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ECON 203: EXAM 2
inflation |
percent increase in general price level;
usually measured in terms of the Consumer Price Index
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Consumer Price Index (CPI) |
average level of prices of goods typically bought by households;
measures cost of a market basket of goods and services the typical household purchases
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deflation |
percent decrease in general price level, usually measured in terms of CPI
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steps to construct CPI |
1) fix the basket
2) find current prices of goods in basket÷ 3) Calculate the cost of the basket 4) compare cost to a base year
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CPI formula |
(cost of basket in year x /cost of basket in base year)*100
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inflation formula |
(year x-year b/year b)*100
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substitution bias |
prices don't all change the same amount (%) for different goods;
prices of various goods don't ∆ proportionately
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introduction of new goods |
new goods are not entered into basket immediately
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unmeasured quality change |
if the quality of a good decreases, but price remains constant, your money is worth less
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GDP vs. CPI |
GDP measures production
CPI measures consumption
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calculating dollar change over time |
amount today $=(amount in year t $)*(price level today/price level year t)
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indexation |
index for inflation when corrected for changes in the price level over time
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real interest rate |
interest rate corrected for inflation;
describes how fast purchasing power increases
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nominal interest rate |
measures ∆$ amounts;
describes how fast # of $ in bank account rises
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economic growth rate |
%∆Real GDP annually
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Real GDP per capita |
measures living standards
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real GDP per capita formula |
real GDP per capita=Real GDP/population
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living standards formula |
∆living standards=%∆real GDP per capita
OR %∆Real GDP - %∆population
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real GDP formula |
(total labor hours worked)*(real GDP)/Hours worked
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labor productivity formula |
real GDP/hours worked
labor productivity=Y/L
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determinants of productivity |
1) physical capital/worker: give new equipment, produce more
2)human capital/worker: knowledge, skills, experience 3)natural resources/worker: provided by nature *4)technology knowledge: understanding the best way to produce goods
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saving |
takes place when an individual spends less than earned and uses the rest to buy stocks, bonds, or to put into a bank account; savers supploy loanable funds
income-purchases-taxes=saving saving=investment saving=private + public saving
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investment |
refers to purchase of new capital, such as equipment or buildings; investors demand loanable funds
investment=savings
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financial system |
links savers (or lenders) who have a surplus of funds and no productive use for it, with investors (or borrowers) who have productive uses for it, but face a fund shortage
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financial markets |
stock markets, bond markets;
direct finance
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financial intermediaries |
banks, mutual fund companies, insurance companies;
indirect finance; pool funds from many individual savers and lend them to borrowers
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stock markets |
stocks, or equities, represent partial ownership of a firm and entitle stockholders to a share of the assets of future earnings of the firm
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equity finance |
when firms raise money by issuing new stock
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bond markets |
bonds are financial claims issued by borrowers;
bonds promise to pay predetermined amounts at specific future dates
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debt finance |
when borrowers issue bonds
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open economy |
trades with other countries;
Y=C+I+G+NX
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closed economy |
no foreign trading;
Y=C+I+G
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private saving |
private saving=Y-C-T
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public saving |
public saving=T-G
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debt |
accumulation of all prior surpluses and deficits
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market for loanable funds |
determines interest rates;
gives insight into level of saving and investment and into the effects of policies on interest rates, saving, and investment
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crowding out |
tendency for increase in government deficit to decrease private investment;
government will "elbow" investors out of the way to get to savers' money to pay off deficit, not to invest in capital; done via taxes (typically)
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frictional unemployment |
voluntary;
just entering and reenting market, still skilled workers; caused by NORMAL serach time required to enter, reenter, or change within labor force
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structural unemployment |
needs of workers doesn't match needs of employeres;
mismatch of skills or location
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cyclical unemploment |
part of the business cycle;
fluctuation caused by expansion or recession creates or eliminates jobs; involuntary; decreases fluctuation of GDP
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unemployment rate |
frictional + structural + cyclical
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natural rate of unemployment |
theoretical concept;
full employment is impossible; natural=frictional + structural
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unemployment rate formula |
=#unemployed/# in labor force
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labor force |
anyone 16 years or older that in not institutionalized, a civilian, and either actively searching for a job or employed for a wage
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labor force participation rate |
=labor force/adult population
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discouraged worker |
someone who is part of the labor force that wants to work, but can't find a job, so he/she stops searching for a job;
no longer unemployed
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efficiency wage |
wage that minimizes total labor costs and maximizes profits;
pay higher than the market wage; able to pick the most productive workers, therefor highering fewer workers because your wages are competitive
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