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 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. 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−depreciation=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 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 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•2012GDP(¿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 CapitaGDP=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 NOT considered 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(age of at least 16)CLFo Labor Force Participation Rate•LFPR=CLFPopulation of age16∧oldero Employment/Population Ration•ER=¿ Employed(age of at least 16)Population of age16∧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* >
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