QUiz #5 (ch 12-13)

Cars have high prices and are durable goods, so when the economy suffers a downturn…

sales decline as unemployment increases, incomes fall, and many people decide to keep their current cars rather than buy new ones.

Microeconomics

The study of how

households and firms make choices,

how they interact in markets, and

how the government attempts to

influence their choices.

Macroeconomics

The study of the

economy as a whole, including topics

such as inflation, unemployment, and

economic growth.

Business cycle

Alternating periods

of economic expansion and economic

recession.

Expansion

The period of a business

cycle during which total production

and total employment are increasing.

Recession

The period of a business

cycle during which total production

and total employment are decreasing.

Economic growth

The ability of

an economy to produce increasing

quantities of goods and services.

Inflation rate

The percentage

increase in the price level from one

year to the next.

Gross domestic product (GDP)

The market value of all final goods

and services produced in a country

during a period of time, typically

one year.

Final good or service

A good or

service purchased by a final user.

Intermediate good or service

A

good or service that is an input into

another good or service, such as a tire

on a truck.

GDP includes only

production that takes place during the indicated time period; does not include the value of used goods.

Transfer payments

Payments by the

government to households for which

the government does not receive a

new good or service in return.

Consumption

Spending by

households on goods and services,

not including spending on new

houses.

3 categories of consumption

1. Expenditures on services, such as medical care, education, and haircuts

2. Expenditures on nondurable goods, such as food and clothing

3. Expenditures on durable goods, such as automobiles and furniture

The spending by households on new houses is not included in consumption.

Investment

Spending by firms

on new factories, office buildings,

machinery, and additions to

inventories, plus spending by

households and firms on new houses.

Spending on gross private domestic investment, or simply investment, is also divided into 3 categories:

1. Business fixed investment is spending by firms on new factories, office buildings, and

machinery used to produce other goods. Since 2013, this category of investment

has included business spending on research and development. The BEA had previ-

ously considered such spending to be an intermediate good.

2. Residential investment is spending by households and firms on new single-family and

multi-unit houses.

3. Changes in business inventories are changes in the stocks of goods that have been pro-

duced but not yet sold. If Ford has $200 million worth of unsold cars at the begin-

ning of the year and $350 million worth of unsold cars at the end of the year, then

the firm has spent $150 million on inventory investment during the year.

Government purchases

Spending

by federal, state, and local

governments on goods and services.

Net exports

Exports minus imports.

Value added

The market value a

firm adds to a product.

Household production

goods and services people produce for themselves.

The most important type of household production is the services a homemaker pro-

vides to the homemaker’s family.

Underground economy

Buying

and selling of goods and services that

is concealed from the government to

avoid taxes or regulations or because

the goods and services are illegal.

The Value of Leisure Is Not Included in GDP

If an economic consultant

decides to retire, GDP will decline even though the consultant may value increased

leisure more than the income she was earning from running a consulting firm.

GDP Is Not Adjusted for Changes in Crime and Other Social Problems

An

increase in crime reduces well-being but may actually increase GDP if it leads to greater

spending on police, security guards, and alarm systems. GDP is also not adjusted for

changes in divorce rates, drug addiction, or other factors that may affect people’s well-being.

GDP Measures the Size of the Pie but Not How the Pie Is Divided

When

a country’s GDP increases, the country has more goods and services, but those goods

and services may be very unequally distributed.

Nominal GDP

The value of final

goods and services evaluated at

current-year prices.

Real GDP

The value of final goods

and services evaluated at base-year

prices.

Price level

A measure of the average

prices of goods and services in the

economy.

GDP deflator

A measure of the

price level, calculated by dividing

nominal GDP by real GDP and

multiplying by 100.

depreciation

In the production of goods and services, some machinery, equipment, and buildings

wear out and have to be replaced. The value of this worn-out machinery, equipment, and

buildings is called

In the NIPA tables, depreciation is called

the consumption of

fixed capital.

national income.

GDP - the consumption of

fixed capital

national income

will always be smaller than GDP by an amount equal to depreciation. In practice,

though, the difference between the value of GDP and the value of national income does

not matter for most macroeconomic issues.

Wages

all com-

pensation received by employees, including fringe benefits such as health insurance.

Interest

net interest received by households, or the difference between the interest received on

savings accounts, government bonds, and other investments and the interest paid on car

loans, home mortgages, and other debts.

Rent

rent received by households.

Profit

the profits of sole proprietorships, which are usually small businesses, and the profits ofcorporations.

the state of the economy can be summarized in just two measures:

the unemployment rate and the inflation rate.

misery index

adds together the unemploy-

ment rate and the inflation rate to give a rough measure of the state of the economy.

the long-run success of an economy is best judged by

its ability to generate

high levels of real GDP per person.

Employed

In government statistics,

someone who currently has a job or

who is temporarily away from his or

her job.

Unemployed

In government

statistics, someone who is not

currently at work but who is available

for work and who has actively looked

for work during the previous month.

Labor force

The sum of employed

and unemployed workers in the

economy.

Unemployment rate

The

percentage of the labor force that is

unemployed.

not in the labor force:

Retirees, homemakers, full-time students, patients in hospitals, and those on active

military service or in prison.

People who are available for work and who have actively looked for a job at some

point during the previous 12 months but have not looked during the previous

4 weeks. Some people are not actively looking for work for reasons such as child-

care responsibilities or transportation difficulties.

• People who are available for work but have not actively looked for a job during the

previous four weeks because they believe no jobs are available for them. These peo-

ple are labeled discouraged workers.

Discouraged workers

People who

are available for work but have not

looked for a job during the previous

four weeks because they believe no

jobs are available for them.

Labor force participation rate

The percentage of the working-age

population in the labor force.

Employment–population ratio

Employment–population ratio

problems with unemployment rate

may understate the true

degree of joblessness in the economy. The BLS also counts people as being employed if

they hold part-time jobs but would prefer to hold full-time jobs; to overstate the true extent of joblessness. These problems arise

because the BLS does not verify the responses of people included in the survey. Some

people who claim to be unemployed and actively looking for work may not really

be actively looking.

labor force participation rate is important because

it determines the amount of labor

that will be available to the economy from a given population. The higher the labor force

participation rate, the more labor that will be available and the higher a country’s levels

of GDP and GDP per person.

two important trends in the labor

force participation rates of adults aged 16 years and over in the United States since 1948:

the falling labor force participation rate of adult men and the rising labor force participa-

tion rate of adult women.

Economists have not reached a consensus in

explaining the remainder of the decline in the employment–population ratio, but

here are several explanations they offer:

“Labor market scarring ;; An increased number of people receiving Social Security Disability Insur-

ance;; The Affordable Care Act;; The minimum wage;; Licensing requirements;; Better videogames.

“Labor market scarring.”

The slow recovery from the 2007–2009 recession

meant that some people were out of work for years. Often when people have not

held a job for a long period, their skills deteriorate, and employers become more

reluctant to hire them.

An increased number of people receiving Social Security Disability Insur-

ance.

Under this program, people with disabilities receive cash payments from

the federal government and receive medical benefits under the Medicaid program.

Some people who might otherwise be working are being supported by disability

payments instead. Research by Alan Krueger of Princeton University indicates

that about half of prime-age men who are not in labor force take pain medication,

and most of them believe that their pain prevents from them taking full-time jobs.

Interventions aimed at helping the disabled or those suffering from pain reenter the

labor force may increase the employment–population ratio among the prime-age

population.

The Affordable Care Act.

Economists at the Congressional Budget Office (CBO)

estimate that the Affordable Care Act, which provides subsidies to buy medical

insurance and expands Medicare coverage (see Chapter 5, Section 5.4), has resulted

in a decline in employment. According to a CBO report, as a result of the act, “some

people will decide not to work or to work fewer hours than would otherwise be

the case—including some people who will choose to retire earlier than they would

have otherwise, and some people who will work less themselves and rely more on a

spouse’s earnings.”

The minimum wage.

Economists Jeffrey Clemens and Michael Wither of the Uni

-

versity of California, San Diego, analyzed the effects of the increase in the federal

minimum wage from $5.15 an hour in 2007 to $7.25 an hour in 2009. They found

that by making it more difficult for low-skilled workers to find jobs, the increase in

the minimum wage reduced the employment–population ratio.

Licensing requirements.

As we saw in Chapter 6, Section 6.1, new businesses

are being started at lower rates than in past years, and barriers to entering certain

occupations have increased as states have imposed additional licensing require

-

ments. Difficulties in starting new businesses mean that some people who would

otherwise be self-employed as small business owners may have left the labor force

instead.

Better videogames.

Mark Aguiar of Princeton University, and colleagues have

noted that young men between the ages of 21 and 30 worked 12 percent fewer hours

in 2015 than in 2000. This decline in employment was larger than for other groups.

Aguiar and his colleagues argue that as much as 46 percent of the decline was due to

improvements in videogames that led some young men to prefer leisure to working.

economic growth in the United States has slowed

in recent years.

Many economists believe that one key to increasing growth and living

standards is for the government to develop policies that will help reverse the decline in

the employment–population ratio.

establishment survey, some-

times called the payroll survey,

measure total employment in the economy. This

monthly survey samples about 300,000 business establishments (such as factories,

stores, and offices). A small company typically operates only one establishment, but a

large company may operate many establishments. The establishment survey provides

information on the total number of persons who are employed and on a company payroll.

The establishment survey has four drawbacks:

1. The survey does not provide information on the number of self-employed persons

because they are not on a company payroll.

2. The survey may fail to count some persons employed at newly opened firms that

are not included in the survey.

3. The survey provides no information on unemployment.

4. The values for employment that the BLS initially announces can be significantly

revised as data from additional establishments become available.

When the BLS announces each month the increases or decreases in the number of persons

employed and unemployed,

these are net figures. That is, the change in the number of persons

employed is equal to the total number of jobs created minus the number of jobs elimi-

nated.

Notice, though, that the

unemployment rate never falls to zero. To understand why, we need to discuss the three

types of unemployment:

1. Frictional unemployment

2. Structural unemployment

3. Cyclical unemployment

Frictional unemployment

Short-

term unemployment that arises from

the process of matching workers with

jobs.

Structural unemployment

Unemployment that arises from a

persistent mismatch between the

skills or attributes of workers and the

requirements of jobs.

Cyclical unemployment

Unemployment caused by a business

cycle recession.

As production falls, firms start laying off workers. Workers who lose their jobs because of a recession

Natural rate of unemployment

The normal rate of unemployment,

consisting of frictional

unemployment and structural

unemployment.

full employment.

When the only remaining unemployment is structural and frictional unem-

ployment, the economy is said to be at____

government policies can aid these

private employment efforts:

Governments can help reduce the level of frictional unemployment with policies

that speed up matching unemployed workers with unfilled jobs. Government-

sponsored job fairs are an example of this type of policy.

• Governments can help reduce structural unemployment by implementing policies

that aid worker retraining. For example, the federal government’s Trade Adjust-

ment Assistance program offers training to workers who lose their jobs as a result

of competition from foreign firms.

Labor unions

organizations of workers that bargain with employers for higher wages

and better working conditions for their members. In unionized industries, the wage

is usually above what otherwise would be the market wage.

Efficiency wage

an above-market wage that a firm pays to motivate

workers to be more productive.

Inflation rate

The percentage

increase in the price level from one

year to the next.

consumer price index (CPI) / cost-of-living index

measure of the average of the prices a typical

urban family of four pays for the goods and services they purchase.

Producer price index (PPI)

An

average of the prices received by

producers of goods and services at all

stages of the production process.

Nominal interest rate

Nominal interest rate

Real interest rate

The nominal

interest rate minus the inflation rate.

Menu costs

The costs to firms of

changing prices.