Macroecon: Unit 2

GDP, inflation, unemployment // when answering don't write in full sentences // review circular flow diagrams

a simple diagram of the macro economy - flow of physical things and money

what is the circular flow diagram and what does it represent?

goods, services, and factors of production

what is included in the flow of physical things in the circular flow diagram?

to pay for goods, services, and factors of production

what is the purpose of “the flow of money” in the circular flow diagram?

households

another name for people

factors of production - money

households provide ______ _____ _________ for the factor market in exchange for _______

households - factor market - firms - product market

what are the 4 sections that are included on the basic circular flow diagram?

taxes

households give money to the government through _______

transfers

government gives households money through _______

transfer

any payment by the government to a household

stimulus, social security, unemployment checks

3 examples of transfers

financial markets

government borrows money from ______ ______ to pay back debt

markets - invest in capital equipment

firms borrow money from ______ for goods and services to ______ _____ ______ _______

macroeconomic indicators

tools economists use to measure the “health” of a nation’s economy

GDP

total dollar value of all final goods and services produced within a country during one calendar year

gross domestic product

what does GDP stand for?

final products

products sold to the final end user

count

capital goods —————— towards GDP because they can be used to produce more goods

consumer spending, capital equipment, all exports

3 major things included in GDP

consumer spending

all goods and services bought by consumers

intermediary goods

materials and goods that can only be used ONCE to produce a product

used goods

goods that are being sold secondhand

financial assets

stocks, bonds, and other financial products

intermediary goods, used goods, financial assets, government transfers

4 major things not included in GDP

GDP = C + I + G + (X - M)

GDP Expenditure formula

GDP = C + I + G + NX

alternate form of GDP formula

c: consumer spending, i: investments, g: government spending, x: total value of exports, m: total value of imports

what do C, I, G, X, and M stand for in the GDP formula

consumer spending

what is the main driver of the US’s GDP?

GDP contraction

when GDP goes down, it is called a ____ _______

Value Added Approach

adding up the value added to a product at each stage of product, minus the values of its’ inputs

Income Approach

the national income earned by factors of production earned in the economy — wages earned by labor, profits earned by firms, the interest earned by those who lend their savings to firms and the government, and the profit earned by those who lease their land and capital to firms

profit + wages + interest +rent = GDP

Income Approach formula

nominal value

any value that is stated in current dollars and does not take price changes into account

real value

values that account for changes in the price level

real

_____ values allow comparisons of values across time periods

GDP is a rough estimate and data is not verified, does not include black market, cannot show economic gains or losses are distributed across the economy

3 limits of GDP

Bureau of labor statistics

what does BLS stand for?

BLS

who calculates the unemployment rate?

employed

those who work as paid employees, own their own business, or worked as unpaid workers in a family member’s business. a full or part time worker

unemployed

those who were not employed or were unavailable to work and has tried to find employment in the previous four weeks. includes those waiting to be recalled to a job if they were laid off

not in the labor force

category for anyone who is 16 or over, not institutionalized, and doesn’t have a job/isn’t looking for work.

labor force

the total number of people who are employed and unemployed (employed + unemployed = ?)

unemployed people/labor force X 100

unemployment rate formula

employed + unemployed/non-institutionalized 16+ people X 100

labor force participation rate formula

discouraged workers

Individuals who are not working but want a job but have given up because they see little prospect of finding a job

underemployed

Someone who is not working up to their skill level

discouraged workers are not included, underemployed people are considered employed and wouldn’t be counted

2 limits of the unemployment rate

frictional unemployment

unemployment from people entering or reentering the labor force (ex: students graduate from college and look for a job)

structural unemployment

unemployment where the supply of labor is greater than the demand for labor (surplus of workers)

efficiency wage

when firms willingly pay above equilibrium wage in order to encourage workers to keep working and be productive

structural

_____ unemployment can happen due to technological change or when wages are set above equilibrium wage

cyclical

unemployment due to downturns in the business cycle (economic contractions, RGDP going down, etc.)

cyclical

the government can control _____ unemployment through increasing government spending and transfers

natural rate of unemployment

an estimated number by Economists when the economy has no cyclical unemployment

structural unemployment + frictional unemployment

natural rate of unemployment formula

potential output

the level of RGDP associated with reaching unemployment; indicates we are in a recession

upward

when unemployment rate is low there will be an ________ pressure on wages because labor is scarce

downward

when unemployment rate is high there will be an ________ pressure on wages because labor is plentiful

inflation

the rise in the GENERAL price level in the economy; reduces the purchasing power of the dollar

inflation rate

the percent change in the GENERAL PRICE LEVEL from the year before

deflation

a decline in the general price level; inflation rate needs to be negative; increases the purchasing power of the dollar

disinflation

decline in the inflation rate;  prices are still rising but they are not increasing at as fast of a rate as they were previously

hyperinflation

extraordinarily high rates of inflation

Shoe Leather Costs

people make more transactions in order to avoid holding cash due to inflation - usually associated with very high rates of inflation

Menu costs

the costs of changing prices incurred by a firm due to inflation - typically associated with hyperinflation

Unit of Account Costs

money becomes a less reliable unit of measurement

Aggregate Price Level

the general price level in the economy - changes to this can be used to calculate the inflation rate

price index

a tool used to track the aggregate price level and inflation

consumer price index (CPI)

what is the most used price index?

consumer price index

a price index who’s market basket tries to match what a typical urban consumer buys

producer price index

contains prices of goods and services produced by producers

substitution, introduction of new goods, unmeasured quality changes

3 limits of price indexes

borrowers

_______ would prefer inflation because the value of the dollar decreases, meaning you’re losing money

lenders

______ would prefer deflation because the value of the dollar increases, meaning you’re gaining money

nominal interest rate - inflation rate

real interest rate formula

CPI 2 - CPI 1/ CPI 1 X 100

inflation rate formula

nominal value/ CPI for same year X 100

converting a nominal value to a real value formula