Economics Exam 1 Review: GDP, Unemployment, Price Level, and Labor Market

Flashcards for Econ 200 Exam 1 Review, covering key concepts from Chapters 5-8 including GDP, unemployment, inflation, productivity, and the labor market. Topics include definitions, calculations, and determinants of economic activity and well-being.

Gross Domestic Product (GDP)

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

What is the difference between final goods and services and intermediate goods and services?

Final goods and services are consumed by the ultimate user and are included in GDP. Intermediate goods and services are used up in the production of final goods and are not included in GDP to avoid double counting.

How do Real GDP and Nominal GDP differ?

Real GDP values output in the current year using prices from a base year and measures physical volume of production. Nominal GDP values output in the current year using current-year prices and is the current dollar value of production.

Which measure of GDP should be used to compare economic activity over time and why?

Real GDP should always be used to compare economic activity over time because it eliminates the effects of price changes (inflation) and shows only changes in the quantity of output.

What is the GDP Expenditures Equation?

Y = C + I + G + NX, where Y = GDP, C = Consumption Expenditure, I = Investment, G = Government Purchases, and NX = Net Exports.

What are the three components of Investment (I) in the GDP Expenditures Equation?

Investment includes (1) Business fixed investment (purchases of new capital goods), (2) Residential investment (construction of new homes and apartment buildings), and (3) Inventory investment (change in unsold goods to the company's inventory).

What types of government spending are excluded from Government Purchases (G) in the GDP Expenditures Equation?

Transfers payments (like Social Security, Food Stamps) and interest paid on government debt are excluded because they do not involve the purchase of current goods and services.

What is the formula for calculating Net Exports (NX)?

Net Exports (NX) = Exports - Imports.

How are individuals classified in the labor market based on the Bureau of Labor Statistics (BLS) surveys?

Individuals are classified as Employed, Unemployed, or Out of the Labor Force. The Labor Force = Employed + Unemployed.

What are the formulas for the Unemployment Rate and the Participation Rate?

Unemployment Rate = (Unemployed / Labor Force) * 100%. Participation Rate = (Labor Force / Population 16+) * 100%.

What is the Consumer Price Index (CPI)?

The CPI is a measure of the cost of a standard basket of goods and services in a given year relative to the cost of the same basket in a base year, used to measure the cost of living.

What is the rate of inflation, and what is deflation?

The rate of inflation is the annual percentage change in the price level. Deflation occurs when inflation rates are negative, meaning there is a period of falling prices.

How do you 'deflate' a nominal quantity to convert it to a real quantity?

To deflate a nominal quantity, you divide it by its price index (expressed as a fraction, e.g., CPI/100) to express the quantity in real terms, allowing for comparison over time.

What is 'indexing' in the context of inflation adjustment?

Indexing increases a nominal quantity each period by the percentage increase in a specified price index, preventing the purchasing power of the nominal quantity from being eroded by inflation.

What is the relationship between the real interest rate, nominal interest rate, and inflation rate?

Real interest rate = Nominal interest rate - Inflation rate (r = i - π). The real interest rate is the annual percentage increase in the purchasing power of financial assets.

How is Real GDP per person expressed as the product of two terms, and what do they represent?

Real GDP per person = Average labor productivity × Share of population employed. Average labor productivity (Y/N) is output per worker, and the share of population employed (N/POP) is the percentage of people working.

What are the six determinants of average labor productivity?

1. Human capital, 2. Physical capital, 3. Land and other natural resources, 4. Technology, 5. Entrepreneurship and management, 6. Political and legal environment.

What is the concept of 'diminishing returns to capital'?

Diminishing returns to capital states that for a given number of workers, adding more capital generally increases total output and average labor productivity, but beyond a certain point, the benefits of adding extra capital become smaller (output increases at a decreasing rate).

What two factors determine the demand for labor?

The demand for labor depends on the productivity of workers and the price of the worker's output.

What is the 'Value of Marginal Product (VMP)' and when will a firm hire an extra worker?

VMP is the extra revenue that an added worker generates. A firm will hire an extra worker if and only if the VMP exceeds the wage paid.

What are the macroeconomic determinants of labor supply?

Macroeconomic determinants of labor supply include the size of the working-age population (influenced by domestic birthrate, immigration/emigration) and the share of the working-age population willing to work (influenced by ages of entry/retirement and social changes).

What are the three broad types of unemployment?

Frictional unemployment, Cyclical unemployment, and Structural unemployment.

Frictional unemployment.

Frictional unemployment occurs when workers are between jobs; it is typically of short duration, has low economic cost, and may increase economic efficiency by matching workers to better jobs.

Cyclical unemployment.

Cyclical unemployment is the increase in unemployment during economic slowdowns or recessions; it is usually of short duration but has an economic cost in the form of a decline in real GDP.

Structural unemployment.

This unemployment is long-term, chronic unemployment in a well-functioning economy, often due to a lack of skills, language barriers, discrimination, or structural shifts in production creating a mismatch between workers' skills and market needs. It has high economic, psychological, and social costs.