Exam 2 Study Guide- GDP (Gross Domestic Product)o The market value of all final goods and services produced within a country during a specific period (usually a year)- What gets included into GDP?o Final goods/services: goods and services purchased by their ultimate usero 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 goodo 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 transactionso GDP counts only goods and services produced WITHIN THE GEOGRAPHIC BORDERS OF ACOUNTRY- 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. GDPo 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 countryo Counts the income Americans earn abroado Ignores the income foreigners earn in the U.S.- Price Index and Real Value:o Nominal Values: values expressed in current dollarso Real Values: values that have been adjusted for the effects of inflationo 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 yearcost of bundle∈base year-PI =Cost ∈2013Cost ∈1996- 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 basketin 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 itemsincluded 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 Valueso To calculate real values you need to know:- Nominal values- Price index for the current year and the year you are comparing to (base year)oReal=Nominal ×PI Base YearPI Current Year-2012 GDP(¿2000 dollars)=2012 GDP ×PI 2000PI 2012- Limitations of GDPo 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 GDPoPer Capita GDP=GDPPopulationo Broad indicator of general living standards- Business Cycles:o Fluctuations in the general level of economic activityo Usually measured by two variables:- Changes in real GDP- Unemployment rateo Expansion: characterized by growing GDP and declining unemploymento Peak (boom): the height of the expansion phaseo Contraction: characterized by falling GDP and rising unemploymento Trough: the lowest point of the contraction phaseo Recession: a decline in real GDP for two or more consecutive quarterso 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 jobo 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 NOTconsidered unemployedo Civilian Labor Force: number of people age 16 or older who are employed or unemployedo Labor Force Participation Rate: percent of population age 16 and older who is in the civilian labor forceo Unemployment Rate: percentage of people in the labor force who are unemployedo Employment/Population Ratio: percent of population age 16 and over who are employed- Calculations:o Civilian Labor Force-CLF=¿ Employed(age of at least 16)+¿Unemployed(age of at≤ast 16)o Unemployment Rate-UR=¿Unemployed(ageof at least 16 )CLFo Labor Force Participation Rate-LFPR=CLFPopulation of age 16∧oldero 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 openingso Structural Unemployment (Us): unemployment due to structural characteristics of the economy that prevent the matching of available jobs with available workerso Cyclical Unemployment (Uc): unemployment due to recessions and inadequate labor demand- High during recessions- Negative during expansions- Natural and Actual Rate of Unemploymento Natural Rate of Unemployment (U*): the normal unemployment rate when the economy is operating at a sustainable rate of output-U¿=Us+Uf- Natural rate of unemployment is not fixed, but it is affected by:- Structure of the labor force- Public policyo Actual Rate of Unemployment (U): sum of all three types of unemployment-U =Us+Uf+Uc or U =U¿+Uc- Expansion: U* > U- Recession: U* < U- Full Employment:o Occurs when the economy is experiencing the highest rate of output that it can sustaino Full employment
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