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Define GDP
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the total market value of all final goods and services produced domestically by an economy in one years time
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market value
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the amount for which something can be sold on a given market.
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final products
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those goods that do not require further processing
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production on our soil
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goods produced on US soil
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What production does GDP fail to include?
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household production and the underground economy
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What are the shortcomings of GDP when used as a measure of well-being?
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It fails to include the value of leisure, it is not adjusted for pollution or other negative factors of production, it is not adjusted for crime or other negative social issues
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GDP per capita
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GDP divided by population
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Y, C, I, G, NX
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the calculation for GDP based on the expenditure approach
Y = GDP
C = Consumption
G = Gov Spending
I = Investment
NX = net exports
Y = GDP
C = Consumption
G = Gov Spending
I = Investment
NX = net exports
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Nominal GDP
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takes current production values with current prices
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Real GDP
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takes current production and values it with constant/base year prices
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What is the point of calculating real GDP?
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it gets ride of the impact of inflation
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Value-Added Approach
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calculating GDP is to survey firms and add up their contributions to the value of final goods and services
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Gross National Product (GNP)
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the total market value of all final goods and services produced anywhere in the world by a US corporation in one year
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Gross National Income (GNI)
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measurement of the overall production of people or corporations native to a country
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Profitability Index (PI)
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a measure of a project's or investment's attractiveness
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Disposable Income (DPI)
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the amount of money that an individual or household has to spend or save after income taxes have been deducted
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Who measured GDP?
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Bureau of Economic Analysis (BEA)
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How often is GDP measured?
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four times throughout the year, every quarter
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What is our goal for GDP?
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to grow at the most ideal rate, 3% every year
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What is the household survey?
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the BLS contacts 60,000 households a month with a survey
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Being unemployed vs employed
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Those who have jobs are employed, those who do not have jobs but are looking for them and are available for work are unemployed. Those who are working or looking for work are not counted as members of the labor force.
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When is someone not in the labor force?
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anyone under 16, not available, available but not working, discouraged workers, or life situations
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Frictional Unemployment
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"temporary," the best type of unemployment
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Structural Unemployment
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typically a skill no longer wanted
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Cyclical Unemployment
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directly attributed to the business cycle
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Discouraged Workers
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available workers who want jobs but have stopped looking
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How do government programs contribute to unemployment?
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allows people to live off unemployment and discouraged them to find jobs
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Natural Rate of Unemployment
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unemployment that does not arise from the business cycle, around 4% is the goal, it is a fluid number
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Establishment Survey
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monthly survey of 300,000 businesses' payroll reports that gives the BLS employment numbers
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The Unemployment Rate
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the percentage of the labor force that is unemployed
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Efficiency Wages
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above-equilibrium wages paid by firms to increase worker productivity
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Consumer Price Index (CPI)
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a measure of the overall cost of the goods and services bought by a typical consumer
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Producer Price Index (PPI)
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an index that represents the average movement in selling prices from domestic production over time
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GDP Deflator
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a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
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What are the effects of anticipated inflation?
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anticipated inflation is the percentage increase in the level of prices over a given period that is expected by an economy, a higher rate of inflation than expected lowers the realizes real real interest rate below the contracted real interest rate
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What are the effects of unanticipated inflation?
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lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than they loaned out
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What is the connection between increasing GDP per capita and labor productivity?
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the only way that GDP per capita can grow continually is if the productivity of the average worker rises or if there are complimentary increases in capital
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Potential GDP or Full Employment GDP
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amount of GDP when economy is at full employment
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Financial System
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the system of financial markets and financial intermediaries through which firms acquire funds from households
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Financial Markets
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financial institutions through which savers can directly provide funds to borrowers
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Financial Intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
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Connection of S and I
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S = I
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Private Saving
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the income that households have left after paying for taxes and consumption
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Public Saving
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the tax revenue that the government has left after paying for its spending
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Government Budgets
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plan for spending and raising funds for the government
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Gov Budget: Balance, Deficits Surpluses
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When revenues exceed expenses there is a budget surplus; when expenses exceed revenues there is a budget deficit
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The Market for Loanable Funds
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a market in which savers supply funds to those who want to borrow
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What shifts the S curve?
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1. resource prices
2. technology
3. prices of other goods produced
4. number of sellers
5. expectations of future price
2. technology
3. prices of other goods produced
4. number of sellers
5. expectations of future price
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What shifts the D curve?
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1. income
2.population/demographics
3. tastes/preferences
4. prices of related goods
5. expectations of future price
2.population/demographics
3. tastes/preferences
4. prices of related goods
5. expectations of future price
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4 Phases of the Business Cycle
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1. peak
2. recession
3. trough
4. expansion
2. recession
3. trough
4. expansion
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Effects of the business cycle on GDP
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Economic expansions are measured by the increase in GDP from the trough to the peak of a cycle, and contractions are measured by the decrease in GDP from the peak to the trough.
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Effects of the business cycle on inflation
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Inflation decreases during recessions and increases during expansions
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Effects of the business cycle on unemployment
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Unemployment increases during business cycle recessions and decreases during business cycle expansions
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