Chapter 7 Know and understand the definition for Gross Domestic Product GDP Gross Domestic Product GDP The market value of all final goods and services produced within a country during a specific period usually a year Understand what transactions get included into GDP and what transactions are left out Included Not included Final goods services goods and services purchased by their ultimate user Only goods and services that are produced are included in GDP 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 Only goods produced in 2008 are included in the figure for 2008 GDP Intermediate goods services Goods purchased for resale or for use in producing another good or service transfers are not Ex 100 graduation gift Welfare payments Financial transactions note sales commission would be counted in GDP Production of an U S Nike Shoe factory in Indonesia is not included in U S GDP Know the two approaches for finding GDP 1 Expenditure approach Y C I G NX understand what goes into each of these components and be able to calculate Investment inventory investment and Net Exports so that you can calculate GDP Y GDP C Consumption Household spending on goods and services during the current period I Investment production or construction of capital goods that provide future service Investment depreciation Net investment G Government capital goods Does not include transfer payments Government expenditures are counted at cost not value to tax payers NX Net Exports Exports Imports 2 Resource cost income approach Y employee compensation proprietor s income rent corporate profits interest income indirect business taxes depreciation Net income of foreigners Know and understand the definition for Gross National Product GNP and know how it is GNP total market value of all final goods and services produced by the citizens of a different from GDP country Counts the income Americans earn abroad Ignores the income foreigners earn in U S Know the difference between nominal and real values and know how to calculate real values Nominal Values values expressed in current dollars Real Values Values that have been adjusted for the effects of inflation Percentage of nominal return inflation percentage real value Know how to calculate a price index and know the two most common price indexes Cost of bundle in current year cost of bundle in base year 1 Consumer Price Index CPI Indicator of general level 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 2 GDP Deflator reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year Understand the limitations to using GDP as a measure of productivity 1 Excludes non market production 2 Excludes the underground economy 3 Excludes leisure and human costs 4 Difficult measuring quality variation and introduction of new goods 5 Excludes the costs of harmful side effects Know how to calculate GDP per capita and understand that it is used as a broad indicator of general living standards Per capita GDP GDP Population Chapter 8 Understand the idea of business cycles and how they are measured Business cycle Fluctuations in the general level of economic activity Usually measured by two variables Changes in real GDP Unemployment rate Know the business cycle definitions expansion peak contraction trough recession depression Expansion characterized by growing GDP and declining unemployment Peak boom the height of the expansion phase Contraction characterized by falling GDP and rising unemployment Trough The lowest point of the contraction phase Recession A decline in real GDP for two or more consecutive quarters Depression A prolonged and severe recession Understand the labor market definitions and know who gets counted as employed and unemployed Be able to calculate 1 Civilian Labor Force Number of people age 16 or older who are employed or 2 Labor Force Participation Rate Percent of population age 16 and over who is in the 3 Unemployment Rate percentage of people in the labor force who are unemployed 4 Employment Population Ratio Percent of population age 16 and over who are unemployed civilian labor force employed 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 Unemployed A person who is not currently employed but is actively seeking employment in last 4 weeks or waiting to start or return to a job Understand the 3 types of unemployment 1 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 2 Structural Unemployment Us Unemployment due to structural characteristics of the economy that prevent the matching of available jobs with available workers 3 Cyclical Unemployment Uc Unemployment due to recessions and inadequate labor demand Understand that Natural Unemployment U is the combination of Structural Unemployment and Frictional Unemployment and is not fixed but affected by the structure of the labor force and public policy Know that Actual Unemployment U is the sum all three types of unemployment and understand the relationship between Actual Unemployment and Natural Unemployment within the business cycles 1 Expansion U U 2 Recession U U 3 Full Employment U U Understand the concept of Potential Output Yf The level of output that can be achieved and sustained in the future given 1 the size of the labor force 2 expected productivity quality of labor 3 natural rate of unemployment and know how it relates to business cycles 1 Expansion Actual output Y Potential output Yf 2 Recession Actual output Y Potential output Yf 1 Reduces investment 2 Distorts the information delivered by prices 3 Results in less productive use of resources Know the main sources of high inflation 1 Demand rising faster than supply 2 Rapid increase in the money stock Understand the concept of inflation and how to calculate it Know the problems of high and variable inflation Inflation An increase in the general level of prices percent change in prices Chapter 9 Understand the market for goods and services know why the demand curve is downward sloping the supply curve is upward sloping the idea of market equilibrium and how a
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