ECO 2013 Principles of Macroeconomics Chapter 7 Taking the Nation s Economic Pulse 4 Learning Goals 1 Define gross domestic product and describe the key phrases of the definition Chapter heading GDP A Measure of Output Key term Gross domestic product the market value of final goods and services produces within a country during a specific time period Provide more details of the key phrases of the GDP definition 1 Only final goods and services count Only count the finished products not products still being produced You wouldn t count the flour for the bread and the bread sold because that is double counting 2 Only transactions involving production count financial transactions and income transfers are excluded 3 Only production within the country is counted Can t count products produced in another country 4 Only goods produced during the current period are counted The purchase and sale of goods produced during earlier years are not counted 2 List the ways to measure gross domestic product and identify the source of higher income levels Chapter heading GDP as a Measure of Both Output and Income Key terms Personal consumption the measure of goods and services targeted and consumed by individuals Private investment investments made for individuals concern not the general public Net exports Exports minus Imports Gross national product Market value of all products and services produced in one year by labor and property supplied by the residents of a county What are the two ways to measure GDP Expenditure Approach sum of expenditures on final user goods and services purchased by households investors governments and foreigners and Resource cost income Approach the sum of costs incurred and income generated by the production of goods and services during the period What is the source of higher income levels Many things the type of job you work the number of years of education you have the background you come from Components of the expenditure approach 1 Personal consumption purchases 2 Gross private investment including inventories 3 Government Purchases Consumption and investment 4 Net Exports exports imports What is the difference between GDP and GNP GDP defines production based on the geographical location of production and GNP allocates ownership based on ownership 3 Differentiate between real and nominal GDP Chapter heading Adjusting for Price Changes and Deriving Real GDP Key terms Nominal values values before inflation Real values adjusted for inflation Inflation an increase in the general level of prices Consumer price index measures the impact of price changes on the cost of a typical bundle of goods and services purchased by households GDP deflator measure the change in the average price of the market basket of goods Why are nominal values adjusted for inflation So we can tell if prices are really rising or falling Like Gas is it really more expensive now then in was 20 years ago You can only tell for sure when you adjust for inflation Amount of money movies made class example What s the difference between the CPI and the GDP Deflator The GDP deflator is a broader price index than the CPI 4 Examine the limitations of using GDP as a measure of output and income Chapter heading Problems with GDP as a Measuring Rod Key term Underground economy basically the black market the items that are sold that aren t put in the public eye allowing them to be counted towards GDP Reasons why GDP is an imperfect measure 1 does not count non market production 2 does not count the underground economy 3 makes no adjustment for leisure 4 probably understates output increases because of the problem of estimating improvements in the quality of products 5 Does not adjust for harmful side effects ECO 2013 Principles of Macroeconomics Chapter 8 Economic Fluctuations Unemployment and Inflation 5 Learning Goals 1 Characterize fluctuations in economic growth Chapter heading Swings in the Economic Pendulum Key terms Business cycle Refers to economy wide fluctuations in production or economic activity over several months or years Recession The bottom of the business cycle when unemployment rises and GDP falls What happens to unemployment and real GDP during a recession Unemployment increases and the GDP decreases What happens to unemployment and real GDP during an expansion Unemployment decreases and the GDP increases 2 Relate fluctuations in GDP to employment and the demand for labor Chapter heading Economic Fluctuations and the Labor Market Key terms Civilian labor force Those people 16 years who are both employed and unemployed Labor force participation rate in the labor force civilian population 16 Unemployment rate unemployed in the Labor Force Employment Population ratio employed civilian population 16 What s the difference between the labor force participation rate and the unemployment rate LFPR is the number of people who are actually working RU the number of unemployed of the people who could possibly be working Why will an economy always have some unemployment Yes it is healthy for an economy to have unemployment 3 Classify unemployment into three categories Chapter heading Three Types of Unemployment Key terms Frictional unemployment available workers are not fully aware of all the jobs being offered by employers Structural unemployment Someone doesn t possess the qualities or requirements of the available jobs Cyclical unemployment reflects business cycle conditions when there is a downturn in the economy cyclical unemployment increases Provide an example of each kind of unemployment Frictional Tom didn t know that the construction company was hiring or he would have gotten the job Structural Tim worked at McDonalds for three months and then tried to get a job managing a Ruby Tuesdays but he wasn t qualified he didn t have enough experience Cyclical We fall into a recession and jobs are lost or we reach an economic boom and everyone has jobs 4 Distinguish the difference between full employment and the natural rate of unemployment and correlate both to potential GDP Chapter headings Employment Fluctuations The Historical Record Actual and Potential GDP Key terms Full employment Unemployment is normal considering both frictional and structural factors Natural rate of unemployment the level of unemployment that reflects job shopping in an economy of imperfect information and dynamic change Potential output maximum sustainable output level consistent with the economy s resource base given its
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