30 trillion-plus in annual nominal output.

Best

Opportunity cost is the value of the __________ forgone alternative.

False

True / False - An efficient point on a PPF must also be the fairest or socially best point.

Why is a typical PPF bowed outward rather than a straight line?

Because resources are specialized and not equally productive in every use. As an economy shifts more resources toward one good, it increasingly uses resources that were better suited to the other good, so the opportunity cost rises.

What causes a PPF to shift outward?

Can result from more resources, a larger or more skilled labor force, more capital, technological improvement, or productivity gains. Means the economy can produce more than before.

What causes a PPF to shift inward?

Can result from destroyed capital, loss of labor/resources, war, disaster, or a major decline in productive capacity. Means its maximum feasible production has fallen.

Public goods example

Benefits are broadly available and one person’s use does not greatly reduce another’s.

Externalities example

Factory pollution harms people who were not part of the transaction.

Transaction costs example

Search effort, legal work, time, and fees make exchange costly

Market power example

A dominant seller can strongly influence price or terms of exchange.

Information and expectations example

Buyers cannot accurately judge quality and future conditions are uncertain.

Human needs and equity example

Ability to pay leaves some people unable to obtain necessities.

Human needs and equality, information and expectations, market power

A pharmaceutical treatment is lifesaving, but some people cannot afford it; patients also have difficulty judging its quality, and the manufacturer has almost no competitors. Identify THREE distinct market-failure concerns in the example.

Which statement best defines GDP?

The total market value of final goods and services newly produced within a country’s borders over a period of time

Current-year prices

Nominal GDP values current production at __________

base-year prices

Real GDP values current production at __________

Nominal GDP / Real GDP

GDP Deflator = __________ / __________

Nominal GDP / GDP Deflator

Real GDP = __________ / __________.

Real GDP x GDP Deflator

Nominal GDP = __________ x __________

Nominal GDP

values output using current prices, so it can rise because prices rise even if the quantity of output does not.

Real GDP

values output at constant base-year prices, so it isolates changes in actual production.

Why is the distinction between real and nominal GDP important?

The distinction matters because economic growth should measure changes in output, not merely inflation.

Prices

The Consumer Price Index (CPI) measures the average change in __________ over time for a fixed “basket” of goods and services typically purchased by households.

What is the first major problem of using GDP as a measure of well-being

GDP excludes valuable unpaid household and volunteer work. for example, unpaid childcare at home is not counted even though paid daycare is.

What is the second major problem of using GDP as a measure of well-being

GDP can count spending that responds to harm as positive production—for example, paid cleanup after an oil spill raises GDP even though the spill damaged well-being. Other valid problems include inequality, leisure, pollution/resource depletion, and quality differences.

Why do Marilyn Waring and others argue that GDP undervalues women’s work?

Because a large amount of unpaid household and care work, historically performed disproportionately by women, is excluded from market-based GDP even though it produces real value, such as childcare, elder care, cooking, cleaning, and household management.

Unpaid work

A parent provides childcare at home without pay.

Inequality

Total GDP rises, but most gains go to a small share of households.

Environmental limits

Production rises while pollution and resource depletion worsen.

Well-being vs GDP

Output rises, but health, leisure, safety, or life satisfaction do not necessarily improve.

How should GDP be used

Use GDP as a consistent measure of market production and Real GDP to track output over time.

What alternatives or complements to GDP can solve some of its problems?

Pair it with broader indicators such as GDP per capita, poverty and inequality measures, employment and underemployment, health and life expectancy, education, hours worked and leisure, subjective well-being, and environmental measures such as pollution and climate stability.

How shouldn’t GDP be used

as a complete measure of happiness, fairness, sustainability, or quality of life.

Division of labor / specialization

Workers focus on narrower tasks, develop skill, and raise productivity.

Private property

individuals and firms own land, factories, and businesses rather than people being tied to feudal status.

Free wage labor

Workers are not owned and can leave or change jobs

Markets

Prices and quantities are coordinated through buying and selling

Profits / incentives

Returns motivate production, innovation, and investment.

Laissez-faire

Government should not heavily interfere with ordinary economic activity

Say’s Law

producing supply generates income sufficient to create demand for output.

how does keynes disagree with say’s law?

argued that households and firms can choose not to spend enough of that income, so aggregate demand can be insufficient. When businesses cannot sell output, they cut production and employment, which reduces income and can weaken demand further.

What were Keynes’s main criticisms of Classical Economics

• Markets can suffer from insufficient aggregate demand

• Saving does not automatically become enough productive investment

• Falling wages/prices do not guarantee a rapid return to full employment.

• Weak demand can create a vicious cycle: firms sell less, cut output and jobs, household income falls, and spending falls again.

What did Keynes propose to “fix” capitalism

Wanted to preserve capitalism but stabilize it through public policy: supporting household spending, direct government purchases, lower interest rates to encourage private investment, and in some cases greater public direction of investment. The goal was to restore total demand and employment when private spending was too weak.

Similarities between the Great Depression, the 2007-2009 financial crisis, and the COVID recession.

• all produced major declines in output and employment

• all spread through the broader economy

• all prompted major government and/or central-bank intervention.

first difference between the Great Depression, the 2007-2009 financial crisis, and the COVID recession.

Causes:

• Great Depression involved deep financial and demand collapse.

• 2007-09 centered on housing, leverage, and the financial system.

• COVID began as a public-health shutdown and supply/demand shock

second difference between the Great Depression, the 2007-2009 financial crisis, and the COVID recession.

Speed:

• COVID employment/output collapsed extraordinarily fast.

• the Great Depression unfolded over years.

• 2008 was severe but more gradual than COVID.

third difference between the Great Depression, the 2007-2009 financial crisis, and the COVID recession.

Duration:

• the Great Depression was far longer

• COVID’s initial contraction was extremely sharp but comparatively brief

• the Great Recession lasted longerthan the COVID contraction but was much shorter than the Depression.

fourth difference between the Great Depression, the 2007-2009 financial crisis, and the COVID recession.

Financial system: the banking/credit system was central in 1929-33 and 2007-09, while it was not the original cause of COVID

Which transaction occurs in the factor market?

A worker supplies labor to a firm and receives wages.

Production, Income, Spending

Complete the macroeconomic accounting identity: Value of __________ = Value of __________ = Value of __________.

How is the circular flow a diagram of the income of the economy?

Firms pay households income for productive resources, and households use income to buy goods and services. The same underlying economic activity can therefore be viewed as the value of what is produced, the income earned in producing it, or the spending used to purchase it.

Core sphere example

family caring for a child at home.

Business sphere example

A for-profit bicycle shop.

Public purpose sphere example

Government or a nonprofit directly operating a service

Natural environment example

Supplies energy/materials and receives waste/pollution.

Regulation / public purpose example

A government agency setting safety standards.

The three spheres

Core, Business, Public Purpose

The core sphere

includes households, families, care, community activity, saving, consumption decisions, and other unpaid work.

The Business sphere

includes for-profit production and market exchange.

The Public Purpose sphere

includes government and mission-based/nonprofit organizations that regulate and/or directly provide goods and services.

Why can an economy be at “full employment” even when the unemployment rate is above zero?

Normal frictional and structural unemployment remain even in a healthy labor market. People are always entering, leaving, and switching jobs, and some workers’ skills or locations will not immediately match open positions. Full employment means little or no cyclical unemployment, not literally zero unemployment.

A country’s Nominal GDP rises 6%, Real GDP rises 1%, and unemployment stays low. Give one reason not to declare the economy universally health

Most of the Nominal GDP increase reflects higher prices, and aggregate statistics do not show inequality, underemployment, affordability, unpaid work, environmental costs, or whether gains are broadly shared.

Efficient and attainable

What does a point located ON the Production Possibilities Frontier (PPF) represent?

Inefficient but attainable

What does a point located INSIDE the Production Possibilities Frontier (PPF) represent?

Unattainable

What does a point located OUTSIDE the Production Possibilities Frontier (PPF) represent?

Consumer Price Index (CPI)

Measures a fixed basket of consumer goods/services bought by households

GDP Deflator

Measures all final goods/services produced domestically

What two major contexts does the traditional Circular Flow Diagram omit?

1. Environmental Context: Omits natural resource inputs and pollution/waste outputs

2. Social / Core Context: Omits non-market household labor, unpaid care work, and government public purpose activity

U-3 unemployment metric

Counts only jobless individuals available and actively searching for work in the last 4 weeks

U-6 employment metric

Adds discouraged/marginally attached workers and involuntary part-time workers

What was the peak employment and cause of the Great Depression

Endogenous financial/demand crash. peak unemployment 25%

What was the peak employment and cause of the Great Recession (2007-2009)

Endogenous housing bubble crash. peak unemployment 10%