Section III Quick Review Read and Review Section 3 all modules in your text. Major topics covered: Circular Flow Gross Domestic Product (formula, what is or is not…, Nominal vs Real, GDP deflator) Unemployment (Labor force, Unempl rate, what is or is not…, types, effect, affected by) Inflation (formula, types of costs, market basket, price index, inflation rate, CPI, GDP deflator)
Vocabulary! Vocabulary! Vocabulary!
Circular flow diagram
Gross Domestic Product GDP- goods and services produced in given country in a given time (usually quarters or years) GDP= C+I+G+ (x-m) – C=consumption – I=investment (in capital GOODS)-machines, construction (increase output or productivity) – G=Government Purchases (NOT transfer payments) – X=exports – M=imports
Real GDP vs. Nominal GDP NGDP- current output at current prices RGDP-current production fixed prices (base year) GDP Deflator-adjust for inflation NGDP\RGDP x 100 (class formula) RGDP= 100 x NGDP/Price Index (5 steps) – Will depend on whether they give you price index
Business Cycle Rise and fall of economic activity measured with REAL GDP – Expansion – Peak – Contraction – Trough
Consumer Price Index CPI-items consumers buy in a typical year Basket of Goods (Market Basket) Hold quantity constant CPI= current year spending/base year spending x100 Problems: (CPI overstates inflation) 1.Substitute bias 2.New products vs. Old products 3.Quality differences
Inflation Rates Consumers= CPI new -CPI old /CPI old x 100 Nation= use deflator NGDP\RGDP x 100 RGDP= 100 x NGDP/Price Index (5 steps) Wages= Salary (wage) in ____ $ = Comparison Wage x (CPI new/CPI old)
Interest Rates Nominal Interest Rate= Real Interest Rate + Expected Inflation Savers and lenders can be hurt by inflation if don’t plan for it. If actual inflation is the same as expected inflation no one is harmed by it. Rapid unexpected inflation hurts employees if real wages are falling, fixed income recipients, savers and lenders. Rapid unexpected inflation usually helps firms if real wages are falling, and borrowers. It might also increase the value of some assets like real estate or other properties
Unemployment Labor Force= Employed + Unemployed (16+ actively seeking work, or working) Unemployment Rate = Unemployed/labor force **Discouraged workers understates unemployment rate Frictional- New entry or switches jobs Seasonal- Agriculture, Mall Santa, Life Guard Structural- Ex. People replaced by machine Cyclical- Based on business cycle-recession = bad
Unemployment Con’t Need some unemployment- never 0% Full employment= no cyclical unemployment Natural rate of unemployment= 4-6%