Macro Unit 1 Flashcards

GDP, Unemployment, Inflation + Tariffs

Equation to calculate Real GDP

(nominal GDP/ Price Level) x 100

Equation to calculate nominal GDP growth

(GDPn-GDPo/GDPo)

Equation to calculate percentage change in nominal GDP

(GDPn-GDPo/GDPo) x 100

Equation to calculate unemployment rate

(#of unemployed individuals/labor force) x 100

Equation to calculate the labor force participation rate

(labor force/population) x 100

What is GDP?

GDP stands for gross domestic product. It is the market value of all good and services produced within a country’s economy during a certain period of time

What are the 4 components used to calculate GDP

Consumption - the amount of goods and services used/purchased by the customers in an economy (LARGEST part of GDP 2/3)

Investment - the real things that we purchase for long-term use (housing, facilities) NOT stocks and bonds

Government purchases - only products of output of the government (roads, bridges) NOT transfer payments like social security or medicare/medicaid

Net Exports - The total exports a country facilitates - the total imports a country takes in

What is real GDP?

Real GDP is the GDP adjusted for inflation which allows us to see the changes in prices overtime.

What is nominal GDP

Nominal GDP is the GDP calculated with current market-value prices

What can GDP be used to measure?

GDP can be used to measure…

1) Living standards (per capital)

2) Measuring economic growth

3) Business cycles and how well a country’s economy is currently doing

What does GDP NOT measure?

1) Environmental Impact

2) The underground economy (illegal drug activity) and non-market goods and services (housework, babysitting)

3) Wealth inequality and distribution

What do economists say is a healthy unemployment rate and why does a healthy economy still have some unemployment?

4%. Unemployment sometimes indicates innovation within the economy and changes in jobs which helps the economy grow.

What is structural unemployment?

Unemployment caused by the change in need for certain skills over others. Changes in the industrial makeup of the economy (ie. coal mining becoming obsolete, the need for AI developers over computer programmers)

What is frictional unemployment?

Unemployment caused by delays in matching jobs to workers. This is often the case for new college graduates who are relatively new in the labor force looking for job opportunities OR workers who switch jobs during their careers.

What is cyclical unemployment?

Unemployment caused by market troubles, recessions, and depressions due to company layoffs because they cannot afford to pay their workers and sustain their business ventures.

What is a recession?

A short economic downturn that lasts between 6 to 18 months

What is a trade deficit?

If imports exceed exports (ie. NX < 0)

What is a trade surplus?

If exports exceed imports (ie. NX > 0)

What are some advantages about trade deficits?

• Greater variety of goods

• Cheaper manufacturing and prices overseas

• Saves domestic labor for “better” jobs

What are some disadvantages about trade deficits?

• Reliance on other economies in trade wars

• Decline of domestic industries

• Data privacy

• Ethical concerns

What is creative destruction?

Introduction of new products into the market which leads to the destruction of other industries

What does U stand for?

Actual unemployment (rate)

What does U* stand for?

Natural rate of unemployment, typical rate of employment when the economy is healthy

What does Y stand for?

Economic output

What does Y* stand for?

Full employment with NO cyclical unemployment

What are the variable equivalencies that indicate a healthy economy?

U = U*, Y = Y*. This means that cyclical unemployment is 0

What are the variable equivalencies that indicate an economy is in a recession?

U > U*, Y < Y*, cyclical unemployment is positive

What are the variable equivalencies that indicate an economy is going through normal expansion?

U < U*, Y > Y*

What is the labor force?

The total amount of people who are currently employed or are unemployed and have been actively searching for a job within the past 4 weeks.

Who is not counted in the labor force?

Military, retirees, institutionalized individuals, or jobless people who have NOT been searching for employment within the past 4 weeks.

Is unemployment a lagging or leading indicator?

Unemployment is a lagging indicator, meaning that it changes after the economy as a whole has changed.

What is a leading economic indicator?

Indicators within the economy that help us predict the future economic climate and change before the economy as a whole does.

What is inflation?

A general increase in prices/price level

What is deflation?

A general decrease in prices

How do we measure price levels in the United States?

The Consumer Price Index is used to measure price levels based on a typical consumer’s consumption patter.

What is the formula for the price index?

Price Index = (basket price/basket price in base year) x 100

What is the formula to calculate the inflation rate (i)?

I = (price index this year - price index last year/price index last year) x 100

How do we measure real prices today?

price today = price earlier x (price level today/price level earlier)

Why might the consumer price index be faulty?

Slight overstates inflation through…

• substitution bias

• quality of goods

• new products and locations

What are the costs of inflation?

future price level uncertainty

• long-term contracts are riskier

• workers fear getting unpaid next year

• lenders fear lending and getting less $ back

• if long-term contracts don’t transpire, GDP growth is slowed

Shoe-leather costs

• resources are wasted when people change behavior to avoid holding money

• people bear time, effort, and fuel costs when they try to use more money

What are shoe-leather costs?

Resources are wasted when people change their behavior to avoid holding money, people bear time, efforts and fuel costs when they try to use more money.

What is money illusion?

When people interpret nominal changes in wages as real changes

What are menu costs?

The costs of changing prices.

What is future price level uncertainty?

When inflation confuses people, essential long-term agreements seem risky.

What is price confusion?

Whether prices have gone up or actual value of product is adequately increasing.

Why does the government inflate money supplies?

1) Large debts which leads the government to rapidly increase money supply in order to pay it off

2) Surprise increases can temporarily stimulate an economy toward rapid growth rates.

What is the financial market?

Where governments and firms obtain funds for their operations.

What is the interest rate?

The/A price of loanable funds

What is the interest rate to savers?

A reward for saving and receiving money in the bank.

What does a greater interest rate indicate?

When the interest rate is greater, there is a greater incentive to save.

What does a greater interest indicate for borrowers?

Borrowers will need to pay back the sum of the loan included with interest.

What does a lower interest rate indicate for the demand of loanable funds?

It means there is a greater demand for loanable funds because there will be less interest the borrower will pay.

What are time preferences?

People prefer to receive goods and services sooner rather than later.

What is consumption smoothing?

Balancing spending across the lifespan.

What is productivity of capital?

How efficiently a company or organization convert capital into economic output.

What is investor confidence?

A measure of what firms expect for future economic activity. When there is higher investor confidence, there will be more borrowing at any rate.

How does government borrowing impact the demand for loanable funds?

When governments borrow more loans/bonds, there will be a greater demand for loanable funds.

What is equilibrium in the market?

Equilibrium is when plans of the savers match the plans of borrowers.

When should a borrower borrow to invest (demand side)?

When the expected return on investment is greater than the interest rate on the loan.