ap macro u2

macro created to?

1. measure the health of the whole economy

2. guide policies to fix problems

private sector? (circular flow model)

part of economy run by individuals / businesses

public sector? (circular flow model)

part of economy controlled by government

factor payments? (circular flow model)

payment for factors of production

factors of production?

rent, wages, interest, profit, etc.

transfer payments? (circular flow model)

when government redistributes income

government redistribution of income?

i.e. welfare, social security, etc.

subsidies? (circular flow model)

government payments to businesses

all countries three macro econ goals?

1. promote economic growth

2. limit unemployment

3. keep prices stable (limit inflation)

more inflation?

less purchasing power

national income accounting?

economist collection of statistics on production / income / investment / savings

gross domestic product? (GDP)

dollar value of all final goods / services produced within country in one year

dollar value?

GDP measured in dollars

final goods?

GDP only counts NEW goods / services

within country?

GDP measures production within country’s borders

one year?

GDP measures annual economic performance

how use GDP?

1. compare to previous years - is there growth?

2. compare policy changes - did new policy work?

3. compare to other countries - are we better off?

how to measure growth from year to year?

100 • (year 2 - year 1 / year 1)

GDP per capita?

GDP divided by population; identifies average how many products each person makes

best measure of nation’s standard of living?

GDP

why higher GDP?

1. economic system

2. rule of law

3. capital stock

4. human capital

5. natural resources

economic system?

capitalism promotes innovation & provides incentives to improve productivity

rule of law?

companies with solid institutions & political stability historically have more economic growth

capital stock?

more machines / tools, more productive

human capital?

countries have better education / training, more productive

productivity?

output per unit of input

not included in GDP?

1. intermediate goods

2. nonproduction transactions

3. non market / illegal activities

intermediate goods?

goods inside final good

nonproduction transactions?

1. financial transactions (nothing produced)

2. used goods (already produced)

nonmarket / illegal activities?

1. household production

2. unpaid work

3. black market

4. drugs

three ways to calculate GDP?

1. expenditures approach

2. income approach

3. value-added approach

expenditures approach?

add up all spending on final goods / services produced in given year

income approach?

add up all income earned from selling all final goods / services produced in given year

value-added approach?

add up dollar value added at each stage of production process

income approach?

income earned from producing goods / services

1. labor income

2. rental income

3. interest income

4. profit

factor payments?

income + profit

1. labor income - labor earns wages

2. rental income - land earns rent

3. interest income - capital earns interest

4. profit - entrepreneurship earns profit

labor income?

wages earned from working

rental income?

income earned from property owned by individuals

interest income?

interest earned from loaning money to businesses

profit?

money businesses have after paying all costs

four components of GDP?

1. consumer spending

2. business investment

3. government spending

4. net exports

GDP = ?

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

consumer spending? (C)

purchases of final goods / services by individuals

business investment? (I)

businesses spending on tools / equipment

government spending? (G)

government / institutional spending of money

net exports? (X - M)

exports - imports

consumer spending?

1. durable goods - metal/reusable

2. non-durable - perishables/one-use

3. services

investment?

when businesses by capital (i.e. machines, resources, tools)

leading economic indicators?

1. shipping industry

2. inventories

lagging economic indicator?

stock market

inventories?

goods produced / held in storage in anticipation of later sales

unemployment?

workers actively looking for job, but not working

unemployment rate?

percent of people in labor force who want a job but are not working

unemployment rate = ?

100(# unemployed / # in labor force)

labor force?

• at least 16 years old

• able / willing to work

• not institutionalized (jail / hospital)

• not in military

• not in school full time

• not retired

3 types of unemployment?

1. frictional

2. structural

3. cyclical

frictional unemployment?

temporary unemployment / in between jobs; qualified workers with transferrable skills

seasonal unemployment?

specific type of frictional unemployment due to time of year & nature of job

structural unemployment?

changes in labor force to make some skills obsolete; do not have transferrable skill & jobs will never come back — workers must learn new skills to get job

creative destruction?

permanent loss of non-transferrable skill jobs

technological unemployment?

type of structural unemployment where automation / machinery replace workers

cyclical unemployment?

unemployment causes by recession; demand for goods / services fall, workers laid off

cyclical unemployment?

demand deficient employment

natural rate of unemployment? (NRU)

frictional + structural employment — amount of unemployment that exists when economy healthy / growing; focus on output & not having too much employment

full employment output?

real GDP created when no cyclical employment; U.S. is fully employed when 4-6% unemployed

non-acceleterating inflation rate of unemployment? (NAIRU)

focuses on inflation & not having too little unemployment; low employment that doesn’t cause high prices is “non accelerating”

low unemployment good?

too little unemployment cause prices to rise — consumers spend more & producers bit up the price of resources

Europe larger NRU?

European countries have more generous unemployment benefits; U.S. benefits 6 months, European benefits indefinite; generous benefits reduce inventive to search for job

discouraged workers? (criticism of unemployment rate)

some people no longer looking for job; given up

labor force participation rate?

percent of population in labor force

underemployed workers? (criticism of unemployment rate)

someone who wants more hours, but can’t get the, because still considered employed

race / age inequalities? (criticism of unemployment rate)

overall employment rate doesn’t show disparity for minorities / teenagers

inflation?

rising general level of prices & reduces purchasing power of money

real wage growth?

under conditions of higher minimum wage & higher inflation rate

high inflation bad?

banks don’t lend & people don’t save; decrease in investment & GDP

deflation?

decrease in general prices; negative inflation rate

deflation bad?

people will hoard money / assets; decreases consumer spending / GDP

disinflation?

prices increase at slower rates

market baskets?

government-tracked prices of specific goods / services

inflation rate?

percent change in prices year-to-year

price indices?

index #s assigned to each year, showing how prices have changed relative to specific base year

consumer price index? (CPI)

measures inflation for consumers

consumer price index =?

100 (price of market basket / price of market basket in base year)

inflation rate =?

100 (new # - old # / old #)

substation bias? (problem with CPI)

as prices increase for fixed market basket, consumers buy less of products and more of substitutes that may not be part of market basket — CPI may be higher that what consumers are really paying for

new products? (problem with CPI)

CPI market basket may not include newest consumer products — CPI measures prices but not increase in choices

product quality? (problem with CPI)

CPI ignores improvements / decline in product quality — CPI may suggest that prices stay same, though economic wellbeing has significantly improved

government-induced unemployment?

government focus too much on preventing inflation & slows down economy

government-induced inflation?

government focuses too much on limiting unemployment & overheats economy

effects of unanticipated inflation?

hurt - lenders

helped - borrowers

lenders?

people who lend money at fixed interest rates; people with fixed incomes

borrowers?

people who borrow money’ business where price of product increases faster than price of resources

nominal wage?

wage measured by dollars, rather than purchasing power

real wage?

wage adjusted for inflation

costs of inflation?

1. menu costs

2. shoe leather costs

3. unit of account costs

menu costs?

costs money to change listed prices — signs / menus

shoe leather costs?

costs of transactions increase — people reduce real money holdings, so they must spend time / effort to make additional trips to the bank

unit of account costs?

money doesn’t reliably measure value of good / services — leads to less efficient use of resources because of uncertainty caused by changes in currency value

hyperinflation?

typically caused by continuous expansion of money supply to finance government budget deficits

GDP measures?

product, not prices