Untitled Flashcards Set

Gross Domestic Product (GDP)

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

Components of GDP

Consumption, Investment, Government Spending, and Net Exports.

Investment (I) in GDP

A company purchasing new machinery.

Transfer Payments

Payments like Social Security that are not included in GDP.

Nominal GDP

Calculated using current prices.

Real GDP

Calculated using base year prices.

GDP Deflator

Measures the inflation rate between Nominal and Real GDP.

Inflation Rate using GDP Deflator

[(New GDP Deflator – Old GDP Deflator) / Old GDP Deflator] × 100.

Problems with GDP as a Measure

Doesn’t account for environmental damage or income inequality.

Consumer Price Index (CPI) Steps

Fix the basket, find prices, compute the cost of the basket, choose a base year, compute the index.

CPI Calculation

(Cost of basket in current year / Cost of basket in base year) × 100.

Problems with CPI

Substitution bias, introduction of new goods, unmeasured quality changes.

GDP Deflator vs. CPI

GDP Deflator measures all domestic production, while CPI measures a fixed basket of consumer goods.

Financial Markets

Institutions where savers directly provide funds to borrowers.

Examples of Financial Markets

Bonds and stocks.

Financial Intermediaries

Institutions that indirectly provide funds from savers to borrowers.

Examples of Financial Intermediaries

Banks and mutual funds.

National Income Identity for Closed Economy

Y = C + I + G.

Private Saving

The portion of household income not used for consumption or taxes.

Public Saving

The difference between tax revenue and government spending.

Budget Deficit

When government spending exceeds tax revenue.

National Saving in Closed Economy

Equals Private saving + Public saving.

Market for Loanable Funds

Represents the flow of savings into investment.

Supply of Loanable Funds

Slopes upward because higher interest rates encourage more saving.

Demand for Loanable Funds

Slopes downward because higher interest rates discourage borrowing.

Real Interest Rate Determination

Equilibrium in the loanable funds market.

Crowding-out Effect

When government borrowing reduces private investment.

Labor Force

The total number of employed and unemployed workers.

Included in the Labor Force

Employed and unemployed individuals actively seeking work.

Not Included in the Labor Force

Retired individuals, full-time students, and discouraged workers.

Labor-Force Participation Rate

(Labor force / Adult population) × 100.

Unemployment Rate Calculation

(Unemployed / Labor force) × 100.

Problems with Unemployment Rate

Does not distinguish between full-time and part-time work.

Natural Rate of Unemployment

The normal level of unemployment that persists in an efficient economy.

Cyclical Unemployment

Unemployment that rises during economic downturns.

Frictional Unemployment

Unemployment that occurs when workers take time to find jobs.

Causes of Frictional Unemployment

Job search, sectoral shifts, and unemployment insurance.

Structural Unemployment

Unemployment caused by mismatches between workers' skills and job requirements.

Causes of Structural Unemployment

Minimum wage laws, unions, and efficiency wages.