Unit 2 - Measures of Economic Performance

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GDP, unemployment, and inflation

48 Terms

1

product market

place where goods and services produced by businesses are sold to households

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2

resource (factor) market

place where resources (land, labor, etc.) are sold to businesses

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3

Gross Domestic Product (GDP)

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

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4

intermediate goods

goods used in the production of final goods and services

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5

NOT included in GDP

  1. intermediate goods

  2. nonproduction transactions (stocks, welfare, etc.)

  3. nonmarket (illegal) activities

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6

Expenditures approach

adding all the spending

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7

expenditures approach equation

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

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8

4 components of GDP using the income approach

  • labor income/wages (w)

  • rental income (r)

  • interest income (i)

  • profit (π)

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9

Income approach

adding all the resulted income

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10

income approach equation

GDP (y) = w + π + r + i

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11

4 components of GDP using the expenditures approach

  • consumer spending (C)

  • investments (I)

  • government spending (G)

  • net exports (X-M)

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12

investment (I)

when businesses buy capital (machines, resources, etc.)

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13

inventory

good produced and held in storage in anticipation of later sales (counted the year they’re produced)

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14

government (G)

public sector (NOT welfare, subsidies, SS, or interest payments on national debt)

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15

% change in GDP (equation)

(Year 2 - Year 1 / Year 1) x 100

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16

inflation

a rising general level of prices

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17

nominal GDP

GDP measured in current prices; doesn’t account for inflation from year-to-year

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18

real GDP

GDP expressed in constant, unchanging dollars; adjusts for inflation (good to determine econ. growth)

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19

real GDP per capita (equation); good determiner of standard of living

rGDP / population

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20

labor force

employed + unemployed

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21

unemployment rate (equation)

(# unemployed / # in labor force) x 100

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22

labor force participation rate (equation)

(labor force / population ≥ 16) x 100

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23

frictional unemployment

temporarily unemployed or between jobs (ex: seasonal workers)

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24

structural unemployment

skills are made obsolete (ex: replaced by robots)

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cyclical unemployment

results from economic downturns and is the only one that government has control over

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26

Natural Rate of Unemployment (NRU)

frictional and structural unemployment together; unavoidable

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Okun’s Law

when unemployment rises 1% above the national rate, GDP falls around 2%

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28

problems with unemployment rate

it can misdiagnose the actual unemployment rate because of:

  1. discouraged workers (understated)

  2. part-time workers (understated)

  3. race/age inequalities

  4. illegal labor

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29

what does inflation do

lowers the purchasing power of money

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30

how is inflation measured

the gov. tracks prices of the same goods and services each year (called a market basket)

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31

inflation rate

% change in prices in one year

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deflation

general fall in prices (ex The Great Depression)

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disinflation

bringing inflation rates down, but not into the negative (ex lowered from 5% → 2%)

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34

people hurt by unanticipated inflation

savers, people with fixed incomes, and lenders (at fixed interest rates)

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35

people helped by unanticipated inflation

borrowers and businesses where the price of products increase faster than the price of resources

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36

nominal wage

wage measured by dollars rather than purchasing power

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real wage

wage adjusted for inflation (wage-inflation)

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38

3 costs of inflation

  1. menu costs

  2. shoe leather cost

  3. unit of account cost

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39

menu costs

real cost of changing listed prices

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40

shoe leather cost

increased costs of transactions

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41

unit of account cost

currency is no longer reliable as a way of measuring value

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42

consumer price index (CPI)

most commonly used measurement of inflation for consumers

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CPI equation (will NOT be a %)

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

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problems with CPI

  1. substitution bias (CPI may be higher than what customers are really paying)

  2. new products (CPI measures prices but not the increase in choices)

  3. product quality (CPI may suggest that prices stay the same though the economic well being has improved significantly)

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45

GDP deflator

measures the prices of all goods produced (whereas CPI only measures prices of goods and services bought by consumers)

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46

GDP deflator equation

(nominal GDP / real GDP) x 100

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47
  • quantity is constant

  • price changes

CPI

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48
  • price is constant

  • quantity changes

GDP deflator

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