Macroeconomics, Exam 2

national income accounting

the techniques used to measure the overall production of the economy and other related variables for the nation as a whole

Price

Measure of value of a good or service

GDP

Final output dollar value

Intermediate goods

goods used in the production of final goods

GDP measurements

Exclude intermediate goods

GDP

Output produced within a nation's borders

Gdp

Makes it easier to compare economic activity globally

GDP per capita

Used by a measure of a country's standard of living, is gdp divided by population

Nonmarket activities

GDP measurements exclude goods/services produced but not sold

How much money in underground market?

$2 trillion

Gdp

Important use: measure how production changes every year

Real GDP

Nominal GDP/ Price Index

Nominal GDP

the value of final goods and services evaluated at current-year prices

GDP equals

National income

Real GDP=

(Nominal GDP/Price Index) x 100

GDP

Consumption + investments + government expenditures + exports + imports

statistical discrepancy

Makes up for nonmarket income

Personal income

pretax income received by households

disposable income

Personal income left after taking out taxes

unemployment & inflation

Two major economic problems

Unemployed person

No job & is actively seeking one

Loss of output

Cost of unemployment

Labor force

the total number of workers, including both the employed and the unemployed

Not labor force

Not working and not looking for work

Labor force shot up

From 1960-90 bc of women joining

Population growth and immigration

why does the labor force grow?

How much does the labor force grow by every year?

2 million workers

increases production possibilities

labor force growth

unemployment

idled resources- the economy operates inside the production possibilities curve and is inefficient

okun's law

1 percent more unemployment results in 2 percent decrease in gdp

unemployment rate formula

number of unemployed/ labor force

unemployment is higher for

men than women

unemployment is higher for

black and Hispanics more than whites

unemployment is higher for

less educated than highly educated

unemployment is higher for

teens than older

duration of unemployment

lowers when the economy is growing and rises when economy stagnates/declines--- the trend is the same as unemployment rate

reasons for unemplohment

1! lost job

2- reentrants

3-new entrants

4- left job

dicouraged workers

former job seekers who have given up and aren't looking for a job anymore

underemployed

people who want full time work in their field but can only find part time or work below their capacity--- still count as employed

phantom employed

pretend to look for a job to receive public assistance but don't actually want one-- still count as unemployed

human cost of unemployment

loss of income, loss of confidence, social stress, lost lives (suicide)

Full employment

not the same as no unemployment

full employment

the lowest unemployment rate compatible with price stability; zero cyclical unemployment--ranges between 4-6%

seasonal unemployment

seasonal work ends-- lawncare, etc--normal

frictional unemployment

brief period of unemployment experienced by people moving between jobs or into the labor market-- normal

structural unemployment

caused by a mismatch between skills or location of job seekers and requirements/ location of available jobs-- normal

cyclical unemployment

caused by decline in economic activity--not normal

inflation flashpoint

rate of output at which inflationary pressures intensify-- at or below 4% unemployment

changes in structural unemployment

come from changes in society

inflation

increase in average level of prices

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

market mechanism

causes prices of individual goods and services to rise or fall

relative price

price of one good compared to price of other good,, buyers switch from one good to another when their relative prices diverge

inflation

is not a market function

effects of inflation

some prices rise and some fall

real income

income in constant dollars, adjusted for inflation

nominal income

income in current dollars

effect of inflation

can be seen in difference between nominal income and real income

inflation causes

a redistribution of wealth, seen in price changes, income changes, & wealth changes

price effects due to inflation

if you buy products whose prices rise faster-- you're worse off. if you sell faster-- you're better off

income effects due to inflation

nominal income rising slower than inflation- you're worse off

income rising faster than inflation-- you're better off

wealth effects due to inflation

assets declining in real value- worse off

assets increasing in real value- better off

money illusion

using nominal dollars rather than real dollars to gauge changes in one's income or wealth

macro consequences of inflation

uncertainty, speculation, bracket creep

uncertainty

not knowing prices of goods in the future makes purchasing & production decisions much harder

speculation

decisions shift from standard economic activity to betting on future prices of goods

bracket creep

in a progressive tax system, when nominal incomes rise, the taxpayer gets pushed into a higher tax bracket

deflation

a decrease in the general level of prices

redistributive effects-- opposite of those for inflation

GDP deflator

most accurate.

changes in prices of all goods and services are included, used to adjust nominal gdp to real gdp

before the 1930s…

people thought that a market driven economy was inherently stable (laissez faire)

classical economics

the economy "self-adjusts" to any deviations from its long-term growth.

wages and prices are flexible

say's law

supply creates its own demand

all that is produced will be sold, all who want employment will be hired at some point

macrofailure

self adjustment mechanism did not work- great depression

John Maynard Keynes

analyzed great depression- concluded that self-adjusted didn't happen bc of insufficient demand

suggested that the way out of depression was to buy more output

& employ more people

& provide more income transfers

& make more money available

For an overheated economy, Keynes proposed

-Higher taxes

-Gov spending reductions

-Reduce availability of money

business cycle

peak, trough, contraction, recovery

peak

gdp maximizes

contraction

gdp declines

trough

gdp minimizes