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Econ201 Chapter 7/8

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Apr 6th, 2013
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  1. Slide 1
  2.  
  3. Unemployment Review - Module 5
  4.  
  5. Slide 2
  6.  
  7. 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 __________.
  8.  
  9. Slide 3
  10.  
  11. Unemployment occurs when people are looking for a job and cannot find one. The official unemployment rate is calculated as:
  12.  
  13. Unemployment rate = (number unemployed/labor force) x 100
  14.  
  15. Where the labor force is:
  16.  
  17. Labor force = noninstitutional population – those unavailable for work
  18.  
  19. That is, the labor force is comprised of those individuals working and those __________ seeking work.
  20.  
  21. Slide 4
  22.  
  23. FIG 7-4 PAGE 168Slide 5
  24.  
  25. GDP and Inflation Review - Module 5
  26.  
  27. Slide 6
  28.  
  29. Remember that GDP, or Gross Domestic Product, is just "total output" or “total production”.
  30.  
  31. 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.
  32.  
  33. Real GDP is defined as "the total amount of goods and services produced, adjusted for price level changes".
  34.  
  35. 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
  36. however, triple.
  37.  
  38. Slide 7
  39.  
  40. 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):
  41.  
  42. 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?
  43.  
  44. 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.
  45.  
  46. 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.
  47.  
  48. Slide 8
  49.  
  50. 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
  51.  
  52. (because prices will have been kept constant).
  53.  
  54. 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.
  55.  
  56. A typical market __________ of goods (things consumers “typically” buy) is chosen and then the total value of the basket is derived.
  57.  
  58. Slide 9
  59.  
  60. 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?
  61.  
  62. Price index = ($675/$540) x 100 = 125
  63.  
  64. 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%.
  65.  
  66. Slide 10
  67.  
  68. The last step is to calculate Real GDP:
  69.  
  70. Real GDP for Year 2 = (Nominal GDP in Year 2/Price index) x 100 = ($13 trillion/125) x 100 = $10.4 trillion
  71.  
  72. What is real GDP for Year 1?
  73.  
  74. Since Year 1 is the base year, $10 trillion is both nominal and real GDP for Year 1.
  75.  
  76. 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.
  77.  
  78. Slide 1
  79.  
  80. Unemployment Review - Module 5
  81.  
  82. Slide 2
  83.  
  84. 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.
  85.  
  86. Slide 3
  87.  
  88. Unemployment occurs when people are looking for a job and cannot find one. The official unemployment rate is calculated as:
  89.  
  90. Unemployment rate = (number unemployed/labor force) x 100
  91.  
  92. Where the labor force is:
  93.  
  94. Labor force = noninstitutional population – those unavailable for work
  95.  
  96. That is, the labor force is comprised of those individuals working and those actively seeking work.
  97.  
  98. Slide 4
  99.  
  100. FIG 7-4 PAGE 168Slide 5
  101.  
  102. GDP and Inflation Review - Module 5
  103.  
  104. Slide 6
  105.  
  106. Remember that GDP, or Gross Domestic Product, is just "total output" or “total production”.
  107.  
  108. Real GDP differs from nominal GDP in that real GDP takes into account price level changes. That is, in
  109.  
  110. real GDP we adjust our nominal GDP figure to represent how prices have changed from one year to the next.
  111.  
  112. Real GDP is defined as "the total amount of goods and services produced, adjusted for price level changes".
  113.  
  114. 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
  115. however, triple.
  116.  
  117.  
  118. 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):
  119.  
  120. 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?
  121.  
  122. 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.
  123.  
  124. 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.
  125.  
  126. Slide 8
  127.  
  128. 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
  129.  
  130. (because prices will have been kept constant).
  131.  
  132. 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.
  133.  
  134. A typical market basket of goods (things consumers “typically” buy) is chosen and then the total value of the basket is derived.
  135.  
  136. Slide 9
  137.  
  138. 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?
  139.  
  140. Price index = ($675/$540) x 100 = 125
  141.  
  142. If the price index is 125, this means that prices in the economy from Year 1 to Year 2 have increased 25%. You
  143.  
  144. 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%.
  145.  
  146. Slide 10
  147.  
  148. The last step is to calculate Real GDP:
  149.  
  150. Real GDP for Year 2 = (Nominal GDP in Year 2/Price index) x 100 = ($13 trillion/125) x 100 = $10.4 trillion
  151.  
  152. What is real GDP for Year 1?
  153.  
  154. Since Year 1 is the base year, $10 trillion is both nominal and real GDP for Year 1.
  155.  
  156. 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.
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