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Level 25

Measurement of Economic Performance

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dollar value of all g/s produced in an economy with a given time period; only stuff made in the US
gross national product; includes American stuff produced outside the US
Difference between GDP and GNP
GNP includes stuff made outside the physical US
Difference between finished and unfinished/intermediate goods
If something is purchased by a firm for resale, it's intermediate. Something bought by a household is finished.
costs or benefits to a third party; not included in transactions
Expenditures approach
3 methods of GDP calculation
gov spending
net exports (aka rest of the world)
G; I
Public construction counts as __; any kind of private construction/changes in inventory is __.
Income approach
add up people's income; complex method
value added approach
measures production (value added during each step of the process--like logs being made into a bookshelf)
disposable income =
income - taxes
household saving =
disposable income - spending
Who reports GDP numbers?
Government (Dept. of Commerce)
nominal GDP
current; # x $
real GDP
constant dollars, adjusted for inflation; Nom# x Real$
a way to calculate real GDP
a general rising level of prices in the economy
slows the growth of inflation
best scenario (inflation)
mild inflation (side effect of economic growth)
2 types of inflation
Demand pull & cost push
demand pull inflation
caused by changes in demand (demand inflation); shortage; from changes in consumers
cost push inflation
caused by changes in supply (supply inflation); surplus; from changes in suppliers
supply shocks
aka external shocks; something outside the economy that affects the economy, particularly the supply side (like a war in Iraq, hurricane in the Gulf, etc)
real income/wages
adjusted for inflation; has to do with purchasing power
nominal income
decreases. (inverse relationship)
As inflation increases, your purchasing power __________
sticky wages
they'll go up, but they're very slow to go down
Anticipated inflation
we know it's coming, so we can adjust for it
Unanticipated inflation
not expecting it; more detrimental
Winners of inflation
debtors, buyers (spenders), fixed rates
Losers of inflation
lenders, savers, people living on a fixed income
the price of money
With inflation, does price level matter?
nope; it's the relative prices (price is relevant to your income)
creeping inflation
3%; mild/moderate
walking inflation
galloping inflaiton
hyper inflation
50%/month; can lead to economic collapse
High interest rates AND high unemployment
inflation rate formulation
IR = (PL in Y2 - PL in Y1)/PL in Y1 x 100
cost of living adjustment;
inflation premium
what you think inflation is going to be (like w/ a loan over time)
nominal interest =
real interest + inflation premium
real interest rate =
nominal interest - inflation rate
fixed rates
rates of interest that don't change
variable rates
aka indexed rates or adjustable rates
Unemployment and Inflation have __________ relationship
aggregate price level
is a measure of the overall level of prices in the economy
market basket
a hypothetical set of consumer purchases of goods and services
price index
a general measure of prices in the economy
how to make a price index
you'll choose a base year and give it an index number (always 100); use the index number to calculate the change in prices
3 ways to measure inflation
producer price index; production side
GDP deflator
for a given year is 100 times the ratio of nominal GDP to real GDP in that year
price index formula
(PL or MB in current year)/(PL or MB in base year) x 100
citizens 16yrs+ that are non-institutionalized (not in prison, the Armed Forces, etc.)
labor force
(LF) employed + unemployed
(LF/Pop) x 100
labor force participation rate
3 groups in the population
jobless, but actively seeking a job and available to work
not in the labor force
institutionalized, Army, retired, and all those lazy bums
unemployment rate
the percentage of the total number of people in the labor force who are unemployed
rises (less jobs)
During a recession, the UR __________.
During an expansion, the UR ____.
falls (more jobs); but, sometimes it keeps rising because the economy isn't growing fast enough
economic growth
growth is a goal, an increase in GDP
2 problems with UR
doesn't tell us the # of underemployed/discouraged/marginally attached workers
real wages
If you cut a worker's wage in half but also cut all prices in half, the worker's __________ doesn't change.
shoe leather cost
increased costs of transactions caused by inflation
menu cost
real cost of changing a listed price
unit-of-acccount cost
costs arising from the way inflation makes money a less reliable unit of measurement