ECO2013 Exam 2 10 31 13 Chapter 7 Taking the Nation s Economic Pulse GDP The market value of final goods and services produced within a country during a specific period usually a year 1 Only final goods and services count 2 Only transactions involving production count 3 Only production within the country is counted 4 Only goods produced within the current period are counted First way to measure GDP Expenditure approach GDP sum of purchases GDP Y C I G X C consumption purchases for goods and services by consumers I Investment businesses buying final goods and services to use in their production of another good AND consumers buying houses Business plants and equipment are investment goods A substantial amount of net investment indicates that the capital stock of the economy is growing thereby enhancing the economy s future productive potential G Government purchases Government component includes both 1 expenditures on items like office supplies law enforcement and the operation of veterans hospitals and 2 the purchase of long lasting capital goods like missiles highways and dams for flood control X exports imports Largest component of GDP is consumption Second way to measure GDP Income Approach Summing up the income payments to the resource suppliers and the direct cost of producing the goods and services National income indirect business taxes depreciation net income of foreigners Higher income levels are caused by more output GNP the total market value of all final goods and services produced by the citizens of a country It is equal to GDP minus the net income of foreigners Nominal v Real values Nominal money values current year data only Real values adjusted for inflation Use a price index to adjust nominal values into real values GDP deflator designed to measure the change in the average price of the market basket of goods included in the GDP CPI measures the impact of price changes on the cost of a typical bundle of goods and services purchased by households GDP deflator is broader and covers almost all goods bought Inflation the percentage change in an index an increase in the general level of prices Problems with GDP as a measuring rod 1 2 3 4 5 It does not count non market production It does not count the underground economy It makes no adjustment for leisure It probably understates output increases because of the problem of estimating in the quality It does not adjust for harmful side effects Chapter 8 Economic Fluctuations Unemployment and Inflation The four phase of the business cycle are expansion peak contraction and recessionary trough The business cycle varies and is unpredictable The average annual growth rate is 3 Total population divided into 2 categories Under age 16 Over age 16 Not in labor force students retirees disabled In labor force Employed Unemployed but want to be employed Unemployed not currently employed but actively seeking a job or waiting to return to a job Three calculations to know 1 Labor force participation rate employed Labor force participation rate employed unemployed civilian pop over age 16 2 Unemployment rate unemployed rate unemployed employed unemployed OR employed employed unemployed unemployed OR unemployed labor unemployed labor force 3 Employment population ratio Employment population ratio A declining unemployment rate suggests the labor market and the economy are improving employed civilian pop over age 16 The three types of unemployment 1 Frictional Unemployment caused by imperfect information Occurs because employers are not fully aware of all available workers add their qualifications and available workers are not fully aware of all the jobs offered by employers Caused by constant change in the labor market 2 Structural Unemployment reflects an imperfect match of employee skills to skill requirements of the available jobs 3 Cyclical Unemployment reflects business cycle conditions When there is a general downturn in business activity cyclical unemployment increases Productivity or output per worker is the primary source of long term economic growth Some unemployment is unavoidable and arguably desirable Natural rate of unemployment normal frictional and structural unemployment Approximately 5 Full employment exists when the natural unemployment rate exists Potential output is the level of output that can be achieved and sustained in the future given the size of the labor force its expected productivity and the natural rate of unemployment consistent with the efficient operation of the labor market Actual output can differ from the economy s potential output Best thought of as 3 growth rate Trend line maximum sustainable rate Actual and Potential GDP Potential output is the maximum sustainable output level consistent with the economy s resource base given its institutional arrangements Actual and potential are equal when the economy is at full employment Inflation is a persistent increase in the general level of prices Why is inflation bad 1 2 3 It reduces investment It distorts information delivered by prices relative prices are skewed because some prices adjust more quickly than others Less productive use of resources When actual GDP potential GDP unemployment falls upward pressure on prices When actual GDP potential GDP unemployment rises downward pressure on prices High and variable levels of inflation are harmful for several reasons Because unanticipated inflation alters the outcomes of long term projects like the purchase of a machine or operation of a business it will both increase the risks and retard the level of such productive activities It distorts the information delivered by prices People will respond to high and variable rates of inflation by spending less time producing and more time trying to protect their wealth and income from the uncertainty created by inflation Production from jobs is more important than the jobs Most economists believe that the rapid expansion in the money supply is the primary cause of inflation Chapter 9 An Introduction to Basic Macroeconomic Markets Fiscal policy is the use of government taxation and expenditure policies for the purpose of achieving macroeconomic goals Monetary supply is the deliberate control of the money supply and in some cases credit conditions for the purpose of achieving macroeconomic goals There is a circular flow of output and income between businesses and households This circular flow is controlled by four key macroeconomic markets goods and services loanable
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