Unit 2 Measuring Economic Performance

Circular Flow of Income

A simplified model of the economy that shows the flow of money and resources from the factor market, to businesses, to product markets, and to households

Product Markets

Goods and services flow from firms to households in this market

Factor Income

in the ___________ market, households sell resources

Profit

Economists consider _______ to be a COST of producing goods/services

Factor Market

resources can be purchased here

Total Income

the annual cost of producing the entire output of goods/services in the economy, equal to the sum of all wages, rent, and profit paid by firms

National Income Accounting

the measurement system used by the U.S. government to estimate national income, by measuring the flows of income and expenditures.

Gross Domestic Product (GDP)

the total market value of all final goods and services produced within a nation during a year, C+I+G+(X-M)

Value Added

the term ______ ________ refers to the dollar value of an industry's sales less the dollar value of the intermediate goods purchased by the industry, Gross value of the product minus the cost of raw materials and energy

Retail Price

The sum of cost plus markup; the price the customer pays for the merchandise.

Depreciation

the reduction in the value of capital goods due to physical wear and tear

Net Domestic Product (NDP)

GDP minus DEPRECIATION

Wages

Compensation received by employees for services performed. Usually, wages are computed by multiplying an hourly pay rate by the number of hours worked. The largest category of gross domestic income.

Expenditures

Government spending of revenues. Major areas of federal spending are social services and national defense.

Capital Good

a good that is used to make other goods/services

Net Exports

the value of exports minus the value of imports

Households

this sector of our economy accounts for the largest percentage to total spending

National Income

the total factor payments to all resource owners is called

GDP price deflator

The price index that measures the average price level of the goods and services that make up GDP; A measure of the price level; (Nominal GDP / Real GDP) x 100.

Nominal value

expressed in terms of actual market prices at which goods are sold

Real value

computed by taking the nominal value and dividing by the appropriate price index

Constant dollars

dollars are corrected for general price level changes

Real GDP

Expresses value of dollars in terms of what can be purchased rather than the actual number of dollars spent (calculated in constant dollars adjusted for inflation), GDP corrected for changes in the average of overall prices, (GDP/GDP deflator) x 100

Resource Market

a market in which households sell and firms buy resources or the services of resources

Financial Market

Forums in which suppliers of funds and demanders of funds can transact business directly

Consumer Price Index

A price index that measures the average price level of the items in the base year market basket. This is the main measure of consumer inflation.

unemployment

As measured by the Bureau of Labor Statistics, the proportion of the labor force actively seeking work but unable to find jobs

natural rate of unemployment

The level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment. Unemployment rate between 4 and 6 percent in the USA.

Inflation

A continuous rise in the price of goods and services; The percentage change in the CPI from one period to the next.

Business Cycle

The periodic rise and fall (in four stages) of economic activity, such as employment and production

Aggregate Spending

total spending on domestically produced final goods and service in the economy sum of consumer spending (C), investment spending (I), government purchases of goods and services (G), and exports minus imports (X-M)

Aggregate Income

the sum of all income earned by suppliers of resources in the economy. With some accounting adjustments, aggregate spending equals aggregate income. Wages + rent + interest + profit earned by suppliers of resources in the economy.

Expansion

A time when the economy is flourishing, real GDP is growing; also called prosperity.

Peak

The top of the business cycle characterized by GDP being at its highest and expansion has ended.

Contraction

When the economic activity is slowing and real GDP is falling.

Trough

The bottom of the business cycle where a contraction has stopped.

Income Approach

A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services.

Closed economy

An model that assumes there is no foreign sector (imports and exports).

Aggregation

The process of summing the microeconomic activity of households and firms into a more macroeconomic measure of economic activity.

Final goods

Goods that are ultimately consumed rather than used in the production of another good

Intermediate goods

Goods that require further modification before they are ready for final use, e.g., steel used to make the Ferrari

Double counting

The mistake of including the value of intermediate stages of production in GDP on top of the value of the final good.

Second-hand sales

Final goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced

Nonmarket transactions

Household work or do-it-yourself jobs are missed by GDP accounting. The same is true of government transfer payments and purely financial transactions like the purchase of a share of IBM stock.

Underground economy

These include a wide variety of activities through which people make money that they do not report to the government, and in some cases their endeavors may involve criminal behavior, bartering or informal exchange of cash.

Nominal GDP

A measure of GDP in which the quantities produced are valued at current-year prices; measure current dollar value of production. It has not been adjusted for inflation.

Base year

The year chosen as a point of reference or basis of comparison for prices in other years; the benchmark year to compare real values over time.

Price index

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year.

Market basket

A collection of goods and services used to represent what is consumed in the economy

Real rate of interest

The percentage increase in purchasing power that a borrower pays a lender

Expected (anticipated) inflation

The inflation expected in a future time period. This expected inflation is added to the real interest rate to compensate for lost purchasing power.

Nominal rate of interest

The percentage increase in money that the borrower pays the lender and is equal to the real rate plus the expected inflation

Depression

A prolonged deep contraction in the business cycle when business activity slows, prices and wages fall, and unemployment rises.

Nominal income

Today's income measured in today's dollars. These are dollars unadjusted by inflation.

Real income

Today's income measured in base year dollars. These inflation-adjusted dollars can be compared from year to year to determine whether purchasing power has increased or decreased.

Employed

A person 16 years old +) who has worked for at least one hour during the week of the BLS employment survey.

Unemployed

A person not working but looking for work.

Labor force

The sum of of all individuals 16 years and older who are either currently employed (E) or unemployed (U). LF = E + U.

Out of labor force

Someone who is not working and is not actively seeking a job.

Unemployment rate

As measured by the Bureau of Labor Statistics, the proportion of the labor force actively seeking work but unable to find jobs. Sometimes called the jobless rate; UR = 100 X U/LF

Discouraged workers

Individuals who have stopped looking for a job because they are convinced they will not be able to find a suitable one.

Frictional unemployment

A type of unemployment that occurs when someone new enters the labor market or switched jobs. This is a relatively harmless form of unemployment and not expected to last long.

Seasonal unemployment

A type of unemployment that is periodic and predictable, occurs as a result of harvest schedules, vacations, or when industries make seasonal shifts in their production schedule. Employers and employees anticipate these changes and can plan accordingly, thus the damage is minimal.

Structural unemployment

A type of unemployment that is a result of a fundamental change in the economy where some job skills are no longer in demand.

Cyclical unemployment

A type of unemployment that rises and falls with the business cycle. This form of unemployment is felt economy-wide, which makes it the focus of macroeconomic policy.

Full employment

Employment level when there is no cyclical unemployment.

Stagflation

If an economy is suffering from high inflation and high unemployment at the same time (both are greater than 5%). This can be caused when supply shifts to the left. Prices rise and employers lay off workers due to the decrease in quantity demanded.

Cost push inflation

This is when prices rise because the cost of making the product increases. For example, here on the islands we make beautiful shell necklaces that are a big hit with the tourists. If the shell suppliers raise the cost of shells, then that increased cost will create an increase in price of necklaces. This is necessary for necklace sellers to cover their increased costs. When resource costs increase, supply decreases or shifts left.

Wage push inflation

This is when prices increase due to the fact that workers receive more wages for the same amount of work. For example, if the shell collectors are paid one dollar an hour and work eight hours a day this year, then next year they are paid $1.50 an hour and do not take on any extra responsibilities, the shell suppliers will need to raise their prices to cover these costs. This increase in the cost of a resource will decrease supply and prices will rise.

Demand pull inflation

This is when prices go up due to an increase in consumer demand for goods. Many things can increase demand, including an increase in income, growing population, and a change in tastes and preferences. For example, as the number of tourists increases, the demand for goods will increase, thereby leading to a higher equilibrium price.

Profit push inflation

This is when the owners of business raise prices simply because they wish to make more profit. For example, if the Sunny Seashell Necklace Company raised the price of its seashell necklaces because it was sure tourists would pay a higher price, this would lead to an increased price level.