Macroeconomics Exam 2 Review

Aggregate Output

The primary measure of the economy’s performance as a whole is its _____.

Expenditure; Income

GDP can be measured in two ways. It can measure total _____ on the economy’s output of goods and services and it can measure the total _____ of everyone in the economy. For the economy as a whole, these two things are equal.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period of time.

5,500

In year one, there was an annual output of 3 sofas at $500 a piece and 2 computers at $2,000 a piece. The market value is?

Market Value

Things that do not have a _____ are excluded from GDP.

Intermediate Goods

These are used as components or ingredients in the production of other goods.

Final Goods

GDP only includes what goods?

Tangible; Intangible

GDP includes _____ goods (DVDs, bikes, beer) and _____ services (dry cleaning, concerts, cell phone services)

Currently

GDP includes _____ produced goods, not goods produced in the past. It also excludes secondhand sales.

A Country’s Borders

GDP measures the value of production that occurs in what area, whether done by its own citizens or by foreigners located there?

Quarter; 3

The Bureau of Economic Analysis (BEA) estimates US GDP every _____. This is how many months?

C + I + G + NX

The formula for measuring GDP through the expenditure approach is: GDP = ?

Consumption, Investment, Government Purchases, Net Exports

For GDP = C + I + G + NX, what does each letter stand for?

Consumption (C)

The total spending by households on goods and services.

Investment (I)

The total spending on goods that will be used in the future to produce more goods. A firm’s stock of not sold goods that includes capital equipment, structures, research and development activities, and inventories.

Planned Inventory

Changes that reflect management’s decision to add to or to reduce its on-hand stock.

Unplanned Inventory

Changes that reflect the results of unexpected sales variations.

Depreciation

A reduction in the value of an asset with the passage of time, due in particular to wear and tear.

GDP - Depreciation

Net Domestic Product (NDP) = ?

Government Purchases (G)

All spending on the goods and services purchased by the government at the federal, state, and local levels.

Transfer Payments

Government purchases exclude _____, such as Social Security or unemployment benefits because they are not a purchase of goods and services.

Exports (X) - Imports (M)

Net Exports (NX) = ?

Exports; Imports

_____ represent foreign spending on the economy’s goods and services, while _____ are the portions of C, I, and G that are spent on goods and services abroad.

Wages + Rents + Interest + Profits + Statistical Adjustments

The formula for measuring GDP through the income approach is: GDP = ?

National Income (NI)

The value produced by a country’s economy regardless of whether the source of the value created is domestic production or receipts from overseas.

Personal Income (PI)

The sum of all the incomes received by all the individuals or households during a given period.

Disposable Income (DI); = PI - Personal Taxes

What individuals or households have at their disposal for spending or saving (“after-tax” personal income). The formula for this is what?

Nominal GDP

This is based on prices that prevailed when output was produced (current prices). The change in this reflects both prices and quantities.

Real GDP

This reflects changes in the price level and uses base year prices (constant prices). The change in this is the amount that GDP would change if prices were constant.

Nominal GDP ÷ Price Index x 100

Real GDP = ?

GDP Deflator

The measure of the overall level of prices is known as the _____.

100 x Nominal GDP ÷ Real GDP

GDP Deflator = ?

Inflation

An increase in the overall price level in the economy.

Deflation

A decrease in the overall price level in the economy. Periods of this are typically associated with downturns in the economy.

Disinflation

A decrease in the rate of inflation

Decline purchasing power, standard and cost of living, future uncertainty

What are the three reasons inflation is important?

Price Index (PI)

A measure of how prices change over a period of time. What we use to estimate an inflation rate.

Fixing the “Basket”

The first step in constructing a Consumer Price Index (CPI) is what? When the Bureau of Labor Statistics (BLS) surveys consumers.

Finding the Prices

The second step in constructing a Consumer Price Index (CPI) is what? When the BLS collects data on the prices of goods in the basket.

Computing the Basket’s Cost

The third step in constructing a Consumer Price Index (CPI) is what?

Choosing a Base Year and Computing the Index

The fourth step in constructing a Consumer Price Index (CPI) is what?

Cost of Basket in Current Year ÷ Cost of Basket in Base Year x 100

CPI = ?

Finding the Inflation Rate

The fifth step in constructing a Consumer Price Index (CPI) is what?

CPI this Year - CPI Last Year ÷ CPI Last Year x 100

Inflation Rate = ?

Substitution Bias

A problem with the CPI where consumers substitute toward goods that become relatively cheaper, mitigating the effects of prices increases.

Introduction of New Goods

A problem with the CPI where the _____ increase the variety which allows consumers to find products that more closely meet their needs.

Unmeasured Quality Change

A problem with the CPI where the improvements in the quality of goods in the basket increase their value of each dollar.

Included; Excluded

Imported consumer goods are _____ in the CPI, and are _____ from the GDP deflator.

Excluded; Included

Capital goods are _____ from the CPI, and are _____ in the GDP deflator.

Deflate; Nominal Figures ÷ Price Index

One way to compare dollar amounts from different times is to “_____” nominal figures. We do this how?

Amount in Today’s Dollars = Amount in Year T Dollars x Price Level Today/Price Level in Year T

One way to compare dollar amounts from different times is to convert “past dollars” into “today’s dollars.” We do this how?

Demand-Pull Inflation

A type of inflation where there is an excess of spending relative to output. When the central bank issues too much money. This usually continues as long as the excess spending continues.

Cost-Push Inflation

A type of inflation that occurs due to a rise in per-unit input costs and supply shocks. This usually ends in a recession.

Fixed-Income Receivers, Savers, Creditors

Who are the three types of people that are hurt by inflation?

Unadjusted; Adjusted

Nominal income is _____ for inflation. Real income is the nominal income _____ for inflation.

Unemployment Rate

The _____ measures the share of employees in the labor force who don’t have a job but actively are seeking work. This is a key indicator of the performance of a country’s labor market.

The Bureau of Labor Statistics (BLS)

Who is in charge of generating the unemployment rate?

60,000; 16

Unemployment rate is calculated by taking a random survey of _____ households of people older than _____

Employed, Unemployed, Not in the Labor Force

What are the three categories the BLS is divided into?

Employed + Unemployed

Labor Force = ?

Unemployed ÷ Labor Force x 100

Unemployment Rate = ?

Labor Force ÷ Adult Population x 100

Labor Force Percentage Rate = ?

Discouraged

The unemployment rate excludes _____ workers. These are workers who would like to work but have given up looking for jobs. These people are classified as “not in the labor force.”

Cyclical Unemployment

Full employment does not mean that there is zero unemployment, but it does mean that _____ is at zero.

Frictional Unemployment

Individuals searching for jobs or waiting to take jobs soon. This occurs when workers spend time searching for the jobs that best suit their skills and tastes. This is short-term for most workers.

Structural Unemployment

This occurs due to changes in the structure of the demand for labor when there are fewer jobs than workers. This is usually long-term for most workers.

CU

An unemployed auto assembly line worker during a sales slump is an example of what type of unemployment?

FU

A computer programmer who quits his job to look for a job with better benefits is an example of what type of unemployment?

SU

A person whose job has been automated out of existence is an example of what type of unemployment?

Frictional Unemployment + Structural Unemployment

Natural Rate of Unemployment (NRU) = ?