Recording-2025-03-07T03_14_33.634Z

Introduction

• Overview of the importance of understanding Average Scores and Responses to Help Prepare for the Exam

• Average scores indicate general understanding and areas needing attention

• Emphasis on managing expectations regarding performance

Gross Domestic Product (GDP)

Definition and Understanding of GDP

• GDP: The dollar value of all goods and services produced in a year.

• GDP = Output; synonymous terms (use one for the other).

• Distinction between GDP and Gross National Product (GNP):

  • GDP focuses on domestic production (within the U.S.)

  • GNP includes production by U.S. entities abroad

Calculation Approaches

• Expenditures Approach:

  • Formula: GDP = C + I + G + (X-M)

    • C = Consumption

    • I = Investment (business investment only, excludes stocks/bonds)

    • G = Government Spending

    • X = Net Exports (Exports - Imports)

  • Consumption constitutes approximately 70% of GDP.

• Income Approach:

  • Measures income derived from expenditures instead of direct expenditures.

  • Income from services, wages, rent, interest, and profits can be aggregated to reflect GDP.

What is Not Included in GDP

• Intermediate goods are excluded; only final sales count.

• Excludes previous year’s productions, non-market transactions:

  • Transfer payments (no production)

  • Financial transactions (buying stocks/bonds)

  • Bartering and household services not paid

  • Black market activity

Types of GDP

Nominal vs. Real GDP

• Nominal GDP: Not adjusted for inflation

• Real GDP: Adjusted to reflect inflation; use GDP deflator to convert nominal to real.

  • GDP Deflator = Nominal GDP / Real GDP

• Per Capita GDP:

  • Real GDP / Population; used as a measure for the standard of living.

Business Cycle

Phases of Business Cycle

• Four phases: Recession, Trough, Recovery, Peak

• Recession: Defined as two consecutive quarters of negative growth.

• Unemployment correlates with recession phases, while inflation correlates with recovery and peak phases.

Economic Predictions and Indicators

• Current articles suggesting a potential recession; monitoring unemployment and GDP trends essential.

Unemployment

Labor Force Statistics

• Definition: composed of employed and unemployed individuals aged 16 and older, non-institutionalized.

• Labor Force Participation Rate: Labor Force / Population (age 16 and older).

• Unemployment Rate: Unemployed / Labor Force.

Types of Unemployment

• Natural Rate of Unemployment: Sum of structural and frictional unemployment.

  • Structural Unemployment: Skills mismatch (e.g., technological advancements replacing jobs).

  • Frictional Unemployment: Temporarily unemployed (searching for new jobs).

  • Seasonal Unemployment: Fluctuations due to the season (e.g., agriculture, retail).

  • Cyclical Unemployment: Due to economic downturns (business cycles).

  • Hidden Unemployment: Discouraged workers who stop looking for jobs, not counted.

Inflation

Types of Inflation

• Demand-Pull Inflation: Occurs when demand for goods/services exceeds supply.

• Cost-Push Inflation: Results from increased costs of production shifting supply curve to the left.

Measurement of Inflation

• Two CPI variations: Regular CPI (includes all) vs. Core CPI (excludes food/energy for better predictability).

• Inflation Calculation: Current Market Basket Cost / Base Year Market Basket Cost x 100.

Impact on Different Groups

• How inflation affects debtors/creditors, savers, and employees (fixed vs. flexible incomes).

Aggregate Supply and Demand

Components of Aggregate Demand (AD)

• AD = C + I + G + (X-M)

• Influence of consumer confidence, interest rates, and investment on AD.

Aggregate Supply (AS)

• Short-Run vs. Long-Run AS: Factors affecting shifts in AS include input costs, productivity, and taxes/subsidies.

• Importance of understanding shifts in AS to predict economic outcomes.

The Multiplier Effect

Concept of Multiplier

• Spending Multiplier = 1 / MPS or 1 / (1-MPC)

• Tax Multiplier = MPC / MPS, usually one less than spending multiplier.

• Understanding economic impact of government spending and tax changes.

Relative Strength of Spending vs. Tax Changes

• Government spending has a direct and stronger impact compared to tax cuts.

Phillips Curve

Relationship Between Inflation and Unemployment

• Short-run Phillips Curve: Inverse relationship between inflation and unemployment.

• Long-run Phillips Curve: Indicates long-term natural rate of unemployment, showing no relationship with inflation over extended periods.

Conclusion

• Preparation involves understanding key metrics and relationships within the economy.

• Emphasize connections between different economic factors such as GDP, unemployment, inflation, and demand/supply cycles.