ABM Exam 2

Four Types of GDP

Consumption, Investment, Government Purchases and Net Exports

Nominal GDP

measures the value of all goods and services produced in the current year’s prices

Real GDP

measures the value of all goods and services produced using constant prices.

GDP per Capita

Measure of GDP per person; GDP/Population

Growth Rate

(GDP New - GDP Old) / GDP Old * 100

Rule of 70

Number of years to double = 70 / Growth Rate

The Ingredients of Economic Growth

Labor, Human Capital, Capital

Labor

The number of hours worked across the economy

Human Capital

The skills and knowledge a person has

Capital

All equipment and structures used in the production of goods and services

Labor Force Participation Rate

Labor Force / Adult Population * 100

Labor Force

All people who are employed or unemployed

U-5

Traditional unemployment rate plus discouraged workers

Underemployed

Involuntary part time

Discouraged Workers

People margianlly attached to the labor force

Types of Unemployment

Frictional, Structural, Cyclical

Frictional Unemployment

caused by a labor market that does not have perfect information

• Takes time for job seekers and employers to find each other

• There may be a skill mismatch between what workers have and what employers seek

• Unemployment insurance and other income may increase unemployment duration

Structural Unemployment

A fundamental mismatch in the number of people wanting work and the work available

• Minimum Wage

• Labor Unions

• Efficiency Wages

Cyclical Unemployment

Unemployment that comes from the business cycle

Convergence

Poorer countries grow faster than rich/developed contries

Costs of Unemployment

• Recessions are bad because resources sit idle.

• For machines, this is unfortunate for the owner, but ultimately not a big deal.

• For workers, it can be financially and emotionally devastating.

• Research shows that it can take decades to recover lost wages

Inflation

Increase in the overall level of prices

The Largest Component of GDP

Consumption

GDP per capita is higher in one country than another

A country has an avg higher standard of living than the other

Inflation rate

(Price this year - Price last year) / Price last year * 100

Core Inflation

Measure of inflation that excludes food and energy

GDP Deflator

Nominal GDP / Real GDP

Adjusting for Inflation

Today’s dollars = Another time’s dollars × Price level today / Price level in another time

Potential GDP

level of output the economy would reach if all resources were fully employed.

Output Gap

(Actual Output - Potential Output) / Potential Output * 100

Peak

High point of output. After the peak the economy enters into recession.

Trough

Low point of output. It is the end of a recession and the beginning of an expansion

Signs of a Recession

A decline in economic activity, rising unemployment, falling consumer spending, drop in industrial production

How are business cycles measured

Peak to Peak or Trough to Trough

Leading indicators

variables that tend to predict the future path of the economy.

Lagging Indicators

variables that tend to follow the economy’s movements with some delay

Okuns Rule of Thumb

for every percentage point increase in the output gap, unemployment will fall
by 0.5 percentage points.

Negative Output Gap

Indication we are in a recession