Macroeconomics Exam 2 Study Guide Chapter 7 Taking the Nation s Economic Pulse 1 Gross Domestic Product GDP the market value of all the final goods and services produced within a country during a specific period usually a year a Market Value goods are weighed according to the purchase price of the good or service user i Goods worth more add more to GDP ii Total spending on all goods and services produced during the year is summed to obtained GDP b Final Goods and Services goods and services that are purchased by the ultimate i Intermediate Goods and Services goods purchased for resale ii Avoidance of Double Counting intermediate goods are not counted in GDP because their value is calculated in the final good 1 Ex the production of bread c Produced only goods and services that are produced or manufactured are counted in GDP transfers are not i Financial transactions are NOT counted in GDP d Within a Country counts only the goods and services produced within the geographic borders of a country e During a Specific Period only goods produced in 2014 are included in the figure for 2014 GDP 2013 i Ex How will a house produced in 2003 and resold in 2013 affect GDP in 1 Sales commission additions to the home improvements 2 Ways to Measure GDP a Expenditure Approach i Y C I G NX 1 Y GDP 2 C Consumption a Household spending produced on goods and services during the current period durable goods non durable goods and services 3 I Investment a The construction or production of capital goods that provide infrastructure 4 G Government Consumption and Gross Investment a Government spending on goods and services capital goods 5 NX Net Exports a Exports x imports m b Exports domestically produced goods and services sold abroad Page 1 of 15 c Imports foreign produced goods and services purchased b Resource Cost Income Approach domestically 3 Limitations of GDP a Excludes nonmarket production b Excludes the underground economy any transactions that take place outside recorded market channels accounts for 10 15 of possible GDP c Excludes leisure and human costs d Difficulty measuring quality variation and introduction of new goods e Excludes the costs of harmful side effects 4 Per Capita GDP GDP Population a Per Capita GDP is a broad indicator of general living standards 5 Gross National Product GNP total market value of all final goods and services produced by the citizens of a country no matter where they are geographically a Counts the income earned by Americans abroad b Ignores the income foreigners make in the abroad 6 Adjusting for Price Changes a Nominal Values values expressed in current dollars b Real Values values that have been adjusted for the effects of inflation 7 Price Index PI a Measures the cost of purchasing a market basket of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period b 8 Key Price Indexes a Consumer Price Index CPI indicator of the general level of prices compares the cost of a typical market basket in a specific period to the cost of the basket in a different period i Measures the impact of price changes on households b GDP Deflator reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year 9 Which PI should we use a if you are measuring for households use CPI b if measuring for the entire country use the GDP deflator a You need the nominal values and the price index for both the current year and the 10 Calculating Real Values base year b Ex real GDP i GDP2013 400 GDP2000 100 ii PI2013 2 PI2000 1 c Real GDP2013 Nominal Value2013 Chapter 8 Economic Fluctuations Unemployment Inflation 1 Business Cycle fluctuations in the general cycle of economic activity Page 2 of 15 a Expansion characterized by growing GDP and declining unemployment b Peak Boom the height of the expansion phase c Contraction characterized by falling GDP and rising unemployment d Trough the lowest point of the contraction phase e Recession a decline in real GDP for two or more consecutive quarters f Depression a prolonged and severe recession 2 Labor Market Definitions from a regular job 3 Types of Unemployment a Employed he or she worked full or part time in the past week or is on sick leave b Unemployed a person who is not currently employed but is 1 actively seeking employment in the last 4 weeks or 2 waiting to start or return to a job a Frictionally Unemployed UF unemployment resulting from changes in the economy and imperfect information that prevents workers from being immediately matched up with existing job openings not bad to an economist b Structural Unemployment US unemployment due to structural characteristics of the economy that prevent the matching of available jobs with available workers c Cyclical Unemployment UC unemployment due to recessions and inadequate i High during recessions low or negative during expansions d The Natural Rate of Unemployment U the normal unemployment rate when the economy is operating at a sustainable rate of output e Actual Rate of Unemployment U sum of all three types of unemployment f Full Employment occurs when the economy is experiencing the highest rate of 4 Potential Output YF the level of output that can be achieved and sustained in the future given 1 the size of the labor force 2 expected productivity 3 natural rate of unemployment 5 Inflation an increase in the general level of prices percent change labor demands i U US UF output it cans sustain a Causes the value of the dollar to decrease b Problems with inflation i Reduces investment ii Disrupts all the information delivered by prices iii Results in a less productive use of resources c What Causes Inflation i Demand rising faster than supply ii Rapid increase in the money stock d Hyperinflation inflation that is particularly severe and out of control i Ex post WW1 Germany Zimbabwe 2008 1 The Labor Market a Price of labor is called wage w b Quantity of labor is called employment E Chapter 9 Page 3 of 15 c Labor demand i Firms demand labor ii Labor demand is downward sloping because as wage increases firms will want to employ more people d Labor supply i Upward sloping because as wage increases people will want to work more 2 The Loanable Funds Market the market that coordinates the borrowing and lending decisions of business firms and households a Price is the real interest rate r b Quantity is the amount saved or invested QS I 3 The Interest Rate a Nominal Interest
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