Unit 2 Measures of Economic Performance

What are the two basic entities in the circular flow model?

Households and firms.

What do households demand in the product market?

Finished goods and services.

What is the role of firms in the circular flow model?

Firms produce goods and services and demand resources in the factor market.

How do households interact with firms in the circular flow model?

Households provide labor to firms in exchange for wages.

What is the purpose of the expanded circular flow model?

To include interactions with the government, financial markets, and the rest of the world.

How does the government interact with households in the circular flow model?

Households and firms pay taxes to the government, which provides transfer payments to households.

What is GDP?

The total market value of final goods and services produced by a country within one year.

What does GDP measure?

The total count of production within an economy, including both goods and services.

What is the difference between a final good and an intermediate good?

A final good is ready for purchase, while an intermediate good is used to produce another good.

What is the formula for the expenditure model of GDP?

GDP = C + I + G + Xn, where C is consumption, I is investment, G is government spending, and Xn is net exports.

What does the labor force consist of?

People who are currently employed or actively looking for a job.

What is the labor force participation rate?

The percentage of the population aged 16 or older that is in the labor force.

What is the unemployment rate?

The number of unemployed people in the labor force expressed as a percentage.

Who are discouraged workers?

Nonworking people capable of working who have given up looking for a job.

What defines frictional unemployment?

Workers who are unemployed due to the time spent searching for a job.

What is structural unemployment?

Workers whose skills have become obsolete and need retraining, or when there are more job seekers than jobs available.

What is cyclical unemployment?

Unemployment that occurs during economic downturns or recessions.

What does the Consumer Price Index (CPI) measure?

The average change over time in the prices paid by consumers for a fixed market basket of goods and services.

How is the CPI related to inflation?

When the CPI rises, inflation occurs, indicating a decrease in purchasing power.

What happens during periods of deflation?

The CPI decreases, indicating that prices are falling.

What are the limitations of GDP as an economic indicator?

It does not account for non-market transactions or fully address standards of living and quality of life.

What occurs when the Consumer Price Index (CPI) decreases?

Deflation occurs, leading to a decrease in prices and an increase in purchasing power.

What is a market basket in economics?

A fixed category of goods and services bought by consumers, including recreation, medical care, education, and more.

How is the market basket value calculated for CPI?

Multiply the base year quantity by the base year price for each good, then sum the values.

What formula is used to calculate the Consumer Price Index (CPI)?

CPI = (Value of current year market basket / Value of base year market basket) x 100.

What does the term 'nominal' refer to in economics?

Values that have not been adjusted for inflation, such as nominal income and nominal GDP.

What does the term 'real' indicate in economic terms?

Values that have been adjusted for inflation, such as real income and real GDP.

How do you deflate a nominal value?

Real value = nominal value / (price index / 100).

What is the substitute bias in the context of CPI?

The market basket is updated infrequently, failing to reflect consumer shifts to less expensive goods when prices rise.

What are cost of living adjustments (COLA)?

Adjustments made to government programs based on changes in the overall price levels, often using CPI.

What is inflation?

An increase in prices that results in a decrease in the purchasing power of money.

What is deflation?

A decrease in prices that results in an increase in the purchasing power of money.

Who benefits from unexpected inflation?

Borrowers benefit as they repay loans with money that has less purchasing power.

Who loses from unexpected inflation?

Lenders and individuals on fixed incomes lose purchasing power as inflation rises unexpectedly.

What is nominal GDP?

The total value of all goods and services produced in an economy, measured in current dollars and not adjusted for inflation.

What is real GDP?

The total value of all goods and services produced in an economy, adjusted for inflation.

What does the GDP Deflator measure?

Changes in prices for all goods and services produced in an economy over a given period.

How is the inflation rate calculated using the GDP Deflator?

Inflation rate = (Current Year GDP Deflator - Old GDP Deflator) / Old GDP Deflator x 100.

What is the business cycle?

The fluctuations in economic output and employment over time, characterized by expansion and recession phases.

What is an output gap?

The difference between actual output and full-employment output.

What happens during an expansionary phase of the business cycle?

Economic output and employment increase.

What occurs during a recessionary phase of the business cycle?

Economic output and employment decrease.

What are the turning points in the business cycle called?

Peaks (when output goes from increasing to decreasing) and troughs (when output goes from decreasing to increasing).