Studied by 135 peopleGross
earn before taxes, expenses, etc
Net
earn after taxes, expenses, etc
GDP
as proxy for individuals' wealth
to increase GDP increase fundamentals in a country
to increase a country's standard of living you increase GDP
it is seen as focusing only on 'price signals'
difficult to compare across borders
difficult to turn into 'quality of life'
as proxy for military might and cultural and political dominance
National Accounts
Now kept mostly by national governments
These are basis for GDP figures, and others
They Measure: • Consumer spending • Producer sales • Business Investment • Government Purchases
How to calculate GDP
Total Sales. Amount received = total value. Add up the value of all goods and services produced (which means, surveying companies, and asking them to add up their total sales of goods and services… but only the value added*) -> requires firms to list total sales, minus intermediate goods (This means, companies only report ‘value added’)
Total Spending. Adding up spending on goods and services in the goods andservices market (called aggregate spending) -> discounts intermediate goods and looks at final products only
Total Income. Adding up the total factor income earned by households(wages, profit, interest, and rent) (because all sales are income forsomeone). (NB we mostly focus on 1 and 2 in the lecture.) -> GDP = C + I + G + X - IM
BE CAREFUL!: you cannot compare GDP figures because there can be inflation involved -> you counter inflation (nominal rate vs real rate)
Real GDP
In order to see whether your economy is actually producing more or less goods and services, you have to compare all prices with a base year price.
To calculate any real measure, such as Real GDP, Real Wages, you need a price level indicator, so you can turn the nominal figures into real ones: • If prices increased by 5%, you have to remove that 5% from year 2 figures.
Aggregate price level
used to measure the overall price level in an economy
Market Basket
average pool of goods and services for a household
consumer price index
an index of the cost of all goods and services to a typical consumer
price index in a given year
(cost of market basket in a given year ÷ cost of market basket in base year) x 100
Inflation rate
(price index year 2 - price index year 1 ÷ price index year 1) x100
Labor force participation rate
(labor force ÷ population older than 16) x 100
Unemployment rate
(number of unemployed people ÷ labor force) x 100
the unemployment rate is an indicator of how easy or difficult it is to get a job in the current economic climate
can be overstated, because many looking for a job take several weeks to find one, even if they have good prospects
can be understated, because many who really would like to find a job are counted as having given up, if they haven’t been looking actively within the last 4 weeks
Producer price index
measures changes in the prices of goods purchased by producers
GDP deflator
100 times the ratio of nominal GDP to real GDP for a given year
Fed Open Market Committee
sets interest rates for the US economy (this is the price of money: determines how much will be spent)
Normal unemployment rates
Between 4-5%
Discouraged workers
Those who have given up hope (source of unemployment that is not measured)
Marginally attached workers
People who have looked in the recent past, but not currently (discouraged workers are a subset of this group)
Underemployed
Frustrated workers who are more skilled than the job they currently have, and believe that they are qualified to take on more responsibility and/or be paid more
Correlation GDP and unemployment
whenever GDP growth was below average, then unemployment rose
when GDP goes into actual negative territory (recession), then unemployment can spike
Natural rate of unemployment
There will always be some unemployment, and this is called the Natural Rate of unemployment
The Natural Rate is considered to be the sum of two additional types of unemployment: • Frictional and Structural
Cyclical unemployment
The deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle.
Actual unemployment
Natural unemployment + Cyclical unemployment
Factors affecting natural rate
changes in government policies
changes in institutions
changes in labor force characteristics such as children not working till they are 18
Frictional Unemployment
Frictional Unemployment is due to the amount of time that workers spend in a job search
Since workers are qualified to do different things, and jobs are different, it takes time for workers to match themselves up with an appropriate job
There can be frictional unemployment even when the number of seekers = number of jobs
Structural Unemployment
This is what happens when there is a persistent surplus of workers in a particular labour market, who are looking for scarce jobs, at the given wage rate
Your book argues that minimum wage scenarios can create structural unemployment in some markets
At the same time, without this, there might be even more exploitation (at least a minimum wage law encourages people to move to try their luck elsewhere, or to move above this market level)
Also, unions can create structural unemployment (though, again; I see unions as positive because the book doesn’t take into account that companies and governments can often pay higher wages, by removing profits elsewhere, or raising taxes, or changing spending priorities)
Gross National Product
former measure of the United States economy; the total market value of goods and services produced by all citizens and capital during a given period
excludes foreign companies in own country, includes foreign companies owned by your country in other places (GDP includes everything in own borders + foreign companies)
3 methods to calculate GDP
expenditure method: consumption + investment + government + new exports
income method: wages + rental rate on capital + firm profits
production method: final value of all goods and services - intermediate costs
how to calculate value added
sales - cost of input
number of years for variable to double
70 divided by annual growth rate of variable
Good economy
rising inflation, declining unemployment
Bad economy
low inflation, rising unemployment
Real wage
nominal wage divided by the price level (i.e. inflation rate)
Real income
same as real wage, but for income, whether this is salary or total income from all factors
shoe-leather costs
the idea that at high rates of inflation people will have to find ways to hold money that will keep their value, e.g. real estate, gold, foreign currency, etc., so people have to turn their money wages and earnings into something else, and this takes a lot of time and energy and people take commissions
menu costs
Physically changing prices in a supermarket., etc., actually costs money, and this can be big for big corporations who have to print labels etc. With online commerce this is easier, but it still requires effort and vigilance and thus time and this adds up
unit-of-account costs
the economy as a whole will suffer when people cannot make good economic decisions based on the future value of the unit-of-account
costs that we face when our economy experiences inflation
Interest rate
price that lenders charge borrowers the use of their savings of one year
nominal interest rate
interest rate expressed in dollar terms
real interest rate
nominal interest rate minus rate of inflation
Deflation
when price levels drop
disinflation
a reduction of prices intended to improve the balance of payments (intended to bring the inflation rate down)
problem: you have to deal with high unemployment for a significant period of time (politically risky)
Median
The median is the middle number in a sorted, ascending or descending list of numbers and can be more descriptive of that data set than the average. It is the point above and below which half (50%) the observed data falls, and so represents the midpoint of the data.
For example, in a data set of {3, 13, 2, 34, 11, 26, 47}, the sorted order becomes {2, 3, 11, 13, 26, 34, 47}. The median is the number in the middle {2, 3, 11, 13, 26, 34, 47}, which in this instance is 13 since there are three numbers on either side.
Gini index
measures income distribution
productivity
Productivity is really just measured by looking at how many people are working, for how long, and looking at how many goods they collectively produce (measured in units-of-account)
physical capital: machines, buildings, tools (savings and investments spending!!)
human capital (roughly equated with education levels)
Growth accounting
Estimates the contribution of each major factor in the aggregate production function to economic growth
Total factor productivity
the amount of output that can be achieved with a given amount of factor inputs
Convergence hypothesis
, international differences in real GDP per capita tend to narrow over time
sustainable long-run economic growth
long-run growth that can continue in the face of the limited supply of natural resources and with less negative impact on the environment
Note
Flashcard