Exam 2 Study Guide o The market value of all final goods and services produced within a country during a GDP Gross Domestic Product specific period usually a year What gets included into GDP o Final goods services goods and services purchased by their ultimate user o Intermediate goods services ARE NOT INCLUDED goods purchased for resale or for use in producing another good or service Avoid double counting intermediate goods are not counted because their value is already included within the final good o Only goods and services that are PRODUCED are included in GDP transfers are not Example of what s not counted 100 graduation gift Welfare payments Financial transactions o GDP counts only goods and services produced WITHIN THE GEOGRAPHIC BORDERS OF A COUNTRY EX Production of a Japanese car factory in the U S is INCLUDED in U S GDP EX Production of a U S Nike Shoe Factory in Indonesia is NOT INCLUDED in U S GDP o GDP is based on goods and services produced within a specific time period Only goods produced in 2013 would be included in the 2013 GDP Ways to Measure GDP o Expenditure Approach Y C I G NX Y GDP C consumption I private investment G government consumption and Gross investment NX net exports Consumption household spending on goods and services during the current period Durable goods Nondurable goods Services largest component of GDP Investment production or construction of capital goods that provide future service Fixed investment Inventory investment Investment depre ciation Net Investment Government Expenditures includes spending on Goods and services Capital goods Does NOT include transfer payments Government expenditures are counted at cost not value to tax payers Net Exports Exports Imports Exports domestically produced goods and services sold abroad Imports foreign produced goods and services purchased domestically GNP Gross National Product o Total market value of all final goods and services produced by citizens of a country o Counts the income Americans earn abroad o Ignores the income foreigners earn in the U S Price Index and Real Value o Nominal Values values expressed in current dollars o Real Values values that have been adjusted for the effects of inflation o Price Index PI 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 PI cost of bundle current year cost of bundle base year Cost 2013 Cost 1996 PI Consumer Price Index CPI indicator of general levels of prices Compares the cost of a typical market basket in a specific period to the cost of the same basket in a different period Designed to measure the impact of price changes on the cost of the typical bundle of goods purchased by households How do rising prices affect households GDP deflator reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year Broader than CPI includes capital goods and other goods purchased by businesses and government If we want an economy wide measure of inflation Calculating Price Index and Real Values o To calculate real values you need to know Nominal values o Real Nominal PI Base Year PI Current Year 2012 GDP 2000 dollars 2012 GDP PI 2000 PI 2012 Limitations of GDP Price index for the current year and the year you are comparing to base year o GDP Excludes Non market production Underground economy Any transactions that take place outside recorded market channels Leisure and human costs Difficulties measuring quality variation and introduction of new goods Cost of harmful side effects Per Capita GDP o Per Capita GDP GDP Population o Broad indicator of general living standards Business Cycles o Fluctuations in the general level of economic activity o Usually measured by two variables Changes in real GDP Unemployment rate o Expansion characterized by growing GDP and declining unemployment o Peak boom the height of the expansion phase o Contraction characterized by falling GDP and rising unemployment o Trough the lowest point of the contraction phase o Recession a decline in real GDP for two or more consecutive quarters o Depression a prolonged and severe recession Labor Market o Employed person is employed if he or she has worked full or part time even a few hours in the past week or is on vacation or sick leave from a regular job o Unemployed a person who is not currently employed but is Actively seeking employment in last 4 weeks Waiting to start or return to a job Those who do not have a job and are NOT seeking employment are NOT considered unemployed o Civilian Labor Force number of people age 16 or older who are employed or o Labor Force Participation Rate percent of population age 16 and older who is in the o Unemployment Rate percentage of people in the labor force who are unemployed o Employment Population Ratio percent of population age 16 and over who are unemployed civilian labor force employed Calculations o Civilian Labor Force CLF Employed age of at least 16 Unemployed age of at ast 16 o Unemployment Rate UR Unemployed age of at least 16 CLF o Labor Force Participation Rate LFPR CLF Population of age 16 older o Employment Population Ration ER Employed age of at least 16 Population of age 16 older Types of Unemployment o Frictional Unemployment Uf unemployment resulting from changes in the economy and imperfect information that prevents workers from being immediately matched up with existing job openings o Structural Unemployment Us unemployment due to structural characteristics of the economy that prevent the matching of available jobs with available workers o Cyclical Unemployment Uc unemployment due to recessions and inadequate labor demand High during recessions Negative during expansions Natural and Actual Rate of Unemployment o Natural Rate of Unemployment U the normal unemployment rate when the economy is operating at a sustainable rate of output U U s U f Natural rate of unemployment is not fixed but it is affected by Structure of the labor force Public policy o Actual Rate of Unemployment U sum of all three types of unemployment U U s U f U c or U U U c Expansion U U Recession U U Full Employment unemployment Potential Output future given o Occurs when the economy is experiencing the highest rate of output that it can sustain o Full employment exists when the economy is operating at the natural rate of o Potential Output Yf the level of output that can be achieved and
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