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What is CPI?

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Consumer price index

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What does the CPI measure?

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Changes overtime in cost of buying a "market basket" of goods and services.

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71 Terms

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What is CPI?

Consumer price index

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What does the CPI measure?

Changes overtime in cost of buying a "market basket" of goods and services.

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How do the indexes work?

Used to determine inflation or deflation in an economy. An index number compares the value of a good or service in a particular year to its value in a base year, or reference year.

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What does the CPI include?

Food, beverages, housing costs, furniture, clothing, transportation costs, etc.

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What is GDP?

Total dollar value of all final goods produced in an economy in one year.

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What is the formula for GDP?

Consumer spending + Investment + Government spending + Net exports

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What is not included in GDP?

Intermediate goods, barter, illegal goods/services, under the table transactions(babysitting), used goods.

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Nominal GDP

GDP measured in current prices so if prices increase over the years, economy grows - doesn't show inflation.

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Real GDP

GDP expressed in constant or unchanging prices - accounts for inflation.

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Intermediate goods/services

Goods/services used in the production of a final good.

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Final goods/services

Goods/services ready for sell in the market.

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What is consumer spending?

Most important component of GDP.

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  • Spending on durable goods: long lasting (TV, house, car),

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  • Non-durable goods (consumables): get used up quickly(gas, food, clothing), services: housing, utilities, health care, etc.

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What is investment?

Money that businesses spend, capital- machinery, tools

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What is gov. spending?

Federal spending- defense

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State spending- education

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Local spending- police services, libraries

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What are net exports

The difference between a country's total value of exports and total value of imports.

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Inflation

A general increase in prices throughout an economy.

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Impact of inflation on the economy? Person?

Economy grows too fast and offsets rate of return on investments.

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  • Purchasing power is reduced (money buys less) and lower real income.

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  • Helps borrowers but hurts lenders because money paid back in the future is worth less.

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How to calculate net exports?

Value of exports minus value of imports.

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What does it mean if Nx is positive?

There's a favorable balance of trade.

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What does it mean if Nx is negative?

Trade balance is unfavorable.

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Deflation

Reduction in general level of prices.

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What is the business cycle?

The national economy goes up and down like a roller coaster over time.

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What is a recession?

2 Consecutive quarters of negative growth (6 months)

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  • when real GDP goes from peak to trough.

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What is expansion?

When real GDP goes from trough to another peak.

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Frictional unemployment

Temporary unemployment or being between jobs. Individuals are qualified workers with transferable skills.

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Structural unemployment

Changes in labor force make some skills obsolete. These workers don't have transferable skills and these jobs will never come back. Workers must learn new skills to get a job.

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Cyclical unemployment

Unemployment caused from a recession. As demand for goods and services falls, demand for labor falls and workers are fired.

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Creative destruction

Permanent loss of jobs where skills were made obsolete because people created new things.

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Example of frictional unemp.

  • High school or college graduates looking for jobs

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  • people fired and looking for better job.

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Example of structural unemp.

VCR repairman, milkman

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Example of cyclical unemp.

  • Steelworkers laid off during recession

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  • restaurant owners fire waiters after months of poor sales due to recession.

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Effects of inflation on economy

  • Banks can be hurt if inflation wasn't expected. Inflation can hurt lenders because they may be repaid with dollars with less value.

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  • Monetary/fiscal policy designed to slow inflation, results in lost output and increased unemployment in the short run.

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Effects of unemployment on the economy

People have less money to spend which hurts the economy. Companies suffer from low consumer demand.

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If the GDP is rising rapidly, what is probably happening to unemployment and inflation?

Unemployment is going down and inflation is going up.

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Criticisms of the way we count unemployment

The unemployment rate that the government uses doesn't consider all the people who are unemployed. The rate only considers people who are unemployed and actively looking for a job. This also doesn't include people in school. It doesn't accurately count all the people who are unemployed, there are more unemployed people than the rate entails.

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Limitations of GDP

Doesn't include non-market activities, Doesn't include underground economy, Does include negative externalities, Doesn't measure quality of life, Doesn't measure distribution of goods and services, Doesn't account for increasing quality of goods

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Creeping inflation

When inflation remains relatively low (healthy)

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  • Avg. 1-3%

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  • Steady & predictable, no big problems

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Chronic inflation

Inflation rate steadily increases month to month over a long period

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Hyperinflation

-Out of control

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-Over 50% a month

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-Often leads to economic collapse

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ex: Germany

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Who is in the labor force?

  • 16 years old or older

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  • Able & willing to work

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  • Not institutionalized (in jails or hospitals)

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Unemployment

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

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Unemployment rate

The % of people in labor force who want a job but aren't working

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Natural rate of unemployment

  • Fictional plus structural unemployment

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  • Amount of unemployment that exists when the economy is healthy and growing

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  • Full employment at 4-6 % unemployment

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Seasonal unemployment

Specific type of frictional unemployment due to time of year and nature of job.

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ex: Santa Claus who works at mall

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It is possible to have inflation and experience a decrease in some prices. True or False

True

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What is often measured by the consumer price index?

Inflation

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Per Capita Real GDP

Real GDP divided by population.

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  • Considered the best measure of standard of living

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Real GDP and Population

Real GDP should keep up with population growth.

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Depression

Recession for 2+ years or 10%+ decline in real GDP

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  • Usually has very high unemployment, banking and lending crisis, greatly reduced trade