Expansion
- The period of a business cycle during which total production and total employment are increasing
- Low unemployment rate, high inflation rate
Recession
- The period of a business cycle during which total production and total employment are decreasing
- High unemployment, low inflation rate
Inflation Rate
-The percentage increase in the average level of prices from one year to the next
Gross Domestic Production (GDP)
-The market value of all final goods and services produced in a country during a period of time (often 1 year)
Components of GDP
Y=C(consumption)+ I(investment)+ G (government)+NX (Net Exports=Imports-Exports)
Why is GDP a good/bad measure of well being?
- The value of leisure is not included in GDP
- GDP is not adjusted for pollution or other negative effects of production
- GDP is not adjusted for changes in crime and other social problems
- GDP may not provide good information about the distribution of output
Real GDP
The value of final goods and services evaluated at base-year prices.
Nominal GDP
The value of final goods and services evaluated at current-year prices.
Real Variables
Not affected by price level fluctuations
GDP Deflator
Nominal GDP/Real GDP (100)
Gross National Product
- Includes foreign production by U.S firms but excludes US production by foreign firms
- Measure of national output
National Income
GDP- Depreciation
Personal Income
-Includes the payments received by households from the government in the form of transfer payments or interest on government bonds
Disposable Personal Income
Personal Income-Tax
Unemployment Rate
- The percentage of the labor force that is unemployed
- (Number of unemployed/Labor Force) 100
Labor Force Participation Rate
- The percentage of the working-age population in the labor force
- (Labor Force/ Working Age Population)100
Employment-Population Ratio
- The percent of the working-age population that is employed.
- (Employment/Working Age Population)100
Frictional Unemployment
- Short term unemployment that comes from the process of matching workers with jobs
- Example: Kiera voluntarily quit her job to return to school are earn another degree. Now she is busy searching for another job.
Structural Employment
- Comes from a persistent mismatch between the job skills or attributes of workers and the requirements of jobs.
- Example: Bank of America laid off thousands of employees. Those laid off were not able to find jobs at another bank due to the decline of the financial industry.
Cyclical Unemployment
- Unemployment caused by a business cycle recession
- Example: During the Great Recession, Kiera lost her job due to the bad economy
Who is included in the labor force?
Unemployed and employed. Discouraged workers are not included.
What factors determine the unemployment rate?
- Government policies
- Labor Unions
- Efficiency Ages
What affects the accuracy of the consumer price index (CPI)
- Substitution
- Increase in quality bias
- New product bias
- Outlet bias
How is inflation rate calculated?
(CPI1t-CPIt-1)/CPIt-1
