AS

Unit 2 Macro Test

Circular Flow Model

Vocab:

  1. Private Sector - part of economy that is run by individuals and businesses
  2. Public Sector - part of economy controlled by gov
  3. Factor Payments - payment for factors of production (rent, wages, interest, & profit)
  4. Subsidies - gov payments to businesses
  5. Inflation - rise in overall price level and fall in purchasing value
  6. CPI - (Consumer Price Index) Index # showing price changes for value of fixed basket of consumer goods
  7. COLA- cost of living adjustments (gov social programs depend on COLAs)

Economic Goals

  1. Promote Economic Growth
  2. Limit Unemployment
  3. Keep Prices Stable (Limit Inflation)

GDP: dollar value of all final goods and services produced within a country’s borders in one year

NOT INCLUDED in GDP:

  1. Intermediate goods (used to make final goods like tires for a car)

  2. Nonproduction Transactions

    1. Financial Transactions (stocks, bonds, real estate)
    2. Used Goods

  3. Non-Market/Illegal Activities (things made at home, untaxed labor like baby sitting, drug dealing)

Calculating GDP:

  • Expenditures Approach (C+I+G+Xn) - Consumer spending, Investment, Gov spending, Net exports
  • Income Approach (W+I+R+P) - Wages, Income, Rent, Profit
  • both approaches should give same number!

GDP per capita: more representative of standard of living, shows how much on average each person produces

Nominal GDP : dollar value of GDP that year

Real GDP : Nominal GDP gets adjusted for inflation to accurately compare with GDP’s from diff years

Employed: have a job

Unemployed: no job, but ACTIVELY LOOKING

Working age pop: 16+

Labor force: employed+unemployed

Not in labor force: ppl not looking for job, under 16 or retired, students, homemakers, off grid/unreported income

3 Types of unemployment:

  1. Frictional: ppl who choose to be unemployed for a bit to look for new jobs/ weigh options (recent grads)
  2. Structural: ppl who lose job bc skills are obsolete, need new training and skills (blockbuster clerk)
  3. Cyclical: ppl who lose job bc of change in business (getting laid off)

5 Types of Inflation:

  1. Demand Pull Inflation: inflation caused by rising demand
  2. Cost Push Inflation: inflation caused by low supply
  3. Hyperinflation: very high and accelerating inflation (usually caused by printing money)
  4. Disinflation: overall decrease in inflation **good but hard to maintain
  5. Deflation: overall decrease in price level

*Inflation helps ppl who borrow with fixed-rate interest

*Inflation hurts ppl who lend with fixed-rate interest, fixed income receivers (retirees, minimum wage workers), and savers

*Inflation doesn’t affect flexible-income receivers bc businesses anticipate inflation(COLA)

CPI

  • CPI for base year is always 100
  • CPI shortcomings:
    • fixed market basket doesn’t reflect changes in relative prices (consumers will substitute for cheaper goods that aren’t necessarily in market basket)
    • doesn’t reflect changes brought by new products, more variety makes more purchasing power (fewer dollars needed to maintain standard of living- Ex: Music streaming Spotify $10/month vs MP3 $1/song)
    • doesn’t reflect changes in quality (quality changes mean value of dollar is rising even if price stays same)
    • **matters bc if CPI understates inflation rate then COLAs will be higher than needed