more chap7/8

Slide 1

Unemployment Review - Module 5

Slide 2

Unemployment is closely associated with the upward and downward movements in economic activity, more commonly referred to as the __________ cycle. For example, when the economy is in the expansion phase of the business cycle, production is growing and unemployment is usually low. As a downturn in economic activity occurs, unemployment __________.

Slide 3

Unemployment occurs when people are looking for a job and cannot find one. The official unemployment rate is calculated as:

Unemployment rate = (number unemployed/labor force) x 100

Where the labor force is:

Labor force = noninstitutional population – those unavailable for work

That is, the labor force is comprised of those individuals working and those __________ seeking work.

Slide 4

FIG 7-4 PAGE 168Slide 5

GDP and Inflation Review - Module 5

Slide 6

Remember that GDP, or Gross Domestic Product, is just "total output" or “total production”.

Real GDP differs from nominal GDP in that real GDP takes into account __________ level changes. That is, in real GDP we adjust our nominal GDP figure to represent how prices have changed from one year to the next.

Real GDP is defined as "the total amount of goods and services produced, adjusted for price level changes".

Nominal GDP is "the total amount of goods and services measured at __________ prices". So, if the amount of goods and services produced in one year is no different from the amount of goods and services produced in the following year, but prices had tripled, the real GDP number wouldn't change. The nominal GDP number would
however, triple.

Slide 7

Here's an example in going from the raw GDP number (known as nominal GDP) to the GDP number that has been adjusted for inflation (known as real GDP):

Suppose nominal GDP in Year 1 is $10 trillion and nominal GDP in Year 2 is $13 trillion. What is real GDP in Year 2?

Note: Nominal GDP is the sum of all U.S. production of final goods and services in a given year, found by multiplying the quantity produced of each item by its market __________ per unit.

Can we say that our production increased from a value of $10 trillion to $13 trillion in one year? __________, because we don't know how much of that was just due to rising prices.

Slide 8

To get around this, we calculate a price __________, and then use it to calculate real GDP. Then we can compare two real GDP figures in different years and know that we are just looking at a change in production

(because prices will have been kept constant).

Let's say the government chooses Year 1 as the "base year" and we decide to use the CPI, or Consumer Price Index, as the index of choice.

A typical market __________ of goods (things consumers “typically” buy) is chosen and then the total value of the basket is derived.

Slide 9

Continuing on with our example:Suppose we conclude that the exact basket in Year 1 cost $540 compared to $675 in Year 2. What is the price index?

Price index = ($675/$540) x 100 = 125

If the price index is 125, this means that prices in the economy from Year 1 to Year 2 have increased 25%. You always compare the price index relative to the price index in the base year, which is always __________. The percent change between 100 and 125 is 25%.

Slide 10

The last step is to calculate Real GDP:

Real GDP for Year 2 = (Nominal GDP in Year 2/Price index) x 100 = ($13 trillion/125) x 100 = $10.4 trillion

What is real GDP for Year 1?

Since Year 1 is the base year, $10 trillion is both nominal and real GDP for Year 1.

Note that “real” numbers have all been __________ for inflation using the price index, therefore they are "like" numbers and can be used to compare if production (rather than prices) has increased.

Slide 1

Unemployment Review - Module 5

Slide 2

Unemployment is closely associated with the upward and downward movements in economic activity, more commonly referred to as the business cycle. For example, when the economy is in the expansion phase of the business cycle, production is growing and unemployment is usually low. As a downturn in economic activity occurs, unemployment rises.

Slide 3

Unemployment occurs when people are looking for a job and cannot find one. The official unemployment rate is calculated as:

Unemployment rate = (number unemployed/labor force) x 100

Where the labor force is:

Labor force = noninstitutional population – those unavailable for work

That is, the labor force is comprised of those individuals working and those actively seeking work.

Slide 4

FIG 7-4 PAGE 168Slide 5

GDP and Inflation Review - Module 5

Slide 6

Remember that GDP, or Gross Domestic Product, is just "total output" or “total production”.

Real GDP differs from nominal GDP in that real GDP takes into account price level changes. That is, in

real GDP we adjust our nominal GDP figure to represent how prices have changed from one year to the next.

Real GDP is defined as "the total amount of goods and services produced, adjusted for price level changes".

Nominal GDP is "the total amount of goods and services measured at current prices". So, if the amount of goods and services produced in one year is no different from the amount of goods and services produced in the following year, but prices had tripled, the real GDP number wouldn't change. The nominal GDP number would
however, triple.


Here's an example in going from the raw GDP number (known as nominal GDP) to the GDP number that has been adjusted for inflation (known as real GDP):

Suppose nominal GDP in Year 1 is $10 trillion and nominal GDP in Year 2 is $13 trillion. What is real GDP in Year 2?

Note: Nominal GDP is the sum of all U.S. production of final goods and services in a given year, found by multiplying the quantity produced of each item by its market price per unit.

Can we say that our production increased from a value of $10 trillion to $13 trillion in one year? No, because we don't know how much of that was just due to rising prices.

Slide 8

To get around this, we calculate a price index, and then use it to calculate real GDP. Then we can compare two real GDP figures in different years and know that we are just looking at a change in production

(because prices will have been kept constant).

Let's say the government chooses Year 1 as the "base year" and we decide to use the CPI, or Consumer Price Index, as the index of choice.

A typical market basket of goods (things consumers “typically” buy) is chosen and then the total value of the basket is derived.

Slide 9

Continuing on with our example:  Suppose we conclude that the exact basket in Year 1 cost $540 compared to $675 in Year 2. What is the price index?

Price index = ($675/$540) x 100 = 125

If the price index is 125, this means that prices in the economy from Year 1 to Year 2 have increased 25%. You

always compare the price index relative to the price index in the base year, which is always 100. The percent change between 100 and 125 is 25%.

Slide 10

The last step is to calculate Real GDP:

Real GDP for Year 2 = (Nominal GDP in Year 2/Price index) x 100 = ($13 trillion/125) x 100 = $10.4 trillion

What is real GDP for Year 1?

Since Year 1 is the base year, $10 trillion is both nominal and real GDP for Year 1.

Note that “real” numbers have all been adjusted for inflation using the price index, therefore they are "like" numbers and can be used to compare if production (rather than prices) has increased.


What are the two ways in which long-term economic growth is measured?
Answer:  Increases in total output and per capita total output

How does the U.S. per capita growth rate since 1950 compare to growth rates in other areas around the world?
Answer:
U.S. per capita growth rate since 1950 is less than  the per capita growth rates of Japan and China,   Close to the per capita growth rates of Western Europe and Latin America, and greater than  the per capita growth rates of Eastern Europe and Africa.

What is the difference between real output and potential output?
Answer:  Real output is a measure of the total goods and services an economy produces stated in constant prices whereas potential output is a measure of the total goods and services an economy is capable of producing given its resources and institutions.

The index of leading indicators has predicted all past recessions. Nonetheless it’s not especially useful for predicting recessions. Explain.
Answer:  The index has also predicted many recessions that did not occur. They are called indicators and not predictors because they're only rough approximations of what's likely to happen in the future.

Distinguish between structural unemployment and cyclical unemployment.
Answer:  Structural unemployment is unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete whereas cyclical unemployment is unemployment resulting from fluctuations in economic activity.

What type of unemployment is best studied within the long-run framework?
Answer:  Structural unemployment.

What type of unemployment is best studied under the short-run framework?
Answer:  Cyclical unemployment.

Does the unemployment rate underestimate or overestimate the unemployment problem? Explain.
Answer:  The unemployment rate could under or overestimate the problem, depending on how one views those who are not working or working less than desired.

If unemployment rises by 2 percentage points, what will likely happen to output in the United States? (Use Okun’s rule of thumb.)

Answer: The output will decrease by 4 percent

Why are expectations central to understanding inflation?
Answer:  Because the ultimate change in prices is due to both, the prices that producers would like and the inflation that they expect. Expectations of inflation become a self-fulfilling prophecy.

IInflation, on average, makes people neither richer nor poorer. Therefore it has no cost. True or false? Explain.
Answer: False. While inflation doesn’t make the nation any poorer on average, it does have costs. Its costs include increased transactions costs, capricious distributional effects, the destruction of the informational value of prices, and the breaking down of the institutional structure within which markets work.

Why would you expect that inflation would generally be associated with low unemployment?
Answer:  Because both inflation and low unemployment tend to accompany economic upturns.

What expenditure category of production is largest for most countries?
Answer:  Consumption.

What’s the relationship between a stock concept and a flow concept? Give an example that hasn’t already been given in this chapter.
Answer:  A stock concept is the amount of something at a given point in time whereas a flow concept has a time period associated with it. A stock can increase without an increase in the flow. An example is a stream (flow) feeding a lake (stock).


State whether the following actions will increase or decrease GDP:
a) The United States legalizes gay marriages.
Answer: Would fall

An individual sells her house on her own.
Answer:  Would not change

An individual sell his house through a broker
Answer:  Would rise

Government increases Social Security payments
Answer: Would rise

Stock prices rise by 20 percent
Answer:  Would not change

An unemployed worker gets a job
Answer:  Would rise

IIf you add up all the transactions in an economy, do you arrive at GDP, GNP, or something else?
Answer:  Something else.

The United States is considering introducing a value-added tax. What tax rate on value added is needed to get the same revenue as is gotten from an income tax rate of 15 percent?
Answer: 15 percent

There are three firms in an economy: A, B, and C. Firm A buys $250 worth of goods from firm B and $200 worth of goods from firm C, and produces 200 units of output, which it sells at $5 per unit. Firm B buys $100 worth of goods from firm A and $150 worth of goods from firm C, and produces 300 units of output, which it sells at $7 per unit. Firm C buys $50 worth of goods from firm A and nothing from firm B. It produces output worth $1,000. All other products are sold to consumers.

Answer:  Calculate GDP
GDP = $3350

IIf a value-added tax (a tax on the total value added by each firm) of 10 percent is introduced, how much revenue will the government get?

Revenue $ 410.00

Firm A
Cost: 250 + 200 = $450
Revenue: 200*$5 = $1,000
Value added: $(1000 - 450) = $550

Firm B
Cost: 100 + 150 = $250
Revenue: 300*$7 = $2,100
Value added: $(2100 - 250) = $1850

Firm C:
Cost: 50 + 0 = $50
Revenue: $1,000
Value added: $(1000 - 50) = $950

Total Value Added: $550 + 1850 + 950 = $3350

IIf the government increases transfer payments, what happens to aggregate output?
Answer:  remain the same

Economists normally talk about GDP even though they know NDP is a better measure of economic activity. Why?
Answer:  Because NDP is harder to measure (it includes depreciation, which has to be estimated).

Which will be larger, gross domestic product or gross national product?
Answer:  Cannot tell

What is the largest component of aggregate income for most countries?
Answer:  Employee compensation.

What income category keeps aggregate output and aggregate income equal?
Answer:  Profit

What makes it difficult to compare GDP over time? How is the problem addressed?
Answer:  Inflation