CHAPTER 7 GDP a measure of Output 1 GDP a value of final goods and services produced within a country during a specific time period i Good or services that are not FINAL intermediate goods are not included o Only things involving PRODUCTION count Does NOT include financial transaction or income transfers b GDP is measured in dollars i The total spending on all final user goods and services produced during the year is summed in dollar terms to obtain the annual GDP ii GNP is the GDP without the production of foreigners within the country o GDP includes production of foreigners within US borders GNP does not c KEY Point i GDP is a measure of output o Higher income levels are caused by increased output o Output comes first then higher income 2 Two ways GDP is measured a Expenditure Approach i ii C I G X Is the sum of expenditures by households investors governments foreigners b Resource Income Approach i Sum of costs incurred and income generated by production of goods services ii National Income sum of o Personal Consumption purchases o Private INVESTMENT o Government expenditure o Net Exports Exports Imports o Employee compensation o Self employment income o Rents o Interest o Corporate profits o National Income see above o Indirect business taxes o Depreciation o Net income of foreigners iii Final GDP equals 3 Real and Nominal GDP a REAL means adjusted for inflation i Inflation increase in general level of prices ii Two Price Indexes used to measure inflation o Consumer Price Index CPI Measures the impact of price changes on the cost of a typical bundle of goods services purchased by households o GDP Deflator more broad than CPI Measures the change in the average price of the market basket of goods included in GDP 4 Shortcomings of GDP a b c d e It does not count non market production It does not count the underground economy It makes no adjustment for leisure It probably understates output increases because of the problem of estimating improvements in the quality of products It does not adjust for harmful side effects CHAPTER 8 Economic Fluctuations Unemployment and Inflation o The business cycle continually goes through expansion peaks contraction and recession o But overall real GDP annual average growth rate is 3 1 The LABOR Market i Employed a Civilian Labor Force equals the civilians either employed or unemployed a person 16 years old or over who meets one of the requirements Working for pay at least 1 hr week Working 15 hrs week without pay in a family operated Self employed enterprise ii Unemployed Actively seeking a job Waiting to begin a job On layoff waiting to return to a previous job b NOT in Labor Force i People 16 that are not employed or unemployed Retirees students homemakers disabled people etc c People NOT included in civilian population i Under 16 years of age ii Institutionalized d Calculations to know i Labor Force Participation Rate ii Unemployment Rate Unemployed Labor Force Labor Force Civilian Population 2 THREE types of Unemployment a Frictional b Structural c Cyclical i Imperfect information i Workers do not possess necessary skills i Results from business conditions 3 Employment Fluctuations a Full Employment Is when the natural rate of unemployment exists i When the rate of unemployment is normal ii iii Equals about 95 iv Cyclical unemployment is NOT present at full employment b Natural Rate of Unemployment i A rate that is both Achievable and Sustainable ii Accompanies the economy s maximum rate of sustainable output iii Actual unemployment rate will be HIGHER in recession and LOWER in a boom iv Equals about 5 4 Actual and Potential GDP a Potential Output Is the Maximum Sustainable Output think about the 3 growth rate i ii Reached at Full Employment and therefore when the Natural Rate of Unemployment exists iii At the average growth rate of 3 Full employment is most likely present 5 Inflation a b Two types Inflation is the increase in general level of prices i Anticipated and Unanticipated Self explanatory meanings c High Inflation is bad because i ii iii It reduces investments long term agreements would be risky It distorts information delivered by prices It results in less productive use of resources People will spend more time trying to combat the effects of inflation rather than engaging in productive activity CHAPTER 9 Intro to Basic Macroeconomic Markets 1 Goods and Services market a Coordinates demand for and supply of domestic production GDP b Aggregate DEMAND c Aggregate SUPPLY i Short Run i Indicates quantity of goods and services produced domestically at given price levels x axis quantity or Real GDP y axis price level ii Curve slopes down and to the right iii LOWER price level o Increases purchasing power their dollar is worth more if items cost less o Increases demand o Leads to lower interest rates o Make domestically produced goods cheaper compared to foreign goods o HIGHER Price Level Vice Versa o Period of time where some prices fixed by prior agreements contracts and cannot be changed upon unexpected changes o Curve slopes UP and to the RIGHT o Unanticipated increases in price level INCREASES profitability of firms a Firms respond with higher output i Because higher profit margins will be temporarily be available due to many costs being fixed o Period of sufficient time where people can modify behavior in response ii Long Run to o Is a VERTICAL line a Meaning change in price level has no effect on quantity b Therefore Long run is determined by technology resources and efficiency o LRAS potential output output d Equilibrium i Short Run Equilibrium a The natural rate of unemployment occurs at LRAS or potential o Where the aggregate demand equals the short term aggregate supply o Price level below equilibrium excess demand pushing prices up o Price level above equilibrium excess supply pushing prices down ii Long Run Equilibrium o When Actual GDP Potential GDP o Also Actual Unemployment Natural Unemployment Full employment iii Unexpected Changes in Price Level o Unexpected Increase o Unexpected Decrease a Improves profit margins increasing output and employment a Lowers profit margins cutting back on output and employment e Expansion and Recession i When in EXPANSION o Actual GDP is GREATER than Potential GDP o Actual Unemployment is LESS than the Natural Rate o Short run Equilibrium is GREATER than average greater than long run ii When in RECESSION o Actual GDP is LESS than Potential GDP o Actual unemployment is GREATER than
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