Unit 2

Question 1

Gross Domestic Product (GDP)

Answer 1

dollar value of all final goods and services produced within a country in one year.
–> measures eco growth on PPC within country producing borders(land, labor, capital)

Question 2

dollar value (market price)

Answer 2

sale price (found at equilibrium)

Question 3

GDP calculation

Answer 3

sale price - production price = profit

Question 4

expenditure model

Answer 4

c + i + g + xn = Y(GDP)

Question 5

intermediate goods

Answer 5

goods still being used in the production of another good
–> not counted in GDP

Question 6

final good

Answer 6

goods available for purchase for consumers
–> counted in GDP

Question 7

consumer spending

Answer 7

what consumer buy

Question 8

investment (business) spending

Answer 8

all new construction
change in capital
change in inventory

Question 9

government spending

Answer 9

must make an exchange of money for a good or service

Question 10

net exports

Answer 10

exports - imports

Question 11

what is not included in GDP

Answer 11

• DIY
• financial assets transactions (stocks + bonds)
• transfer payments (subsidies)
• used goods

Question 12

% change in GDP

Answer 12

(year 2 - year 1)/year 1 *100

Question 13

GDP per capita (per person)

Answer 13

identifies average on how many products each person makes

Question 14

Why GDP is higher in some countries

Answer 14

1. human capital (edu)
2. capital stock (tech)
3. rule of law (political stability)
4. natural resources reservoir

Question 15

ways to calculate GDP

Answer 15

1. expenditure approach : add up all spending on final G + S produced in given year
2. income approach : add up all income earned from selling final G + S produced in given year
3. value add approach : add up dollar valued added at each stage of production process

Question 16

3 component consumer spending

Answer 16

1. durable goods (washing machine, long term tech)
2. non durable goods (food, clothes)
3. services (dental work, tutoring, repairs)

Question 17

to be employed :

Answer 17

16+
civilian (not military)
non institutionalized (jail)
actively seeking employment

Question 18

to be part of labor force :

Answer 18

unemployed / employed
labor force = unemployed + employed

Question 19

employment figure
employment rate

Answer 19

unemployed/labor force
unemployed/employed

Question 20

underemployed

Answer 20

people go from full time to part time not by choice; pay cut. unemployed so take what you get

Question 21

discouraged workers

Answer 21

unemployed originally but then stop looking for work

Question 22

frictional unemployment

Answer 22

short term (move/ graduated and looking for job; no cause)

Question 23

structural

Answer 23

long term unemployment
-> no skills to transfer to another job

Question 24

Cyclical

Answer 24

Unemployment when nation is going through economic hardships

Question 25

natural rate of unemployment

Answer 25

healthy eco system -> US : 4 < x < 6% unemployment rate

Question 26

inflation

Answer 26

rising general level of P + reduces purchasing power of money --> decreases investment and GDP

Question 27

deflation

Answer 27

decreasing in general prices; a negative inflation rate

Question 28

disinflation

Answer 28

inflation that occurs at a slower rate

Question 29

inflation rate

Answer 29

% change in P from year to year

Question 30

price indices

Answer 30

index numbers assigned to each year that show how P has changed relative to a specific base year.

Question 31

consumer price index

Answer 31

(price of market basket) / (price of market basket in base year)

Question 32

substitution bias

Answer 32

as P increase or fixed market basket, consumers buy less if these products and more substitutes that may not be part of market basket. (CPI may be higher than what consumers are really paying).

Question 33

new products

Answer 33

CPI market basket may not include the newest consumer products. (CPI measures prices not the increase in choices

Question 34

products Q

Answer 34

CPI ignores both improvements and decline in products Q

Question 35

problems with CPI

Answer 35

- substitution bias - new products - product Q

Question 36

lenders

Answer 36

people who lend money at fixed interest rates (hurt by inflation)

Question 37

borrowers

Answer 37

people who borrow money

Question 38

people who are hurt by inflation

Answer 38

- lenders - people with fixed incomes - savers

Question 39

people who are helped by inflation

Answer 39

- borrowers - bus where P of products increases faster than P of resources

Question 40

people who are helped by inflation

Answer 40

- borrowers - bus where P of products increases faster than P of resources

Question 41

nominal wage

Answer 41

wage measured by money rather than purchasing power

Question 42

real wage

Answer 42

wage adjusted for inflation

Question 43

menu costs

Answer 43

costs money to change listed prices

Question 44

shoe leather costs

Answer 44

costs of transaction increasing --> people reduce real money holding, so they must spend time and effort making additional trips to bank

Question 45

unit of account cosrs

Answer 45

money doesnt reliably measure the value of G + S --> leads to less efficient use of resources bc of uncertainty caused by changes in currency values

Question 46

real

Answer 46

adjusts for GDP

Question 47

inflation

Answer 47

rising general level of prices

Question 48

norminal GDP

Answer 48

GDP measured in current prices; doesnt account for inflation from year to year

Question 49

real GDP

Answer 49

GDP measured in cibstant/ unchanging $; adjusts for inflation

Question 50

GDP deflator

Answer 50

measures P of all goods produced; includes only G + S produced domestically. Imported goods not part of GDP thus wont show in GDP deflator

Question 51

GDP deflator equation

Answer 51

nominal GDP / Real GDP * 100

Question 52

recession

Answer 52

6 month period of decline in real GDP

Question 53

peak

Answer 53

highest time of GDP

Question 54

trough

Answer 54

lowest value of GDP

Question 55

contraction

Answer 55

recession - increase in unemployment - decrease in GDP