question
Define gross domestic product (GDP).
answer
Gross domestic product (GDP) is the dollar value of all final goods and services produced within a country's borders in one year.
question
What is not included in GDP?
answer
GDP does not include the value of intermediate goods (goods used in the production of final goods and services), nonproduction transactions, and non-market (illegal) activities.
question
What are the 4 components of GDP?
answer
The four components of GDP are consumer spending, investment spending, government spending, and net export spending.
question
Difference between nominal GDP and real GDP
answer
Nominal GDP is GDP based on current output at current prices. While it gives the level of output of the country, GDP can also rise because of rising prices due to inflation. Real GDP gives the level of output in a base year's prices, which shows actual growth.
question
If someone told you that the nominal GDP increased by 4% in 2004, what 2 additional pieces of information would you need to conclude that the standard of living for the typical person also increased by 4%?
answer
1. Inflation rate (to find the real growth rate)
2. Growth rate of population (to find the real GDP per capita)
2. Growth rate of population (to find the real GDP per capita)
question
What are the 3 types of unemployment?
answer
1. Frictional unemployment
2. Structural unemployment
3. Cyclical unemployment
2. Structural unemployment
3. Cyclical unemployment
question
What is frictional unemployment?
answer
Frictional unemployment is defined as "temporarily unemployed" or being between jobs. These individuals are qualified workers with transferable skills, but they are not working.
question
What is structural unemployment?
answer
Structural unemployment is defined as changes in the structure of the labor force making some skills obsolete. Workers do not have transferable skills and these jobs will never come back. Workers must learn new skills to get a new job. The permanent loss of these jobs is called "creative destruction".
question
What is cyclical unemployment?
answer
Cyclical unemployment is unemployment that results from economic downturns. As demand for goods and services falls, demand for labor falls and workers are fired.
question
How is the unemployment rate calculated?
answer
Unemployment rate = (# of unemployed)/(# in labor force) x 100
question
What is the natural rate of unemployment at full employment?
answer
At full employment, we have only the natural rate of unemployment.
question
What are the two types of unemployment that make up the natural rate of unemployment?
answer
1. Frictional unemployment
2. Structural unemployment
2. Structural unemployment
question
Is zero unemployment desirable?
answer
Economists generally agree that an unemployment rate of around 4 to 6% is acceptable.
question
If zero unemployment is NOT desirable, why?
answer
Zero unemployment is not wanted and is impossible because people will always be searching for better jobs after they quit their previous job.
question
Define Consumer Price Index (CPI).
answer
Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.
question
How to calculate the real interest rate?
answer
Real interest rate = Nominal interest rate - inflation rate
question
How to calculate the nominal interest rate?
answer
Nominal rate = Real interest rate + inflation rate
question
If the actual inflation is greater than the anticipated inflation, fully explain who would benefit and who would be hurt and explain why?
answer
If actual inflation is greater than the anticipated inflation, then borrowers of money on a fixed interest rate would benefit because they are paying back their debt with less real dollars. Lenders who loan money on a fixed rate interest would suffer because they are getting less real dollars.
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