Unit 2: Economic Indicators and the Business Cycle

What is the private sector?

part of the economy that is run by individuals and businesses

What is the public sector?

part of the economy that is controlled by the government

What are factor payments?

payment for the factors of production, namely rent, wages, interest, and profit

What are transfer payments?

when the government redistributes income (ex: welfare, social security)

What are subsidies?

government payments to businesses

What are all countries’ macroeconomic goals?

1. Promote economic growth

2. limit unemployment

3. keep prices stable (limit inflatation)

What is national income accounting?

when economists collect statistics on production, income, investment, and savings

What is Gross Domestic Product (GDP)?

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

Formula: % of change in GDP= Year 2-Year 1 / Year 1 × 100

What is GDP per capita (per person)?

GDP divided by the population. It identifies on average how many products each person makes

• best measure of a nation’s standard of livinh

Why do some countries have higher GDP?

1. Economic System- Capitalism promotes innovation and provides incentives to improve productivity.

2. Rule of Law- Countries with solid institutions and political stability have historically had more economic growth.

3. Capital Stock- Countries that have more machines and tools are more productive.

4. Human Capital- Countries that have better education and training are more productive.

5. Natural Resources- In general, countries that have access to more natural resources are more productive.

It all results from PRODUCTIVITY

What is NOT included in GDP?

1. Intermediate Goods

• Goods inside the final goods don’t count. (Ex: Price of finished car, not the stock radio or tires.)

2. Nonproduction Transactions

• Financial Transactions (nothing produced) (Ex: Stocks, bonds, real estate)

• Used Goods (Ex: Old cars, used clothes )

3. Nonmarket and Illegal Activities

• Things made at home- household production

• Ex: Unpaid work, black markets, drugs

What are the three ways of calculating GDP?

• Expenditures Approach-Add up all the spending on final goods and services produced in a given year.

• Income Approach-Add up all the income earned from selling all final goods and services produced in a given year.

• Value-added Approach-Add up the dollar value added at each stage of the production process.

What is the income approach?

adds up all the income earned from producing goods and services

What are factor payments?

its when labor earns wages, land earns rent, capital earns interest, and entrepreneurship earns profit

What are the four components of GDP?

1. Consumer Spending- ≈ 70% of U.S. GDP Purchases of final goods and services by individuals. (Ex: $5 Sandwich at Subway)

2. Business Investment- ≈ 16% of U.S. GDP

Businesses spending on tools and equipment. (Ex: Walmart buys self checkout machines.)

3. Government Spending- ≈ 17% of U.S. GDP (Ex: Schools, roads, tanks (NOT transfer payments)

4. Net Exports- Exports (X) – Imports (M) ≈ -3% (Ex: Value of 3 Ford Focuses minus 2 Hondas)

Formula: GDP (Y) = C + I + G + (X-M)

What are the three components of consumer spending?

1. Durable goods- (ex: washing machines, refrigerators, cars)

2. Non-durable goods- (ex: food, clothes, toilet paper)

3. Services- (ex: dental work, repairs, tutoring)

What is investment?

- Investment is NEVER when individuals buy assets like stocks and bonds.

- Investment is ALWAYS when businesses buy capital like machines, resources, and tools.

What are inventories

Goods produced and held in storage in anticipation of later sales.

• are counted in the year they are produced, not the year they are sold.

What are government expenditures

tracks the spending made in the “public sector”.

-This includes payments made by the government for goods and services.

-It does not include money spent on transfer payments like welfare, social security, and subsidies.

-It also does not include interest payments on the national debt.

What are some things that count towards GDP but actually indicate that society is worse off?

• money spent cleaning up toxic waste

• Money spent on jails

• Money spent on divorce lawyers

What are some things that DON’T count towards GDP but actually indicate that society is better off?

• time spent recycling

• Community service hours

• church donations

• hours spent with family at a park

• homemade birthday card

What are nonmarket transactions?

many goods and services provide value but don’t count in GDP

What is unemployment?

Workers that are actively looking for a job but aren’t working.

What is unemployment rate?

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

Formula: Unemployment rate= # of unemployed/# in labor force x 100

Who is in the labor force?

• At least 16 years old

• Able and willing to work

• Not institutionalized (in jails or hospitals)

• Not in military, in school full time, or retired

What is frictional unemployment?

• Temporary unemployment or being between jobs.

• Individuals are qualified workers with transferable skills.

• Examples: High school or college graduates looking for jobs.

  Individuals that were fired or are looking for a better job.

  
  

What is structural unemployment?

• Changes in the labor force make some skills obsolete.

• These workers DO NOT have transferable skills and these jobs will never come back. Workers must learn new skills to get a job.

• Examples: VCR repairman, Milkman

  
  

What is Cyclical Unemployment?

• Unemployment caused by a recession.

• As demand for goods and services falls, demand for labor falls and workers are laid off.

Examples: Steel workers laid off during recessions.

What is the natural rate of unemployment?

• frictional plus structural unemployment. The amount of unemployment that exists when the economy is healthy and growing.

• The US is at full employment when there is 4-6% unemployment.

What are some criticisms of unemployment?

• Discouraged Workers: some people are no longer looking for a job because they have given up

• Underemployed Workers: some want more hours but can’t get them is still considered employed

• Race and Age inequalities: The overall unemployment rate doesn’t show disparity for minorities and teenagers.

  
  

What is the labor force participation rate?

• Percent of population in the labor force.

• If people leave labor force the unemployment rate falls