Econ 0110 Exam 1 Review Lecture

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Economics

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study of how rational humans make decisions in the face of scarcity

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Two key components to the study of economics:

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Choice: a decision by an individual of what to do
Scarcity: human wants for goods, services, and resources exceed what is available

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Scarcity

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society has limited resources and therefore cannot produce all the goods and services people with to have

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In most societies, these limited resources are allocated _________ of millions of households and firms

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through the combined actions

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Market Economy

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if the decisions of individual consumers and producers largely determine what, how, and for whom to produce, with little government involvement in the decisions

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Market

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a group of buyers and sellers of a particular good or service

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Buyers determine_______ and sellers determine ________

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demand for a product; supply of a product

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Competitive Market

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market in which there are so many buyers and so many sellers that each has a negligible impact on the market price

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Once society has allocated resources to various jobs, it must also allocate the _________

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output of goods and services

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Economists study....

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how people make decisions, how much they work, what they buy, how much they save, and how they invest their savings

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Factors of production

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-Land (including timber, water, minerals, and all other resources that come from nature)
-Labor (effort of workers)
-Capital (machinery, buildings, tools, and all other manufactured goods used to make other goods and services)
-Entrepreneurship (risk taking, innovation, and the organization of resources for production)

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Individuals make choices based on their ______

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budget constraint

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Society makes choices based on the _________

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production possibilities frontier (PPF)

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Trade-off

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when you give up something in order to have something else

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Opportunity cost

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the value of what you must give up when you make a particular choice. with every choice, an alternative is forgone

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Efficiency

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there is no way to make some people better off without making other people worse off

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Production possibility frontier (PPF)

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this illustrates the trade-offs facing an economy that produces only two goods

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Productive efficiency

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given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good

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Allocative efficiency

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the particular mix of goods a society produces represents the combination that society most desires

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Key principles of how people make decisions:

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Principle 1: People face trade-offs
Principle 2: people respond to incentives
Principle 3: trade can make everyone better off
Principle 4: a country's standard of living depends on its ability to produce goods and services
Principle 5: price rise when the government prints too much money
Principle 6: society faces a short-run trade-off between inflation and unemployment (Phillips curve)

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What causes inflation?

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growth in the quantity of money. when a government creates large quantities of the nation's money, the value of the money falls

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Short run effects of monetary injections

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-increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services
-higher demand may over time cause firms to raise their prices but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services
-more hiring means lower unemployment
-Fed's target inflation/interest rate? 1-2%

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Policy makers can exploit the short-run trade-off between inflation and unemployment using various policy instruments:

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-by changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the overall demand for goods and services
-changes in demand in turn influence the combination of inflation and unemployment that the economy experiences in the short run

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Microeconomics focuses on:

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how decisions are made by individuals and firms, how those decisions interact, and the consequences of those decisions

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Macroeconomics focuses on:

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the aggregate behavior of the economy and focuses on economic aggregates-economic measures such as the unemployment rate, inflation rate, and GDP

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Examples of microeconomic questions

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-Should I go to college or get a job?
-What determines the salary that Citibank offers to a new college graduate?
-What determines the cost to a college of offering a new course?
-What government policies should be adopted to make it easier for low-income students to afford college?
-What determines the number of iPhones exported to France?

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Examples of macroeconomic questions

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-How many people are employed in the economy as a whole this year?
-What determines the overall salary levels paid to workers in a given year?
-What determines the overall level of prices in the economy as a whole?
-What government policies should be adopted to promote employment and growth in the economy as a whole?
-What determines the overall trade in goods, services, and financial assets between the US and the rest of the world?

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Before the 1930s, economists regarded the economy as:

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self-regulating

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Market Failure

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market fails to allocate resources efficiently

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According to ________, the economy can be made better off by monetary and fiscal policy

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Keynesian

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Monetary policy

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uses the quantity of money to alter interest rates, which affects overall spending

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Fiscal policy

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uses changes in taxes and in government spending to affect overall spending

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Business cycle

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short-run alternation (fluctuations) between economic downturns (recessions), and economic upturns (expansions). It is the downward and upward movement of gross domestic product (GDP) around its long-term growth trend

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Depression

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very deep and prolonged downturn

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Recessions

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periods of economic downturns when output and employment are falling

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Expansions

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periods of economic upturns when output and employment are rising

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Output

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the quantity of goods and services produced in the economy

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Aggregate output

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the economy's total production of goods and services for a given time period to measure the rise and fall of an economy's output

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Inflation

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rising overall price level throughout the economy

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Deflation

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falling overall price level throughout the economy

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Problems of inflation and deflation

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-inflation discourages people from holding onto cash, because if price level is rising, cash loses value. if price level rises, a dollar will buy less than it would before

-deflation causes opposite problem. if overall price level falls, a dollar will buy more than it would before. it can be more attractive to hold onto cash. this can deepen a recession (Irving Fisher's story)

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Other things equal assumption (ceteris paribus)

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all other relevant factors remain unchanged

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Examples of Monetary policy

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policies that affect bank lending, interest rates, and financial capital markets, are conducted by a nation's central bank (i.e. US Fed and ECB)

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Examples of Fiscal policy

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policies that change taxes and government spending to affect overall spending, are determined by a nation's legislative body

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Unemployment

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total number of people who are actively looking for work but aren't currently employed. A country's labor force is the sum of employment and unemployment

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Price stability

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when the overall price level is changing either not at all or only very slowly

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Demand

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the amount of some good or service consumers are willing to purchase at each price

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Price

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what a buyer pays for a unit of the specific good or service

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Quantity demanded

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the total number of units purchased at that price (given price)

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Law of demand

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a rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded

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Price and quantity demanded have an

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inverse (negative) relationship

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Supply

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the amount of some good or service a producer is willing to supply at each price

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Law of supply

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a rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied

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Price and quantity supplied have a

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positive relationship

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Equilibrium (E*)

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a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

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Equilibrium price (P*)

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the price that balances quantity supplied and quantity demanded

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Equilibrium quantity (Q*)

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the quantity supplied and the quantity demanded at the equilibrium price

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Five primary factors that shift the demand curve for a good or service:

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-changes in the prices of related goods or services (substitutes/complements)
-changes in the prices of related goods or services (substitutes/complements)
-changes in income (normal/inferior)
-changes in tastes
-changes in expectations
-changes in the number of consumers

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Substitutes

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two goods are substitutes if a rise in the price of one of the goods leads to an increase in the demand for the other good, for example, coffee and tea (same direction)

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Complements

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two goods are complements if a rise in the price of one of the goods leads to a decrease in the demand for the other good, for example, cars and gasoline (opposite direction)

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Normal Good

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when a rise in income increases the demand for a good (same direction)

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Inferior Good

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when a rise in income decreases the demand for a good, for example, bus ride vs taxi ride. Usually an inferior good is one that is considered less desirable than more expensive alternatives (opposite directions)

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When is there a movement along the demand curve?

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when there is a change in price

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Five principles that shift the supply curve for a good or service

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-changes in input prices
-changes in the prices of related goods or services
-changes in technology
-changes in expectations
-changes in the number of producers/suppliers

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When is there movement along the supply curve?

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when there is a change in price

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In financial markets, those who supply financial capital through saving expect to ________ a rate of return, while those who demand financial capital by receiving funds expect to _____ a rate of return

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receive; pay

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Interest rate

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most widely used rate of return in financial markets

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According to the law of demand, as the interest rate rises, consumers will ________ the quantity that they borrow

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reduce

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According to the law of supply, as the interest rate paid on credit card borrowing rises, more firms will be eager to issue credit cards and to _______ customers to use them

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encourage

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Prices

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mechanism for rationing scarce resources. allocate scarce resources

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Macroeconomic goals

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-economic growth
-low unemployment
-low inflation

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Framework economists use to analyze macroeconomy

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-aggregate demand/aggregate supply
-keynesian model
-neoclassical model

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Policy tools governments use to manage the macroeconomy

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-monetary policy
-fiscal policy

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Gross Domestic Product (GDP)

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measure of a country's aggregate output

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The size of a nation's overall economy is typically measured by its GDP, which is....

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the value of all final goods and services produced within a country in a given year

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Market Value

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means that production is valued at the price paid for the product. Thus, items sold at higher prices are more heavily weighted in GDP

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Of All

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means that GDP measures all production in the economy that is legally sold in markets

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Final

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means that GDP only includes goods and services that are sold to the end user (final goods vs intermediate goods)

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Goods and Services

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means that GDP includes tangible manufactured items and intangible items

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Produced

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means that we exclude the sale of used items that were produced (and counted) in a previous period (ex. used goods)

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Within a country

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means that GDP measures the value of production within the geographic borders of a country

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In a given period of time

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means that we measure GDP per year or per quarter

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The GDP of an economy can be measured either by the total dollar value of ________ in the economy, or by the total dollar value of _________

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what is purchased; what is produced

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GDP Measured by components of demand

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-Consumer spending (consumption)
-Business spending (investment)
-government spending (government purchases)
-spending on net exports (exports-imports)

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Consumer spending (C)

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spending by households on goods and services, with the exception of new housing

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Business spending (I)

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spending on capital equipment, inventories, and structures such as new housing. This does NOT include spending on stocks, bonds, and mutual funds

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Government spending (G)

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spending on goods and services by all levels of government. This does not include transfer payments such as social security, welfare, and unemployment benefits

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Spending on net exports (Nx)

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imports must be subtracted so that only spending on domestic production remains

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Investment demand is....

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far smaller than consumption demand but it is very important for the economy because this is where jobs are created

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Government expenditure includes spending by all three levels of government:

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federal, state, and local

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Services

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largest single component of total supply, representing over half of GDP
-ex: healthcare, education, and legal and financial services

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Durable goods ex

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cars, computers, and refrigerators

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Nondurable goods ex

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food and clothing

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Structures ex

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homes, office buildings, shopping malls, and factories

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GDP per capita

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GDP/population

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GDP equation

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Y = C + I + G + NX

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Nominal GDP

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the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced

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Real GDP

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the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

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Nominal GDP reflects:

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both the quantities and prices of those goods and services

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Real GDP reflects:

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only the quantities produced (because it holds the prices constant at base-year levels)

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GDP deflator

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reflects only the prices of goods and services

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GDP deflator equation

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Nominal GDP/Real GDP x 100

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Facts about GDP deflator

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-measures the current level of prices relative to the level of prices in the base year
-one measure that economists use to monitor the average level of prices in the economy and thus the rate of inflation
-always 100 for the base year

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Inflation rate equation

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((GDP Deflator 2 - GDP Deflator 1) / GDP Deflator 1) x100

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What is NOT included in GDP

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-intermediate goods
-transfer payments and non-market activities
-used goods
-illegal goods

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Limitations of GDP

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-GDP does not reflect the actual levels of environmental protection, healthcare, and education
-GDP includes production that is exchanged in the market, but it does not cover production that is not exchanged in the market
-GDP has nothing to say about the level of inequality in society

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Economic growth is shown by

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-outward shift in the PPF
-right shift in the long-run aggregate supply curve

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Key statistic used to track economic growth

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Real GDP per capita

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Labor productivity

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value that each employed person creates per unit of his or her input (output per worker)

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Long-run economic growth depends almost entirely on...

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rising productivity

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Human Capital

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the accumulated knowledge (from education and experience), skills, and expertise that the average worker possesses in an economy

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Physical capital

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this includes buildings and machinery making workers more productive (backhoe vs shovel)

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Technological change

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combination of invention-advances in knowledge-- and innovation, which is putting that advance to use in a new product or service

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Production function

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process of turning economic inputs into outputs like goods and services
-Y = F(L,K)

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Aggregate production function

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the connection from inputs to outputs for the entire economy

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Cobb-Douglas production function

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Y=F(L,K)=AK^aL^1-a

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What is the common measure of US productivity per worker?

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dollar value per hour the worker contributes to the employer's output

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Over the long term, the only way that GDP per capita can grow continually is if....

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the productivity rises or if there are complementary increases in capital

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In the long run, productivity per hour is the most important determinant of...

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the average wage level in any economy

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To understand economic growth, it is often useful to focus on GDP per capita. it makes it easier to....

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compare countries having different sized populations

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Capital deepening

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when society increases the level of capital per person

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Convergence hypothesis

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relatively poor countries should have higher rates of growth of real GDP per capita than relatively rich countries

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Although economic convergence between the high-income countries and the rest of the world seems possible and even likely, it will...

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proceed slowly

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A rise or fall of just 0.1% in the unemployment rate translates into...

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155,000 people

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Even with the unemployment rate now at ___ as of February 2015, about 8 million people total are out of work (8.4% as of August 2020 and 5.4% as of July 2021)

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5.5%

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Employed

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currently working for pay

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Unemployed

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out of work and actively looking for a job

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Out of the labor force

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out of paid work and not actively looking for a job

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Labor force

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the number of employed plus the unemployed

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Unemployment rate equation

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unemployed people/total labor force x 100

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a worker who is confident of finding a job but has not yet accepted a position is counted as...

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unemployed

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Discouraged workers

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individuals who want to work but aren't currently searching because they see little prospect of finding a job given the state of the job market

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Underemployed

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workers who would like to find full-time jobs but are currently working part time "for economic reasons". They aren't counted in the unemployment rate

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There is a __________ between growth in the economy and rate of unemployment

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strong negative relationship

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growth recession

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periods in which GDP is growing, but at a below-average rate; these are periods in which the economy isn't in a recession but unemployment is still rising

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Unemployment patterns

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-Unemployment rates do fluctuate over time
-Unemployment rates in late 1990s adn mid 2000s were rather low by historical standards
-unemployment rate never falls all the way to zero
-timing of rises and falls in unemployment matches fairly well with the timing of upswings and downswings in the overall economy

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The national unemployment rate has never dropped below____

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2.9%

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Frictional Unemployment

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unemployment due to the time workers spend in job search. a certain amount of frictional unemployment is inevitable. all jobs are different and there is imperfect information

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Even at the equilibrium wage rate, there will still be some____

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frictional unemployment

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Structural Unemployment

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unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate. occurs when wage rate is persistently above equilibrium wage rate.

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Several factors can lead to wage rate in excess of equilibrium wage rate WE

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minimum wages, labor unions, and efficiency wages

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Minimum wages

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government-mandated floor on the price of labor. For less skilled workers, the minimum wage may be binding--it affects the wages that people are actually paid and can lead to structural unemployment

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Labor Unions

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the actions of labor unions can have effects similar to those of minimum wages, leading to structural unemployment. Unions can have greater bargaining power. There are more people willing to work at the wage being paid than there are jobs available

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Efficiency wages

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actions by firms may also contribute to structural unemployment. Firms may choose to pay efficiency wages-- wages that employers set above the equilibrium wage rate as an incentive for their workers to deliver better performance

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Natural Rate of Unemployment

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unemployment rate that arises from the effects of frictional plus structural unemployment

Frictional unemployment + structural unemployment

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Cyclical unemployment

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the deviation of the actual rate of unemployment from the natural rate; that is, it is the difference between the actual and natural rates of unemployment

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Actual unemployment equation

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natural unemployment + cyclical unemployment

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Causes for changes in unemployment in short run

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-cyclical unemployment
-in the short run the labor supply curve does not shift much
-one primary determinant of the demand for labor from firms is how they perceive the state of the macro economy
-the variation in unemployment caused by the economy moving from expansion to recession or from recession to expansion is known as cyclical unemployment

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sticky wages

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nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages (wage is forced to remain above the equilibrium level)

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natural rate of unemployment

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the normal rate of unemployment around which the unemployment rate fluctuates. remaining level of unemployment that occurs even when the economy is healthy

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Frictional unemployment vs structural unemployment

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Frictional unemployment: unemployment that results from the process of matching workers and jobs
Structural unemployment: unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

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Full employment

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actual unemployment rate is equal to natural unemployment

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Potential real GDP

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level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

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Economy below full employment

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real GDP < potential real GDP

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Economy above full employment

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real GDP > potential real GDP

1 of 155

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Economics

answer

study of how rational humans make decisions in the face of scarcity

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Two key components to the study of economics:

answer

Choice: a decision by an individual of what to do
Scarcity: human wants for goods, services, and resources exceed what is available

question

Scarcity

answer

society has limited resources and therefore cannot produce all the goods and services people with to have

question

In most societies, these limited resources are allocated _________ of millions of households and firms

answer

through the combined actions

question

Market Economy

answer

if the decisions of individual consumers and producers largely determine what, how, and for whom to produce, with little government involvement in the decisions

question

Market

answer

a group of buyers and sellers of a particular good or service

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Buyers determine_______ and sellers determine ________

answer

demand for a product; supply of a product

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Competitive Market

answer

market in which there are so many buyers and so many sellers that each has a negligible impact on the market price

question

Once society has allocated resources to various jobs, it must also allocate the _________

answer

output of goods and services

question

Economists study....

answer

how people make decisions, how much they work, what they buy, how much they save, and how they invest their savings

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Factors of production

answer

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Individuals make choices based on their ______

answer

budget constraint

question

Society makes choices based on the _________

answer

production possibilities frontier (PPF)

question

Trade-off

answer

when you give up something in order to have something else

question

Opportunity cost

answer

the value of what you must give up when you make a particular choice. with every choice, an alternative is forgone

question

Efficiency

answer

there is no way to make some people better off without making other people worse off

question

Production possibility frontier (PPF)

answer

this illustrates the trade-offs facing an economy that produces only two goods

question

Productive efficiency

answer

given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good

question

Allocative efficiency

answer

the particular mix of goods a society produces represents the combination that society most desires

question

Key principles of how people make decisions:

answer

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What causes inflation?

answer

growth in the quantity of money. when a government creates large quantities of the nation's money, the value of the money falls

question

Short run effects of monetary injections

answer

question

Policy makers can exploit the short-run trade-off between inflation and unemployment using various policy instruments:

answer

question

Microeconomics focuses on:

answer

how decisions are made by individuals and firms, how those decisions interact, and the consequences of those decisions

question

Macroeconomics focuses on:

answer

the aggregate behavior of the economy and focuses on economic aggregates-economic measures such as the unemployment rate, inflation rate, and GDP

question

Examples of microeconomic questions

answer

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Examples of macroeconomic questions

answer

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Before the 1930s, economists regarded the economy as:

answer

self-regulating

question

Market Failure

answer

market fails to allocate resources efficiently

question

According to ________, the economy can be made better off by monetary and fiscal policy

answer

Keynesian

question

Monetary policy

answer

uses the quantity of money to alter interest rates, which affects overall spending

question

Fiscal policy

answer

uses changes in taxes and in government spending to affect overall spending

question

Business cycle

answer

question

Depression

answer

very deep and prolonged downturn

question

Recessions

answer

periods of economic downturns when output and employment are falling

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Expansions

answer

periods of economic upturns when output and employment are rising

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Output

answer

the quantity of goods and services produced in the economy

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Aggregate output

answer

the economy's total production of goods and services for a given time period to measure the rise and fall of an economy's output

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Inflation

answer

rising overall price level throughout the economy

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Deflation

answer

falling overall price level throughout the economy

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Problems of inflation and deflation

answer

question

Other things equal assumption (ceteris paribus)

answer

all other relevant factors remain unchanged

question

Examples of Monetary policy

answer

policies that affect bank lending, interest rates, and financial capital markets, are conducted by a nation's central bank (i.e. US Fed and ECB)

question

Examples of Fiscal policy

answer

policies that change taxes and government spending to affect overall spending, are determined by a nation's legislative body

question

Unemployment

answer

total number of people who are actively looking for work but aren't currently employed. A country's labor force is the sum of employment and unemployment

question

Price stability

answer

when the overall price level is changing either not at all or only very slowly

question

Demand

answer

the amount of some good or service consumers are willing to purchase at each price

question

Price

answer

what a buyer pays for a unit of the specific good or service

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Quantity demanded

answer

the total number of units purchased at that price (given price)

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Law of demand

answer

a rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded

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Price and quantity demanded have an

answer

inverse (negative) relationship

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Supply

answer

the amount of some good or service a producer is willing to supply at each price

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Law of supply

answer

a rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied

question

Price and quantity supplied have a

answer

positive relationship

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Equilibrium (E*)

answer

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

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Equilibrium price (P*)

answer

the price that balances quantity supplied and quantity demanded

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Equilibrium quantity (Q*)

answer

the quantity supplied and the quantity demanded at the equilibrium price

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Five primary factors that shift the demand curve for a good or service:

answer

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Substitutes

answer

two goods are substitutes if a rise in the price of one of the goods leads to an increase in the demand for the other good, for example, coffee and tea (same direction)

question

Complements

answer

two goods are complements if a rise in the price of one of the goods leads to a decrease in the demand for the other good, for example, cars and gasoline (opposite direction)

question

Normal Good

answer

when a rise in income increases the demand for a good (same direction)

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Inferior Good

answer

question

When is there a movement along the demand curve?

answer

when there is a change in price

question

Five principles that shift the supply curve for a good or service

answer

-changes in input prices
-changes in the prices of related goods or services
-changes in technology
-changes in expectations
-changes in the number of producers/suppliers

question

When is there movement along the supply curve?

answer

when there is a change in price

question

answer

receive; pay

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Interest rate

answer

most widely used rate of return in financial markets

question

According to the law of demand, as the interest rate rises, consumers will ________ the quantity that they borrow

answer

reduce

question

According to the law of supply, as the interest rate paid on credit card borrowing rises, more firms will be eager to issue credit cards and to _______ customers to use them

answer

encourage

question

Prices

answer

mechanism for rationing scarce resources. allocate scarce resources

question

Macroeconomic goals

answer

-economic growth
-low unemployment
-low inflation

question

Framework economists use to analyze macroeconomy

answer

-aggregate demand/aggregate supply
-keynesian model
-neoclassical model

question

Policy tools governments use to manage the macroeconomy

answer

-monetary policy
-fiscal policy

question

Gross Domestic Product (GDP)

answer

measure of a country's aggregate output

question

The size of a nation's overall economy is typically measured by its GDP, which is....

answer

the value of all final goods and services produced within a country in a given year

question

Market Value

answer

means that production is valued at the price paid for the product. Thus, items sold at higher prices are more heavily weighted in GDP

question

Of All

answer

means that GDP measures all production in the economy that is legally sold in markets

question

Final

answer

means that GDP only includes goods and services that are sold to the end user (final goods vs intermediate goods)

question

Goods and Services

answer

means that GDP includes tangible manufactured items and intangible items

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Produced

answer

means that we exclude the sale of used items that were produced (and counted) in a previous period (ex. used goods)

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Within a country

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means that GDP measures the value of production within the geographic borders of a country

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In a given period of time

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means that we measure GDP per year or per quarter

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The GDP of an economy can be measured either by the total dollar value of ________ in the economy, or by the total dollar value of _________

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what is purchased; what is produced

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GDP Measured by components of demand

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-Consumer spending (consumption)
-Business spending (investment)
-government spending (government purchases)
-spending on net exports (exports-imports)

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Consumer spending (C)

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spending by households on goods and services, with the exception of new housing

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Business spending (I)

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spending on capital equipment, inventories, and structures such as new housing. This does NOT include spending on stocks, bonds, and mutual funds

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Government spending (G)

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spending on goods and services by all levels of government. This does not include transfer payments such as social security, welfare, and unemployment benefits

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Spending on net exports (Nx)

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imports must be subtracted so that only spending on domestic production remains

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Investment demand is....

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far smaller than consumption demand but it is very important for the economy because this is where jobs are created

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Government expenditure includes spending by all three levels of government:

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federal, state, and local

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Services

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largest single component of total supply, representing over half of GDP
-ex: healthcare, education, and legal and financial services

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Durable goods ex

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cars, computers, and refrigerators

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Nondurable goods ex

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food and clothing

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Structures ex

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homes, office buildings, shopping malls, and factories

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GDP per capita

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GDP/population

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GDP equation

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Y = C + I + G + NX

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Nominal GDP

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the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced

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Real GDP

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the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

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Nominal GDP reflects:

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both the quantities and prices of those goods and services

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Real GDP reflects:

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only the quantities produced (because it holds the prices constant at base-year levels)

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GDP deflator

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reflects only the prices of goods and services

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GDP deflator equation

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Nominal GDP/Real GDP x 100

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Facts about GDP deflator

answer

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Inflation rate equation

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((GDP Deflator 2 - GDP Deflator 1) / GDP Deflator 1) x100

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What is NOT included in GDP

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-intermediate goods
-transfer payments and non-market activities
-used goods
-illegal goods

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Limitations of GDP

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Economic growth is shown by

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-outward shift in the PPF
-right shift in the long-run aggregate supply curve

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Key statistic used to track economic growth

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Real GDP per capita

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Labor productivity

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value that each employed person creates per unit of his or her input (output per worker)

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Long-run economic growth depends almost entirely on...

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rising productivity

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Human Capital

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the accumulated knowledge (from education and experience), skills, and expertise that the average worker possesses in an economy

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Physical capital

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this includes buildings and machinery making workers more productive (backhoe vs shovel)

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Technological change

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combination of invention-advances in knowledge-- and innovation, which is putting that advance to use in a new product or service

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Production function

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process of turning economic inputs into outputs like goods and services
-Y = F(L,K)

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Aggregate production function

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the connection from inputs to outputs for the entire economy

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Cobb-Douglas production function

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Y=F(L,K)=AK^aL^1-a

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What is the common measure of US productivity per worker?

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dollar value per hour the worker contributes to the employer's output

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Over the long term, the only way that GDP per capita can grow continually is if....

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the productivity rises or if there are complementary increases in capital

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In the long run, productivity per hour is the most important determinant of...

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the average wage level in any economy

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To understand economic growth, it is often useful to focus on GDP per capita. it makes it easier to....

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compare countries having different sized populations

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Capital deepening

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when society increases the level of capital per person

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Convergence hypothesis

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relatively poor countries should have higher rates of growth of real GDP per capita than relatively rich countries

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Although economic convergence between the high-income countries and the rest of the world seems possible and even likely, it will...

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proceed slowly

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A rise or fall of just 0.1% in the unemployment rate translates into...

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155,000 people

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Even with the unemployment rate now at ___ as of February 2015, about 8 million people total are out of work (8.4% as of August 2020 and 5.4% as of July 2021)

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5.5%

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Employed

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currently working for pay

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Unemployed

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out of work and actively looking for a job

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Out of the labor force

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out of paid work and not actively looking for a job

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Labor force

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the number of employed plus the unemployed

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Unemployment rate equation

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unemployed people/total labor force x 100

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a worker who is confident of finding a job but has not yet accepted a position is counted as...

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unemployed

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Discouraged workers

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individuals who want to work but aren't currently searching because they see little prospect of finding a job given the state of the job market

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Underemployed

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workers who would like to find full-time jobs but are currently working part time "for economic reasons". They aren't counted in the unemployment rate

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There is a __________ between growth in the economy and rate of unemployment

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strong negative relationship

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growth recession

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periods in which GDP is growing, but at a below-average rate; these are periods in which the economy isn't in a recession but unemployment is still rising

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Unemployment patterns

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The national unemployment rate has never dropped below____

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2.9%

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Frictional Unemployment

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unemployment due to the time workers spend in job search. a certain amount of frictional unemployment is inevitable. all jobs are different and there is imperfect information

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Even at the equilibrium wage rate, there will still be some____

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frictional unemployment

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Structural Unemployment

answer

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Several factors can lead to wage rate in excess of equilibrium wage rate WE

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minimum wages, labor unions, and efficiency wages

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Minimum wages

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government-mandated floor on the price of labor. For less skilled workers, the minimum wage may be binding--it affects the wages that people are actually paid and can lead to structural unemployment

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Labor Unions

answer

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Efficiency wages

answer

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Natural Rate of Unemployment

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unemployment rate that arises from the effects of frictional plus structural unemployment

Frictional unemployment + structural unemployment

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Cyclical unemployment

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the deviation of the actual rate of unemployment from the natural rate; that is, it is the difference between the actual and natural rates of unemployment

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Actual unemployment equation

answer

natural unemployment + cyclical unemployment

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Causes for changes in unemployment in short run

answer

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sticky wages

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nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages (wage is forced to remain above the equilibrium level)

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natural rate of unemployment

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the normal rate of unemployment around which the unemployment rate fluctuates. remaining level of unemployment that occurs even when the economy is healthy

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Frictional unemployment vs structural unemployment

answer

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Full employment

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actual unemployment rate is equal to natural unemployment

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Potential real GDP

answer

level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

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Economy below full employment

answer

real GDP < potential real GDP

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Economy above full employment

answer

real GDP > potential real GDP

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