Chapter 21 What are two different ways to calculate GDP o Expenditure PG 389 The expenditure approach involves counting expenditures on goods and services by different groups in the economy The four main components are consumption expenditures by households C gross private investment spending principally by firms I government purchases of goods and services G and net exports exports minus imports EX IM o Output PG 393 sums the gross value added of various sectors plus taxes and less subsidies on products Trade Surplus An excess of exports over imports is a trade surplus Trade Deficit An excess of IMPORTS over EXPORTS is a trade deficit Trade Balance in an economy over a certain period measured in the currency of that economy difference between the monetary value of exports and imports of output Double Counting occurs when the same goods in an economy are counted twice This can happen because goods go through several stages of assembly before they find there why to their intended buyer Per Capita GDP A measure of the total output of a country that takes the gross domestic product GDP and divides it by the number of people in the country Business Cycle a cycle or series of cycles of economic expansion and contraction Recession a business cycle contraction It is a general slowdown in economic activity Depression A severe and prolonged downturn in economic activity In economics a depression is commonly defined as an extreme recession that lasts two or more years Peak The highest point between the end of an economic expansion and the start of a contraction in a business cycle Trough The stage of the economy s business cycle that marks the end of a period of declining business activity and the transition to expansion What are the problems with using GDP as a measuring rod o Non market production o Underground economy o Leisure and Human Cost o Quality variation and introduction of new goods Human Development index pg 401 rank countries into four tiers Chapter 22 o a composite statistic of life expectancy education and income indices used to Physical Capital refers to a factor of production or input into the process of production such as machinery buildings or computers Human Capital the stock of competencies knowledge social and personality attributes including creativity cognitive abilities embodied in the ability to perform labor so as to produce economic value Technology Growth Accounting Studies a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress measured as a residual in an economy Convergence o the hypothesis that poorer economies per capita incomes will tend to grow at faster rates than richer economies Chapter 23 Out of labor force Civilian Labor Force all Americans who are eligible to work in the everyday U S economy Unemployed occurs when people are without work and actively seeking work Unemployment Rate percentage of the total labor force that is unemployed but actively seeking employment and willing to work Three Types of unemployment o Frictional unemployment that comes from people moving between jobs careers and locations o Structural unemployment that comes from there being an absence of demand for the workers that are available Caused by changes in technology Change in tastes o Cyclical Cyclical unemployment occurs when the unemployment rate moves in the opposite direction as the GDP growth rate GDP growth is small or negative unemployment is high Implicit Contract refer to voluntary and self enforcing long term agreements made between two parties regarding the future exchange of goods or services Efficiency Wage Theory hypothesis argues that wages at least in some markets form in a way that is not market clearing Specifically it points to the incentive for managers to pay their employees more than the market clearing wage in order to increase their productivity or efficiency Natural Rate of Unemployment hypothetical unemployment rate consistent with aggregate production being at the long run level Chapter 24 Market Basket of good and services the base for the definition of the Consumer Price Index CPI refers to a fixed list of items used specifically to track the progress of inflation in an economy or specific market Consumer Price Index measures changes in the price level of a market basket of consumer goods and services purchased by households Substitutuion Bias describes a bias in economics index numbers arising from tendency to purchase inexpensive substitutes for expensive items when prices change GDP Deflator a measure of the level of prices of all new domestically produced final goods and services in an economy Producer Price Index measures the average changes in prices received by domestic producers for their output It is one of several price indices Deflation a decrease in the general price level of goods and services 1 Deflation occurs when the inflation rate falls below 0 Hyperinflation occurs when a country experiences very high and usually accelerating rates of monetary and price inflation causing the population to minimize their holdings of money Nominal Value Nominal value in economics also refers to a value expressed in monetary terms for a specific year or years without adjusting for inflation Real Value Real value is obtained by removing the effect of price level changes from the nominal value of time series data so as to obtain a truer picture of economic trends The nominal value of time In economics a nominal value is an economic value expressed in monetary terms that is in units of a currency By contrast a real value is a value that has been adjusted from a nominal value to remove the effects of general price level price changes over time For example changes in the nominal value of some commodity bundle over time can happen because of a change in the quantities in the bundle or their associated prices whereas changes in real values reflect only changes in quantities Real values are a measure of purchasing power net of any price changes over time For example nominal income is often restated as real income thus removing that part of income changes that merely reflect inflation a general increase in prices Similarly for aggregate measures of output such as gross domestic product GDP the nominal amount reflects production quantities and prices in that time period whereas the differences between real amounts in different time periods reflect