Macroeconomics Problem Set 2
study of the economy as a whole
What are the three economic goals?
Promote economic growth, limit unemployment, limit inflation
Gross Domestic Product (GDP)
dollar value of all final goods and services produced in one country per year
National Income Accounting
statistics on production, income, investments, and savings
GDP Change Formula
%change in GDP=((year 2- year 1)/year 1)*100
GDP per capita
GDP divided by the population; identifies the amount an individual produces
What are the five elements of Productivity?
economic system, property rights, capital, human capital, and natural resources
What is not included in GDP?
Intermediate goods, financial transactions, used goods, and non-market/illegal activities
What are the two ways of counting GDP?
Expenditures and Income Approach
add up all money spent on final goods in a year
add up all income as a result of selling goods and services in a year
What are the four components of GDP in the expenditures approach?
Consumer spending, investments, government spending, and net exports
Formula for GDP
What are the four components of GDP in the income approach?
labor income, rental income, interest income, and profit
the rising general level of prices; reduces purchasing power of money
GDP measured in current prices
GDP adjusted to inflation
people who are looking for a job but are currently out of work
Unemployment Rate Formula
Unemployment Rate=(#unemployed/#in the labor force)*100
Who is included in the labor force?
age 16 and older, able and willing to work, not institutionalized, not in military, not in school full time, retired
temporary unemployment in between jobs either because the worker was fired or quit
type of frictional unemployment caused by time of year and nature of job (ex:snowplow workers)
change in the labor force making some skills obsolete (ex:VCR repairman)
type of structural unemployment where workers are replaced by machinery
unemployment caused by recession; demand for goods and services falls leading to decrease demand for labor, leading to the firing of workers
Natural Rate of Unemployment (NRU)
amount of unemployment that exists when the economy is healthy and growing; adds frictional and structural unemployment
Full Employment Output
real GDP created when there is no cyclical unemployment
What are some criticisms of unemployment rates?
unemployment rates do not take into account discouraged workers, underemployed workers, and race/age inequalities
decrease in general prices
prices increase at slower rates
Who is hurt by inflation?
lenders, people with fixed incomes, and savers
Who is helped by inflation?
Borrowers, businesses where price of a product increases faster than the price of resources
wage measured by dollars rather than purchasing power
wage adjusted for inflation
percent change in prices from year to year
index numbers assigned to each year that show how prices have changed relative to a specific base year
Consumer Price Index (CPI) Formula
CPI=(price of market basket/ price of market basket in base year)*100
What are some of the problems with CPI?
does not measure substitution bias, new products, or product quality
GDP Deflator Formula
GDP Deflator=(nominal GDP/real GDP)*100
What are the three causes of inflation?
government prints too much money, demand-pull inflation, and cost-push inflation
Velocity of Money
the average number of times a dollar is spent and re-spent in a year
Quantity Theory of Money Equation
money supply*velocity=price level*quantity of output
demand pulls prices up; economy with excessive spending but the same amount of goods
higher production cost results in increased prices
Real Interest Rates
percentage increase in purchasing power that a borrower pays (adjusted to inflation)
Real Interest Rates Formula
Real Interest Rate= nominal interest rate- expected inflation
Nominal Interest Rates
percentage increase in money that the borrower pays not adjusted to inflation
Nominal Interest Rates Formula
Nominal Interest Rate= real interest rate+expected inflation