macro unit 2

economists measure the health of the economy by looking economic indicators like ________, ________, and ___________ which measures inflation.

gross domestic product (GDP), unemployment rate, and consumer price index.

circular flow model

shows how households, business and government interact

gross domestic product (GDP)

the dollar value of all final goods and services produced within a country in one year.

three different types of unemployment

frictional, structural, cyclical

the economy is at FULL employment when there is no…

no cyclical employment

nominal GDP

not adjusted for inflation

• distorts economic activity bc it includes inflation

real GDP

adjusted for inflation and expressed in constant or unchanging dollars.

frictional unemployment

temporary unemployment as people move between jobs

• a college graduate looking for a first job or someone who quit to find a better job

structural unemployment

unemployment caused by a mismatch of workers skills and the skills needed for the job

• factory worker loses their job due to automation and doesn’t have skills for new tech jobs

cyclical unemployment

unemployment that happens during a recession or downturn

• a restaurant owner fires some of its employees during a recession because less people are eating out.

• *rises when economy is in a recession so this is a bad thing!

natural rate of unemployment

the amount of unemployment that exists when economy is at full employment, including only frictional/structural unemployment but not cyclical.

when the economy is in a recession it will have…

all three types of unemployment, frictional/structural/cyclical

when the economy is at full employment there is only…

frictional and structural unemployment

the economy can produce beyond full employment with very little…

frictional/structural unemployment

consumer price index

measures the average change over time in the prices paid by consumers for a basket of g/s commonly purchased by households

• measures inflation

• measures only consumer goods

CPI formula

value of market basket in given year//value of market basket in base year. X 100

disinflation

inflation rate is still positive but slowing down

inflation

prices are going up

deflation

prices are going down

substitution bias

shows a problem with CPI because it overestimates the cost of living since it assumes consumers are buying the same items even as prices change.

who is hurt by unanticipated inflation

lenders that lend at fixed interest rate, people with fixed income like retirees.

people who benefit from unanticipated inflation…

borrowers that borrow at fixed interest rate

GDP Deflator

measures overall level of prices in an economy by comparing nominal to real GDP (not just consumer goods)

formula for GDP deflator

(nominal GDP//real GDP) X 100

trough

economy is at its lowest

• lowest point on wave

expansion (recovery)

slight rising from trough

peak

economy reaches its height

business cycle

periodic rise and fall in 4 phases present in economic activity. can be measured by changes in real GDP

contraction/recession

downward sloping after peak

straight line represents

full employment or potential gdp when there is no cyclical unemployment

_______ GDP may be higher or lower than potential gdp

actual GDP (wavy line)

recession

(negative output gap)

• all three types of unemployment (frictional/structural/cyclical)

• actual GDP < potential GDP

full employment

• actual gdp = potential gdp

• only frictional/structural

• no cyclical unemployment

• natural rate of unemployment

inflationary gap

• (positive output gap)

• super LOW frictional and structural unemployment

• economy is overheating

• actual GDP > than Potential GDP

• leads to higher inflation

GDP per capita formula

average economic output per person in a country

• GDP//Popultation

income approach

calculates GDP by adding up all the income earned in production of g/s within a country in a year.

• Wage + Rent + Interest + Profit