MACROECONUNIT 2 NOTEBOOK

What is a Circular Flow Diagram?

picture or model that shows how free market economic system works. It shows how individuals and businesses exchange money, resources, and products in a market.

What is a Household? ( in terms of a Circular Flow Diagram)

a person or group of people living at the same residence.

What is a Firm ( Circular Flow Diagram)

an organization that uses a resource to produce a product, which it then sells.

What is a Factor Market? ( Circular Flow Digram)

market in which firms purchase the factors of production from households.

What is a Product Market? ( Circular Flow Diagram)

the market in which households purchase the goods and services firms produce.

Private Sector? (CFM)

part of economy that is run by individuals and businesses.

Public Sector? (CFM)

Part of economy that is controlled by the government.

Factor Payments? (CFM)

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

Transfer Payments? (CFM)

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

Subsidies? (CFM)

government payments to businesses

All countries have 3 macroeconomic goals:

Promote economic growth, limit unemployment, keep prices stable.

What is national income accounting?

Economist collect statistics on production, income, investment, and savings.

What is GDP

Gross Domestic Product: the dollar value of all final goods and services produced within a country in one year. 

How do you use GDP?

Compare to previous years to see if there is growth, compare policy changes to see if they worked, compare to other countries to see if we are better off. 

How can GDP measure the standard of living.

adjust to reflect the size of population, GDP per capita

What is the expenditures approach for calculating GDP

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

What is the Income Approach for calculating GDP?

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

What is the Value-added Approach for GDP

add up the dollar value added at each stage of the production process

What does the C stand for in the Expenditures Approach

Consumer Spending

What does the I stand for in Expendutures Approach

Business Investment

What does the G stand for in Expenditures Approach

Government Spending

What does the N stand for in Expenditures Approach

Net Exports. 

What is Consumer Spending made up of?

Durable goods, Non-durable goods, and services.

Things that count toward GDP but actually indicate that society is worse off?

Money spent cleaning up toxic waste, money spent on crimes, and the healthcare costs of negative behaviors. 

things that don’t count toward GDP but indicate that society is better off. 

improved health and life expectancy, reduced inequality, and higher levels of leisure time. 

What is unemployment?

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

What is the Unemployment Rate

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

What is the Labor Force

total population - working age population - people who don’t want jobs= labor force

Who is in the Labor Force?

At least 16 years old, able and willing to work, not institutionalized, not in military, in school, or retired. 

What are the 3 types of unemployment?

Frictional unemployment, structural unemployment, cyclical unemployment.

What is Frictional unemployment?

Temporary unemployment or being between jobs. Usually the individual is a qualified worker with transferable skills. , sometimes like seasonal unemployment.

What is Structural Unemployment?

Changes in the Labor Force make some skills obsolete, these jobs will never come back, and they must learn new skills or get a job. permanent loss of these jobs is called “ creative destruction.

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. sometimes called demand deficient unemployment.

Natural Rate of Unemployment

Frictional plus Structural unemployment. The amount of unemployment that exists when the economy is healthy and growing. frictional and structural unemployment are always present, so if those are the only two present then its okay.

What is full employment Output?

The real GDP reated when there is no cyclical unemployment.

What is NAIRU

the Non-Accelerating Inflation Rate of Unemployment: inflation and not having too little unemployment.

Is too little employment a good or a bad thing?

its a bad thing since consumers spend more and producers bid up the price of resources. Low unemployment that doesn’t cause higher prices is considered “non-accelerating”

Criticisms of the unemployment Rate

Discouraged workers: given up. Labor Force Participation Rate: if people leave labor force the unemployment rate falls. Underemployed Workers: Someone who wants more hours but cant get them. Race Age Inequalities.

What is Inflation?

Inflation is rising general level of prices and it reduces the Purchasing power of of money.

Why is high inflation bad

banks don’t lend and people don’t save. This decreases investment and GDP.

Why is Low inflation okay?

it will cost more to obtain additional resources, businesses offer employees a raise to retain which cost money so prices increase, low and stable inflation leads to predictability and consumers spend more.

What is Disinflation?

Prices increasing at slower rates

What is Deflation

decrease in general prices or a negative inflation rate. this is bad Becasue people will hoard money and assets. . this decreases consumer spending and GDP. 

How is Inflation measured?

The inflation rate, and price indices. What are Price

indicies?

index numbers assigned to each year that show how prices have changed relative or a specific base year.

How to get the cost of the basket?

add up the prices of all items in the basket in a given year. the quantity in the basket must be the same as the base year.

What are problems with the CPI

substitution Bias ( buying cheaper substitutes. ), new products, product quality, 

Who is hurt and who is helped by inflation?

lenders are hurt, borrowers are helped.

What is Nominal Wage?

wage measured by dollars rather than purchasing power.

What is real wage

wage adjusted for inflation.

what are menu costs

costs money to change listed prices

what are shoe leather costs

the costs of transactions increase. People reduce their real money holdings so they ist spend time and effort making additional trips to the bank.

What is a recession?

6 month period of decline in Real GDP

What is a depression?

severe recession with prolonged decreases in GDP and unemployment.Wh

What is a recessionary Gap?

When an economy experiences high unemployment and slow growth.