Chapter 24 to 26 Study guide cis macroeconomic

employment act of 1946

made it so that the government HAD to be involved in the economy so that it will promote full employment to it’s full potential.

The main objec

tive of the Unemployment Act of 1946 was to promote economic stability and full employment in the United States. It aimed to provide federal support for unemployment compensation and established the framework for government intervention in the economy to reduce unemployment rates. The act also created the Council of Economic Advisers to advise the President on economic policy.

Income Approach to GDP

calculates GDP by adding up all incomes earned in the production of goods and services within a country during a specific period.

• Key components include:

  • Wages and Salaries: Compensation to employees for their labor.

  • Rent: Income earned by property owners from leasing their properties.

  • Interest: Earnings from capital, both for households and businesses.

  • Profits: Earnings retained by companies after all expenses have been paid.

  • taxes on production: Taxes on production are government taxes levied on goods and services, affecting production costs and consumer prices.

  • taxes on income: Taxes on income are imposed on individual or entity earnings, calculated as a percentage of net income. They are often progressive, where higher incomes are taxed at higher rates.

consumption of fixed capital

The consumption of fixed capital refers to the decrease in value of fixed assets (like buildings, machinery, and equipment) due to wear and tear over time or through obsolescence. It is an important factor in calculating net investment and helps assess how much of the capital stock is being used up in the production process. This concept is crucial for understanding the long-term sustainability of economic growth, as businesses and governments must account for

Gross National Product (GNP)

Gross National Product (GNP) measures the total economic output produced by the residents of a country within a given time period, including the value of all final goods and services produced by its residents regardless of whether they are located domestically or abroad. It is an important indicator of a country's economic performance and reflects the income earned by residents from investments and work abroad, minus the income earned by foreign residents from domestic production.

Key Components of GNP

• Domestic Production: The value of goods and services produced within the nation's borders.

• Net Income from Abroad: This includes the income earned by nationals abroad and subtracts the income earned by foreigners in the domestic economy.

Income Approach to GDP

The income approach to calculating Gross Domestic Product (GDP) sums up all incomes earned in the production of goods and services within a country during a specific period. Here are the key components:

• Wages and Salaries: Compensation to employees for their labor.

• Rent: Income earned by property owners from leasing their properties.

• Interest: Earnings from capital, both for households and businesses.

• Profits: Earnings retained by companies after all expenses have been paid.

• Taxes on Production: Government taxes levied on goods and services, affecting production costs and consumer prices.

• Taxes on Income: Imposed on individual or entity earnings, calculated as a percentage of net income, often with progressive rates where higher incomes are taxed at higher rates.

The Expenditures Approach to GDP

The Expenditures Approach to GDP calculates Gross Domestic Product (GDP) by summing up all expenditures made in an economy over a specific period. This approach highlights the total spending on the nation's final goods and services. The key components of the Expenditures Approach include:

• Consumption: The total spending by households on goods and services, such as food, clothing, and healthcare.

• Investment: The expenditure by businesses on capital goods that will be used for future production, including machinery, equipment, and buildings.

• Government Spending: The total government expenditure on goods and services, including public services and infrastructure, but excluding transfer payments.

• Net Exports: The value of a country's exports minus its imports, representing international trade balance

Real Interest Rate

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Cost of Living Adjustments (COLA)

Cost of Living Adjustments (COLA) are changes made to income payments to counteract the effects of inflation. These adjustments ensure that the purchasing power of individuals or families remains consistent despite rising prices. COLA is commonly used in various contexts, including Social Security benefits, pensions, and wages. The typical measure for these adjustments is based on the Consumer Price Index (CPI), which tracks the prices of a basket of goods and services over time.

Types of Unemployment

1. Frictional Unemployment: This type of unemployment occurs when individuals are temporarily unemployed while transitioning from one job to another. It can also include new entrants to the labor force such as recent graduates seeking their first employment.

2. Structural Unemployment: Structural unemployment arises from shifts in the economy that create a mismatch between the skills of the workforce and the needs of employers. This can be due to technological advancements, changes in consumer demand, or geographical shifts in jobs.

3. Cyclical Unemployment: Cyclical unemployment is linked to the economic cycle and occurs during economic downturns. When the demand for goods and services decreases, companies reduce production, leading to layoffs and increased unemployment rates.