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GDP per capita measures...
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income per person for an economy
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Real GDP per capita is used as a measure of living standards because...
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it is positively correlated with other measures of well-being (NOT a perfect measure)
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GINI coefficient for US is
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high relative to other developed countries and has been increasing over time
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Human Development Index (HDI) incorporates
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income, health, education
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GINI Coefficient measures
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distribution of wealth/income within the economy
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Genuine Progress Index (GPI)
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social, economic, environmental
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The unemployment rate that persists in the long-run is known as the
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natural rate of unemployment
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unemployment rate =
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(unemployed/unemployed + employed) x 100
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frictional unemployment
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Unemployment associated with job search
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structural unemployment
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sectoral shifts - unemployment due to the structure of the economy (industries destroyed while new are created)
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Potential GDP
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the amount of income that a country would have if unemployment is at natural rate
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When there is a recession
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Unemployment rate will be greater than the natural rate; and real GDP falls when unemployment rises
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natural rate of unemployment=
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frictional + structural
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Clynical Unemployment
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unemployment due to business cycle
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actual unemployment rate =
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natural rate + cyclical
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Inflation
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increase in average prices as determined by price index
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price index
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measure of average prices
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CPI (today)=
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(cost of basket today/cost of basket in base year) x 100
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Inflation rate =
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(CPI today - CPI last year/CPI last year) x 100
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GDP Deflator
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ratio of nominal and real GDP for a given year
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Core CPI
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calculated same as CPI, but excludes food and energy costs
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Producer price index
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tracks prices of inputs used in production processes
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Amount in today's dollars =
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amount in other year's dollars x (price level today/price level in other year)
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costs associated with inflation
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shoe leather costs, menu costs, redistributions of wealth, tax distortions
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high GINI =
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more income inequality
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CPI is a measure of
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the price level of an economy
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labor force participation rate =
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(Unemployed + employed)/adult population) x 100
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unmeasured quality change
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increase quality of a product (overestimates inflation)
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The Inflation Fallacy
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when inflation rises, wages rise
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shoe leather costs
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increase in resources spent managing money rather than in other productive capacities
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menu costs
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costs associated with updating and posting new prices
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Fisher Equation
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nominal interest rate = real interest rate + inflation
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