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EGC1

Economic Variables and the Economy

QuestionAnswer
define gross domestic product (GDP) Gross domestic product (GDP), a basic measure of an economy’s economic performance, is the market value of all final goods and services produced within the borders of a nation in a year.
describe the relationships among GDP, net domestic product (NDP), national income (NI), personal income (PI), and disposable income(DI) NDP is GDP less the consum.of fixed capital.NI is total income earned by a nation’s rsrce.suppliers+taxes on prod.&imports.PI is the total income paid to households prior to any allowance for pers.taxes.DI is pers.income after pers.taxes have been paid.
explain the nature and function of the GDP price index Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular period by the price of the same market basket in a base period and multiply the result by 100.
distinguish between nominal GDP(current-dollar) and real GDP(constant-dollar) Nominal measu.each yr’s output valued in trms of the prices prevailing in that yr.Real measu.each yr’s output in terms of the prices that prevailed in a selc.base yr.Bc real is adjusted for price-level changes,diff.in real R due only to diff.in prod.actv
describe some limitations of the GDP measure GDP is a reasonably accurate&very useful indicator of a nation’s econ.perf,but it has its limits.It fails to account for nonmarket& illegal transac.,changes in leisure&in product qualy,the composition& distrib.of output,&the environ.effects of prod.
national income accounting The techniques used to measure the overall production of the economy and other related vari- ables for the nation as a whole.
gross domestic product (GDP) defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year.
intermediate goods products that are purchased for resale or further processing or manufacturing
final goods products that are purchased by their end users.
multiple counting Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.
value added The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product. inputs is paid out as wages, rent,interest,& profit.
expenditures approach The method that adds all expenditures made for final goods and services to measure the gross domestic product.
income approach The method that adds all the income generated by the production of final goods and services to measure the gross domestic product
personal consumption expenditures (C) The expenditures of households for durable and nondurable consumer goods and services
durable goods In a typical year, roughly 10 percent of these personal consumption expenditures are on durable goods — products that have expected lives of three years or more. Such goods include new automobiles, furniture, and refrigerators.
nondurable goods Another 30 percent are on nondurable goods —products with less than three years of expected life. Included are goods like food, clothing, and gasoline.
services About 60% of personal consumption expenditures are on services —the work done by lawyers, hair stylists, doctors,mechanics, and other service providers. Because of this high percentage, economists sometimes refer to the U.S. economy as a service economy
gross private domestic investment (Ig) Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.
net private domestic investment includes only investment in the form of added capital. The amount of capital that is used up over the course of a year is called depreciation. So Net investment=gross investment-depreciation
government purchases (G) 1.expend.for goods/services that gov.consumes in providing public services2.expend.for publicly owned capital such as schools&high-ways,which have long lifetimes.Include gov. expenditures on final goods& all direct purchases of resources,including labor.
net exports (Xn) Exports minus imports
taxes on production and imports A national income accounting category that includes such taxes as sales,excise, business property taxes,and tariffs which firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.
national income Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors’ income, and such taxes.
consumption of fixed capital An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.
net domestic product (NDP) Gross domestic product less the part of the year’s output that is needed to replace the capital goods worn out in producing the output; the nation’s total output available for consumption or additions to the capital stock
personal income (PI) The earned and unearned income available to resource suppliers and others before the payment of personal taxes.
disposable income (DI) Personal income less personal taxes; income available for personal consumption expenditures and personal saving
nominal GDP GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation.
real GDP Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.
price index An index number that shows how the weighted- average price of a “market basket” of goods changes over time.
explain how economic growth is measured A nation’s economic growth can be measured either as an increase in real GDP over time or as an increase in real GDP per capita over time.Real GDP in the US has grown at an avg. annual rate of about 3.2%since 1950;realGDP grows at roughly a 2%annual rate
define the business cycle The US & other industrial economies have gone through periods of fluctuations in real GDP, employment,&the price level. Although they have certain phases in common—peak, recession, trough, expansion—business cycles vary greatly in duration and intensity.
describe the relationship between unemployment and inflation Unemployment rates & inflation rates vary widely globally. Unemployment rates differ because nations have different natural rates of unemployment & often are in different phases of their business cycles.
explain how unemployment is measured Economists distinguish btwn.frictional, structural,&cyclical unemploy.The fullemploy. or natural rate of unemploy.,which is made up of frictional&structural unemploy.,is between 4&5%.The presence of part-time&discouraged workers makes it diffu.2 measure.
explain how inflation is measured, and what happens to prices at various phases of the business cycle Inflation is a rise in the general price level&is measured in the US by the Consumer Price Index (CPI).When inflation occurs,each $ of income will buy fewer goods&services than before.That is, inflation reduces the purchasing power of money.
compare why some people are hurt by inflation while others benefit from inflation Unanticipated inflation arbitrarily redistributes real income at the expense of fixed-income receivers, creditors, an savers. If inflation is anticipated, individuals & bus. may be able to take steps to lessen or eliminate adverse redistribution effects.
economic growth An increase in real GDP occurring over some time period. • An increase in real GDP per capita occurring over some time period.
real GDP per capita the amount of real output per person in a country. It is calculated, as follows. Real GDP per capita = Real GDP/Population
rule of 70 The rule of 70 tells us that we can find the # of years it will take for some measure to double,given its annual % increase, by dividing that % increase into the number 70.(Approximate number of years required to double real GDP = 70/annual%rate of growth
modern economic growth is characterized by sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human lifetime.
leader countries As it relates to economic growth, countries that develop and use advanced technologies, which then become available to follower countries.
follower countries As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries.
supply factors They are: •Increases in the quantity&quality of natural resources. •Increases in the quantity&quality of human resources. •Increases in the supply (or stock) of capital goods. •Improvements in technology.
demand factor To achieve the higher production potential created by the supply factors, households, businesses, and government must purchase the economy’s expanding output of goods and services.
efficiency factor To reach its full production potential, an economy must achieve economic efficiency as well as full employment.
labor productivity Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.
labor-force participation rate The percentage of the working-age population that is actually in the labor force
growth accounting assess the relative importance of the supply-side elements that contribute to changes in real GDP. This system groups these elements into two main categories: • Increases in hours of work. • Increases in labor productivity.
infrastructure The capital goods usually provided by the public sector for use by citizens and firms (for example, highways, bridges, transit systems, wastewater treatment facilities, municipal water systems, and airports).
human capital the knowledge and skills that make a worker productive.
economies of scale Reductions in per-unit production costs that result from increases in output levels
information technology New and more efficient methods of delivering and receiving information through the use of computers, fax machines, wireless phones, and the Internet.
start-up firms A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.
increasing returns a situation in which a given percentage increase in the amount of inputs a firm uses leads to an even larger percentage increase in the amount of output the firm produces.
network effects Increases in the value of a product to each user, including existing users, as the total number of users rises.
learning by doing Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale
business cycles alternating rises and declines in the level of economic activity, sometime over several years. Individual cycles (one “up” followed by one “down”) vary substantially in duration and intensity.
peak a temporary maximum. Here the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity. The price level is likely to rise during this phase.
recession a period of decline in total output, income, and employment. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy.
trough the recession or depression, output and employment “bottom out” at their lowest levels. The trough phase may be either short-lived or quite long.
expansion A period in which real GDP,income,&employ.rise. At some point,the economy again approaches full employment.If spending then expands more rapidly than does production capacity, prices of nearly all goods&services will rise. Therefore, inflation will occur.
labor force which constituted slightly more than 50 percent of the total population in 2009. The labor force consists of people who are able and willing to work.
unemployment rate The percentage of the labor force unemployed at any time
discouraged workers Employees who have left the labor force because they have not been able to find employment.
frictional unemployment A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
structural unemployment Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
cyclical unemployment A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand
full-employment rate of unemployment The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the United States because some frictional and structural unemployment is unavoidable.
natural rate of unemployment (NRU) The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.
potential output The real output (GDP) an economy can produce when it fully employs its available resources.
GDP gap Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap ) or a negative amount (a negative GDP gap
Okun’s law The generalization that any 1 -percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).
inflation A rise in the general level of prices in an economy.
deflation A decline in the economy’s price level
Consumer Price Index (CPI) An index that measures the prices of a fixed “market basket” of some 3 00 goods and services bought by a “typical” consumer.
demand-pull inflation Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
cost-push inflation Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply
per-unit production costs The average production cost of a particular level of output; total input cost divided by units of output.
core inflation The underlying increases in the price level after volatile food and energy prices and removed.
nominal income The number of dollars received by an individual or group for its resources during some period of time.
real income The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
unanticipated inflation Increases in the price level(inflation) at a rate greater than expected.
anticipated inflation Increases in the price level (inflation) that occur at the expected rate.
cost-of-living adjustments (COLAs) An automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers.
real interest rate The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
nominal interest rate The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.
hyperinflation A very rapid rise in the price level; an extremely high rate of inflation.
Created by: mmoreno12 on 2012-06-25



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