Cis MacroEco Unit 2

Types of income/output not included in GDP:

• Non-market transactions: Activities not bought and sold in the market, such as unpaid household labor and volunteer work.

• Informal economy: Economic activities that are not taxed or regulated, including many freelance and casual jobs.

• Transfer payments: Government payments like social security and unemployment benefits that do not result in immediate goods or services.

• Black market transactions: Illegal transactions that are not reported to authorities, falling outside of official economic measurements.

• Intermediate goods: Goods used in the production of final goods and services are not counted separately to avoid double counting.

• Secondhand sales: Sales of used goods which do not represent new production, and therefore are not included in GDP calculations.

Gross investment refers to the total amount spent on investment goods within an economy over a specific period of time, including the costs of replacing depreciated assets. It encompasses all new investments made without accounting for wear and tear on existing assets.

Net investment, on the other hand, is derived by subtracting depreciation (the value lost due to wear and tear) from gross investment. It reflects the actual increase in an economy's productive capacity, indicating how much investment is being added to the existing capital stock after accounting for the loss of value in current assets.

To calculate real GDP using nominal GDP and the GDP price index, the formula is:

Real GDP = (Nominal GDP / GDP Price Index) x 100

Where the GDP price index is typically expressed as a percentage. This formula adjusts nominal GDP for inflation to reflect the true value of goods and services produced in an economy.

To calculate real GDP using nominal GDP and the GDP price index, the formula is:

Real GDP = (Nominal GDP / GDP Price Index) x 100

Where the GDP price index is typically expressed as a percentage. This formula adjusts nominal GDP for inflation to reflect the true value of goods and services produced in an economy.

To calculate real GDP using nominal GDP and the GDP price index, the formula is:

Real GDP = (Nominal GDP / GDP Price Index) x 100

Where the GDP price index is typically expressed as a percentage. This formula adjusts nominal GDP for inflation to reflect the true value of goods and services produced in an economy.

Unanticipated inflation can have varying effects on different groups in the economy:

Groups Hurt by Unanticipated Inflation:

• Fixed-Income Earners: Individuals on fixed incomes, such as retirees relying on pensions, may find their purchasing power diminished as prices rise, while their income remains constant.

• Lenders: Creditors may be hurt as the real value of money repaid is less than anticipated, leading to losses on loans that are not adjusted for inflation.

• Employees with Fixed Salaries: Workers with fixed wages who do not receive cost-of-living adjustments may struggle to maintain their living standards as prices increase.

Groups Helped by Unanticipated Inflation:

• Borrowers: Individuals and businesses with fixed-rate loans benefit because they repay loans with money that has less purchasing power than when they borrowed it, effectively reducing the real cost of their debt.

• Assets Holders: Those holding tangible assets, like real estate or commodities, may see an increase in the nominal value of their assets, protecting their wealth against inflation.

• Companies with Pricing Power: Firms that can easily pass on costs to consumers through price increases may benefit as they maintain their profit margins in an inflationary environment.

In the context of the labor force, the following groups are generally included and excluded:

Groups Included in the Labor Force:

• Employed Individuals: Those who are currently working for pay or profit, including full-time and part-time workers.

• Unemployed Individuals: People who are actively seeking employment but do not currently have a job.

Groups Excluded from the Labor Force:

• Students: Individuals who are primarily focusing on education and not seeking work.

• Retirees: Older adults who have exited the workforce and are not actively looking for work.

• Disabled Individuals: Those with disabilities that prevent them from participating in the labor force may be excluded.

• Discouraged Workers: People who have stopped looking for work because they believe no jobs are available for them.

• Homemakers: Individuals who manage household duties and are not actively seeking outside employment.

• Military Personnel: Active-duty members of the armed forces are generally not counted in the civilian labor force.

The unemployment rate is calculated using the formula:

Unemployment Rate = (Number of Unemployed Individuals / Labor Force) x 100%

Where the labor force includes both employed and unemployed individuals actively seeking work.

Factors that can understate the amount of unemployment include:

1. Discouraged Workers: Individuals who are available for work but have given up looking because they believe no jobs are available are not counted in the official unemployment statistics.

2. Underemployment: Those working part-time jobs who desire full-time work are not considered unemployed, even though they are not fully utilizing their skills or earning a sufficient income.

3. Informal Employment: Workers in informal or casual jobs may not be captured by official statistics, leading to an underestimation of true unemployment levels.

4. Statistical Anomalies: Changes in how unemployment is measured or reported can sometimes temporarily affect the unemployment rate, failing to reflect the reality of joblessness.

5. Temporary Workers: Individuals employed in temporary or seasonal jobs may mask underlying unemployment issues, as they may not have consistent or stable employment.

6. Labor Force Participation Rate: A declining participation rate may suggest fewer unemployed individuals, but it can actually indicate a larger number of people who are not engaged in the labor market, thus underrepresenting unemployment figures.

The four phases of the business cycle are:

1. Expansion: This phase is characterized by increasing economic activity, rising GDP, and higher levels of employment. Businesses invest more, consumer confidence grows, and spending increases.

2. Peak: At this stage, the economy reaches its highest point of activity before a downturn. Economic indicators are at their best, but inflation may begin to rise due to increased demand.

3. Contraction: Economic activity decreases, leading to a decline in GDP, higher unemployment, and reduced consumer spending. This phase can lead to a recession if it persists.

4. Trough: The lowest point of the business cycle, where economic activity is at its minimum. After this stage, the economy begins to recover and move back into the expansion