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156 Cards in this Set
- Front
- Back
K |
Capital |
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L |
Labor |
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Y |
Income |
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Per Worker Production Function |
the relationship between Real GDP per hour worked and capital per hour worked,
holding the level of technology constant |
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What causes a movement along the Per Worker Production Function? |
An increase in the capital per hour worked is a movement along theper-worker production function
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What causes a shift in the Per Worker Production Function? |
Technological change, an investment in R&D, and education cause a shift in the per-worker production function |
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Economic Growth Model
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a model that explains growth rates in real GDPper capita over time
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The Great Moderation (1945 – 2007)
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absence of severe recessions in the US during this time period
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What caused The Great Moderation? |
1. Services were greater than goods 2. Establishment of unemployment insurance 3. Active gov't policies stabilized the economy 4. Stability of the financial system |
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Durable goods |
Goods that last longer than 3 years Ex. consumer- fridges, carsEx. producer – machinery |
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Non-durable goods
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Food |
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During a recession what happens to durable goods? |
Will decrease |
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During a recession what happens to non-durable goods?
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Will have no impact |
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What will happen to inflation during a recession? |
will decrease in a recession. It is much harder to raise prices during a recession |
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What will happen to unemployment during a recession? |
will increase in a recession. Sometimes unemployment will remain high even after a recession has ended
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Why will unemployment remain high after a recession has ended? |
1. Growth rate of capital is greater than the growth of employment 2. Firms my hold onto productivity gains 3. Firms choose to continue to operate below capacity |
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Savings of Households
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the interest = the level of savings
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TR |
Transfer Payments |
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C |
Consume |
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T |
Taxes |
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G |
Government expenditures and purchases |
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Formula: Sprivate |
= Y + TR - C - T = income + transfer payments - consume - taxes |
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Formula: Spublic |
= T - G - TR = taxes - government - transfer payments |
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Formula: Total Savings |
= Sprivate + Spublic or = Y - C - G |
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Balance Budget |
Tax = G + TR |
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Budget Deficit |
Tax < G + TR |
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Budget Surplus |
Tax > G + TR |
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During a budget deficit what happens to Spublic and savings? |
Spublic is (-) and Savings goes Down
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During a budget surplus what happens to Spublic and savings
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Spublic is (+) and Savings goes UP
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Financial intermediaries |
firms such as banks, mutual funds, pension fund, and insurance companies that borrow funds from savers and lend them to borrowers |
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What are the four roles of Financial intermediaries? |
1. Match borrowers with lenders
2. Risk Sharing 3. Liquidity 4. Information |
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Risk sharing
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the chance the value of a financial security will change relative to what you expect. |
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Liquidity |
ease of which financial security can be turned into cash |
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Information
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facts about borrowers and expectations about returns on financial securities.
Ex. Stock price |
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Labor Productivity
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the quantity of goods and services that can produced by one worker or by one hour of work
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What causes labor productivity to increase? |
1. Increase in capital per hour worked 2. Technological change
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Capital |
manufactured goods that used to produce other goods and services
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Capital Stock |
the total amount of physical capital available in a country
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Human Capital |
accumulated knowledge and skills workers acquire from education and training from their life experiences
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Technology |
processes a firm uses to turn inputs into outputs of goods and services Can Be processes, but typically machinery, equipment, or software |
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Which is better in the long-run? Technological change or increase in capital? |
Technological is better in the longrun, able to produce more with less capital
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What increase Real GDP per capita? |
Increases in Labor Productivity |
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6 Economic Functions of the Government |
1. ensure all resources are employed 2. stabilize economy 3. prevent unemployment 4. stabilize business cycle 5. prevent inflation 6. promote economic growth |
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What does the process of economic growth depended on? |
the ability of firms to expand their operations, buy additional equipment, train workers, and adopt new technologies
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Retained Earning
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profits that are reinvested in the firm rather than paid to the firm’s owners
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Funds from households: Directly |
Stocks - financial securities thatrepresent ownership of a firm Bonds – financial securities thatrepresent a promise to repay a fixed amount of funds |
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Funds from households: indirectly
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Bank loans |
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ProducerPrice Index (PPI)
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an average of prices received by producers of goods andservices at all stages of production
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What is included in the PPI? |
intermediate goods (goods used to create something else) and raw goods
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Relationship between PPI and CPI
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if price increases on PPI, then price increases CPI
you see movements in the PPI before you see them in the CPI |
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Nominal Variables
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economic variables calculated in current year prices
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Real Variables
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are measured in dollars of the base year of the price index
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Nominal Interest Rate
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the stated interest on a loan |
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Real Interest Rate
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nominal interest rate minus the inflation rate |
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Interest
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cost of barrowing funds expressed as a percentage of the amount borrowed |
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For the economy as a whole do we measure nominal interest rate or real interest rate? |
Nominal Interest Rate |
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Treasure Bills
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Short-term loans made to the government
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Can the nominal interest rate be less than realinterest rate? |
Yes when inflation > nominal interestrate |
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Deflation
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a decline in the price level (negative inflation rate)
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Formula: Growth rate |
= (Real GDPyear2 - Real GDPyear1) / Real GDPyear1
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Rule of 70
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take an annual growth rate and put 70 over it and that will tell you how long it will take to double. Ex. 70/3 = 23 years 70/10 = 7 years |
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Long Run economic growth |
process by which rising productivity increases the standard of living
1. Best measured standard of living is Real GDP 2. Real GDP per capita 3. fluctuates due to business cycle |
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Price Level |
measure of the average prices of goods and services in the economy |
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Formula: GDP Deflator
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= (Nominal GDP / Real GDP) * 100
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GrossNational Product (GNP) |
the value of final goods and services produced by residents of the US even if production takes place over seas (outside of US) |
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National Income |
= GDP - Depreciation
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Formula: Disposable Personal Income |
= Personal Income - Tax Payments
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Formula: Personal Income
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= GDP - RE + TR +I |
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RE
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Retained Earnings
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Income
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1. wages
2. interest 3. rent 4. profit corporations 5. profit sole-properoritship |
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Wages |
Wages + fringe benefits (health care)
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Interest or Net interest
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difference between interest and savings and debt
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Rent
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rent received by households
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profit corporations
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larger businesses
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profit sole proprietorship
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usually smaller businesses
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Labor Force |
is the sum of employed and unemployed workers in the economy |
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Who is not included in the Labor force?
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retirees, active military, prisoners, mental patients, those who looked for work in the past 12 months but not past 4 weeks |
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Discourages workers |
are people who havenot looked for a job in the previous 4 weeks because they believe none are available to them |
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How is unemployment rate measured?
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The US Census Bureau conducts HouseHold Surveys. They interviews 60k households about employment (includes anyone 16+) |
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Formula: Employment Rate
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= (# of unemployed / Labor Force) * 100 |
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Formula: Labor Force Participation Rate
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= (Labor Force / Working Age Population) * 100 |
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Formula: Working Age Population
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= Labor Force + Not included Labor Force
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Underemployed |
people, who are “over” qualified for their position, Part-time but want a full-time job, understates the degree ofjoblessness |
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Problems with measuring the Unemployment Rate
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Not taken into account:
1. discouraged workers 2. understating / overstating unemployment 3. underemployed workers |
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Labor Force Participation Rate |
which measures the share of Americans at least 16 years old who are either employed or actively looking for work |
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The EstablishmentSurvey (Payroll Survey) |
-Samples 30,000business -measures totalnumber of persons employed and on a company payroll -doesn’t includeself-employed people - doesn’t includenew firms -doesn’t provideinformation on unemployment |
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Vibrant Economy |
firms are constantly created and destroyed |
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Creative Destruction |
1. Changes in consumer preferences 2. Technological Change 3. Entrepreneurs Respond to the changes |
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Frictional Unemployment |
short-term unemployment that arises from the process of matching workers with jobs |
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Seasonal Unemployment |
unemployment due to factors such as weather,variations in tourism, and other calendar events |
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Structural Unemployment |
unemployment arising from a persistent mismatch between the skills and attributes of workers and their requirements of jobs |
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Cyclical Unemployment |
unemployment caused by a businesscycle recession Recessionoccurs, company lay off workers Eventually will have an Expansion – hire people back |
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Full Employment |
when the only remaining unemployment is structural andfrictional |
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Formula: Natural Rate of Unemployment |
= Frictional Unemployment + Structural Unemployment
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Explaining unemployment: Government Policies |
Can reduce the level of frictional and structural unemployment:
Frictional - speed up matchmaking process Structural - Trade Adjustment Assistant Program Can add to Frictional and Structural unemployment: increase time devoted to searching for jobs keeping wages above market level provide incentives for firms to hire workers |
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Unemployment Insurance |
1. The US and most otherindustrialized economies 2. Usually equal to ½the average wage 3. Opportunity Costto job search 4. Recessions worse without it |
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Unemployment: International Comparison |
Other countries will have higher unemployment rates |
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Minimum Wage Laws (price floor) |
- State and Local gov't can set Minimum Wage - Est. in 1938 was $0.25/hour - Qs > Qd = Surplus - increase the the unemployment rate - teenager affected the most (least skilled) |
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Labor Unions |
Organization of workers that bargainfor higher wages and better working conditions for their members |
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Efficiency Wages |
Are higher than market wages that a firm pays to increase worker productivity |
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Inflation |
the percentage increase in the average price level form one year to the next |
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How to measure Price Level? |
1. GDP Inflator 2. Consumer Price Index (CPI) |
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Consumer Price Index (CPI) |
an average of the prices of goods and servicespurchased by the typical urban family of four it is sometimes referred to as a cost-of-living index |
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Formula: Consumer Price Index (CPI) |
1. Total the yearly cost of the basket
2. CPI = (current year basket / base year basket) * 100 3. Percent change: (CPIyear2-CPIyear1)/CPIyear1 |
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Who calculates CPI? |
The Bureau of Labor Statistics (BLS) -Surveys 30,000 HH on their spending habitso -Constructs a market basket of goods andservices purchased by the typical urban family of 4 -Eight broad categories along with their share ofthe basket |
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What are the categories of the basket? |
1. Housing
2. Food and Beverage 3. Transportation 4. Medical 5. Education 6. Recreation 7. Apparel 8. Other g/s |
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What is best used to measure Price Levels? GDP Inflator or CPI? |
CPI is best used. GDP Inflator is broad, measures the price level of all final goods and services and doesn't measure the change in price level. |
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Sub Bias |
BLS assumes that each month consumers purchasethe same amount of each product in the market basket Note: you wouldpurchase less of a product that went up in price and more of one that went downin price. |
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Increase in Quality Bias |
Increase in the price of a productis due to: 1. Pureinflation 2. Improvedquality Note: It hard to tell which onecaused the change in price. Use statistical methods to determine. |
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New Product Bias |
if the market basket is not updated frequently,the price decreases of new products are not included CPI |
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Outlet Bias |
- consumersbegan to increase their purchases from discount stores - BLS didn't account for this, continued to collect data from traditional full-price retail stores - To deal with this, Point of Purchase Survey |
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MACRO |
the study of the economy as a whole allows individuals, firms, and the government to understand current economic conditions and help predict future conditions. This enables them to make better choices. Measure Total Production and Total Income |
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Business Cycle |
alternating period of economic growth and economy recession Graph will have peaks and troughs – trending upward Ideal: we want the graph to tend upwards and be smooth Government to help keep the business cycle “smoother” |
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Two Stages of the Business Cycle |
Expansion Recession |
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Expansion |
Increase in Total production Increase in Total employment |
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Recession |
Decrease in Total production Decrease in Total employment |
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Economic Growth |
the ability of an economy to produce increasing quantities of good and services |
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Rate of growth |
how fast it grows Lower growth rates lead to lower standard of living Higher growth rate leave to higher standards of living |
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Why do growth rates differ across countries? |
high levels of employment There is a relationship between unemployment and the business cycle in the short run but not in the long run |
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Growth rate in the short run? |
would increase during recession and decrease in an expansion |
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Growth rate in the long run?
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Will revert to the average |
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Inflation Rate |
percent increase in the price level from one year to the next
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Gross Domestic Product (GDP) |
the market value of all final goods and services produced in a country during a period of time (usually a year) |
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Who measures GDP? |
Measured by Bureau of Economic Analysis (BEA) Compiles the data necessary to calculate GDP. Done every 3 months |
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How is GDP measured? |
measured in market values NOT quantities |
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What is included in GDP? |
market value of final goods and services Intermediate goods Only current production goods ("used" not counted) |
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Final goods/services |
goods/services purchased by its final user and not used in the production of any other good or service |
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Intermediate good |
good or service that is input into another good or service |
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Formula: Government Purchases |
= Y - C - I
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Formula: Investment spending
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= C - Y - G
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Formula: Transfer Payments
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= T - G - Spublic
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Formula: GDP |
Y = C + I + G + NX |
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Net Exports (NX) |
= Exports - Imports |
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Consumption |
spending by HH on goods and services Doesn't include spending on new houses |
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Investment |
spending by firms on new factories, office buildings, machinery, inventory Includes spending by HH + firms on new houses |
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Gross Private Domestic Investment |
1. business fixed investment 2. residential investment 3. changes in business investment |
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Business Fixed Investment |
new factories, etc.. largest component of investment because it can fluctuate |
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Residential Investment |
new single and multi-family homes |
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Changes in Business Inventories |
changes in business inventories |
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Government Purchases |
spending by federal, state, and local governments doesn't include transfer payments |
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Why are imports not included in Net Exports |
Exports are what are produced in the US |
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Purchases by State and Local Gov't > Federal |
Most government activities are provided at a state and local level |
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Imports > Exports |
Negative Net Export |
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Spending on Services > Spending on goods |
Long term tend in high income countries Shift away from goods and more toward services Due to wealthier and older populations |
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Saving rate |
percent of income saved |
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Long run consequence of the increase in the saving rate? |
increase in saving increase funds convertible for investment |
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Short run consequence of the increase in the saving rate?
|
hard for sales of durable goods. decrease in consumption |
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Value Added |
The market value a firm adds to a product Final Price = Total Value Added |
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GDP fails to include two types of production? |
Household production Underground Economy |
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Household production
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good and service people produce for themselves |
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Underground Economy
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buying and selling of goods and services that is concealed from the government to avoid taxes or regulations (illegal) |
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Is it a big deal that GDP excludes household productions and underground economy? |
Short run - no Long run - yes |
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Nominal GDP |
the value of final goods and services evaluated at current year prices |
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Real GDP |
the value of final goods and services evaluated at base year prices when using Real GDP we are keeping the purchasing power of the dollar constant |
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Price Index |
Measures prices in 1 year relative to price in the base year |
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Transfer payments |
payments by government to individuals for which the government does not receive a new good or service in return
(ex. SS or Income Tax returns) |