B252 Exam 1

Frictional unemployment

results from searching for a job offer (time between graduation and start date)

Structural unemployment

results from a poor match of workers’ abilities and skills with current requirements of employers

cyclical unemployment

results from business recessions that occur when total demand is insufficient to create full employment

Seasonal unemployment

Results from the seasonal pattern of work in specific industries

Natural rate of unemployment (full employment)

when seasonally adjusted, the natural rate of unemployment should only take into account frictional and structural unemployment

Price index equation

Price index = (cost today of market basket/cost of market basket in base year)x100

Inflation equation

Inflation rate = ([priceindex2 - priceindex1]/priceindex1)x100

Real Rate of interest equation

Nominal - expected = real

Who benefits from inflation

Debtors

Business fluctuations (in order)

Peak → contraction → trough → expansion

Observations of the Circular Flow Model

In every economic exchange, the seller receives exactly the same amount that the buyer spends

Goods and services flow in one direction and money payments flow in the other

Things not included in GDP

Financial transactions

Transfer payments

secondhand goods

household production

legal underground transactions

illegal underground transactions

GDP limitations

Excludes non-market production

Different countries have different legal versus illegal activities

QoL is not measured (value of leisure)

GDP poorly measures a country’s wellbeing

Does not discuss distribution of income

Net Domestic Product Equation

NDP = GDP - depreciation

Net Income Equation

NI = NDP - IBT - transfers + net US income abroad + other business income adjustments

NI = wages (w) + interest (i) + rent (r) + profits (p)

Expenditure GDP approach

GDP = C + I + G + NX

Income approach to GDP

GDP = wages + rent + interest + profit + depreciation + IBT

GDP = NI + depreciation + IBT

Personal Income equation

PI = NI - corporate taxes - SS Contributions - Corporate retained earnings + government and business transfer payments

Disposable Personal Income (DPI)

DPI = PI - personal taxes

You can either consume or save with DPI

Real GDP Equation

Real GDP = (nom GDP/GDP delator)x 100

Doubling Equation

number of years to double = 70/growth rate

Equation for real gdp with growth rate

New Real GDP = Old Real GDP x (1+growth rate)^n

Keys to Economic Growth

Saving
Productivity
Education
Number of resources
Technology

Economic stages of development

Agricultural stage

Manufacturing stage

Services stage

Outward shifts to the aggregate demand curve

A drop in the foreign exchange value of the dollar

Increased security about jobs and future income

Improvements in economic conditions in other countries

A reduction in real interest rates (nominal interest rates corrected for inflation) not due to price level changes

Tax decreases

An increase in the amount of money in circulation

Assumptions of the classical model

Pure competition exists

Wages and prices are flexible

People are motivated by self-interest

People cannot be fooled by money illusion

Consequences of the assumptions of the classical model

Minimize the role of govt in the economy

If all prices and wages are flexible, any problems in the macroeconomy will be temporary

The power of the market will keep the economy at full employment in the long-run

Say’s law

supply creates its own demand