Test Questions 2 Define Nominal and Real GDP Nominal GDP the dollar value at current prices of all goods and services produced in one country in one year no inflation current level prices Real GDP nominal GDP adjusted for inflation associate with base year What is the difference between Nominal and Real GDP Why is this difference important RGDP eliminates the effects of inflation by holding prices constant at some base year This difference is important so that GDP does not seem to be too high or too low because of inflation Just because GDP goes up does not mean that quantity went up it could mean that quantity went down and price went up a lot Using real GDP helps to show if output has changed What are the three ways of calculating GDP How do they all get to the same number income approach the income of all the factors of production wages interest profit rent dollar PxQ approach total output x price expenditure approach total amount of dollars spent consumption investment government spending exports imports List 4 shortcomings of the RGDP as a measure of economic wellbeing 1 Doesn t count non market activity volunteer market or the labor of a homeowner repairing his own house 1 Doesn t count the black market 2 Doesn t count improved quality 3 Doesn t count leisure time GDP Deflator RGDP NGDP Change in price Index By deflating the nominal GDP for the increase in the price index you are able to get the Real GDP Show and explain on a PPC that a country that produces more capital goods than consumer can go further in 50 years than the other country Why is this true Factors of Production Land Labor Capital and Entrepeneurship push the PPC out Your ability to produce more goes up when you get more resources and by producing capital goods you are increasing your production investing in the future Draw the business cycle Put on all the labels axises phases when do we know the recession is over determines the RGDP The business cycle is rises and declines in economic activity Recession is over right after the trough above employment inflation below recession Spending What are causes of the business cycle Major innovations Changes in productivity Monetary factors Political events Financial stability bubbles and bursts Changes in aggregate spending Who s in the labor force and who s not Not under 16 institutionalized not willing to work and not looking for work Labor Force Age 16 who are willing able and looking for work in the past 4 weeks What is the unemployment rate Percentage of the labor force that is unemployed What is the definition of full employment Zero cyclical unemployment What is core inflation Inflation without incorporating food and energy goods What are the three types of unemployment Explain them Frictional between jobs Structural skills are not demanded or they don t have the right skills Cyclical caused by insufficient total spending demand because of the business cycle There is no cyclical unemployment at Full Employment What is Okun s Law than it could be For every 1 increase in unemployment rate the country s GDP will be 2 less What is inflation and how do you calculate it Inflation Increase in general price level or CPI CPI is measure of inflation Decrease in the purchasing power of the dollar Inflation Rate change in CPI from one period to the next 1 Why is the GPI better than the GDP 1 2 3 4 5 Adds weight for when poor people get more of the money Adds weight for increased leisure time Takes away weight when nonrenewable resources are depleted Takes away for crime Takes away for pollution and environmental damage List and briey describe the 7 sources of economic growth that we talked about in class 1 Strong property rights People will not invest if they believe that thieves bandits or a rapacious and tyrannical government will steal their investments and or their expected returns 2 Patents and copyrights These are necessary if a society wants a constant state of innovative new technologies and sophisticated new ideas Before patents and copyrights were first issued and enforced inventors and authors usually saw their ideas stolen before they could profit from them By giving inventors and authors the exclusive right to market and sell their creations patents and copyrights give a strong financial incentiveto invent and create 3 Efficient Financial Institutions These are needed to channel the savings generated by households toward the business entrepeneurs and inventors that do most of society s investing and inventing 1 Education and Health Care First note that educated or well trained workers are more productive Second better health reduce incapacity debility and the number of days lost to sick leave Furthermore resources may be used inefficiently when preventive health treatments are not available for the population 2 Free Trade Free trade promotes economic growth by allowing countries to specialize so that different types of output can be produced in the countries where they can be made most efficiently In addition free trade promotes the rapid spread of new ideas so that innovations made in one country quickly spread to other countries 3 Market System Under a market system prices and profits serve as signals that tell firms what to make and how much of it to make 4 Ideas of Innovations Growth is enhanced in societies that view the innovators and business people with a high degree of prestige and respect As well the lack of social or moral taboos towards progress promotes innovation and economic growth Economic Growth RGDP Economic Development HPI Economic growth change of production over time Economic development standard of living vs economy RGDP Good indicator of growth not of development HPI Good indicator of development not of growth Redistributive effects of inflations Unanticipated inflation stronger impact Fixed income groups get screwed because their real income goes down Savers get screwed because because interest rates may not cover inflation Borrowers debtors can be helped because interest payments could be less and the lenders will be screwed because they don t have as much purchasing power