unit 2 chap 23, 24 and 28

Promote economic growth
Limit unemployment (not eliminate unemployment)
Keep prices stable (limit inflation not eliminate it)

the market value of all final goods and services produced within a country in a given period of time be it total expenditure or total income. Non market actively (I.E house work or illegal) do not get counted for this

For the economy as a whole

intended for the end user

used as components or ingredients in the production of other goods

Consumption + investment + government purchases + net exports

spending by households on goods and services, with the exception of purchases of new housing which goes in investments

spending firms do on capital, residential capital (buildings), and inventories (inventories: goods produced but not yet sold) (new home construction goes here because it is a long term investment). NOTE: it doesn't mean the purchase of financial assets like stocks and bonds

spending on goods and services by local, state, and federal governments and excludes transfer payments/entitlements

cash benefits from the government such as social security or unemployment insurance benefits

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

If spending raises from one year to the next what atlas one of two things have to been true:

inflation can distort economic variables like GDP, so we have two versions of GDP:

values output using current prices that is not corrected for inflation/ the production of goods and services valued at current prices

values output using prices of a base year which is corrected for inflation/ the production of goods and services valued at constant prices

What would be the value of the goods and services produced this year if valued using the prices that prevailed in some specific year in the past?

Price of the base year for item x times the quantity for item x for that year + price of base year for item y times quantity of items for item y for that year…ect (i.e if base year is 1 and year you finding it for is year 2 used year 1 for price and year 2 for quantity)

a measure of the price level calculated as the ratio of nominal GDP to real GDP (nominal over real) times 100 (round to two decimals normally)

100 times (GDP deflator in year 2 - GDP deflator in year 1) over GDP deflator in year 1

a measure of the overall cost of the goods and services bought by a typical consumer, done every month by the Bureau of Labor Statistics

(Price of basket of goods and services in current year over price of basket in base year) times 100

The Bureau of Labor Statistics (BLS) surveys consumers to determine what;s in the typical consumer’s “shopping basket”

BLS has to made technical adjustments because of the issues but the CPI probably still overstates the inflation by about .5% per year

Problems in measuring the cost of living cause list (3)

Over time some prices rise faster than others and consumers substitute towards goods that become relatively cheaper, mitigating the effects of price increase. The CPI miss this because it used a fix basket causing it to overstated the increase for the cost of living.)

When a new good is introduced, consumers have more variety from which to choose, and this increased variety in turn reduces the cost of maintaining the same level of economic well-being and in effect causing dollars to be more vauble. CPI missed this because it used a fixed basket causing it to overstate increases in the cost of living.

If the quality of a good deteriorates from one year to the next while its price remains the same, you are getting a lesser good for the same amount of money, so the value of a dollar falls. Similarly, if the quality rises from one year to the next, the value of a dollar rises. Because of this the CPI overstates the increase of cost of living.

The basis of cost of living adjustments (COLAs) in many contracts and in social security change

the percentage change in the price index from the preceding period

((CIP in year 2 - CPI in year 1) over CPI in year 1) times 100

a measure of the overall cost of consumer goods and services excluding food and energy because of how volatile it is

a measure of the cost of a basket of goods and services bought by firms. Because firms eventually pass on their costs to consumers in the form of higher consumer prices, changes in this are often thought to be useful for predicting changes in the CPI.

GDP deflator reflects the prices of all goods and services produced domestically, whereas the CPI reflects the prices of all goods and services bought by consumers.

Amount in year T times (price level today over price level in the year T)

the automatic correction by law or contract of a dollar amount for the effects of inflation.

the interest rate as usually reported without a correction for the effects of inflation

the interest rate corrected for the effects of inflation

Nominal interest rate - inflation rate

What age do the BLS set the age of adults for their calatuions/surveies

This category includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business. Both full-time and part-time workers are counted. This category also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather.

This category includes those who were not employed, were available for work, and had tried to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off.

This category includes those who fit neither of the first two categories, such as full-time students, homemakers, retirees, in prison, and discouraged workers.

the percentage of the labor force that is unemployed. Because it is much harder to distinguish between a person who is unemployed and a person who is not in the labor force it is not a perfect measurement so the BLS calculator serves other measures of labor underutilization in addition to this.

(number of unemployed over labor force) times 100

number of employed + number of unemployed

the normal rate of unemployment around which the unemployment rate fluctuates

the percentage of the adult population that is in the labor force

(labor force over adult population) times 100

individuals who would like to work but have given up looking for a job

a good form of unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

a bad from of unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

worst kind of umeployment the deviation of unemployment from its natural rate it is cause by the cycles in the business cycles ( such as recessions and declines during economic expansions).

government-run employment agencies, public training programs

believe that they make the economy operate more efficiently by keeping the labor force more fully employed and that they reduce the inequities inherent in a constantly changing market economy.

They claim that these decisions are best made privately by workers and employers so they question if the government should get involved instead just letting the private market match the workers and jobs that might be better at doing it then the government.

a government program that partially protects workers’ incomes when they become unemployed

are not the predominant reason for unemployment in our economy, but they have an important effect on certain groups with particularly high unemployment rates.

When a minimum-wage law forces the wage to remain above the level that balances supply and demand

is a worker association that bargains with employers over wages, benefits, and working conditions.

the process by which unions and firms agree on the terms of employment

If the union and the firm do not reach agreement, the union can organize a withdrawal of labor from the firm

a level of wages paid to workers above the minimum wage to retain a skilled and efficient workforce. According to this theory, firms operate more efficiently if wages are above the equilibrium level. There are 4 types of this.

4 types of efficieny wages theory

simplest type of efficiency-wage theory, better-paid workers eat a more nutritious diet, and workers who eat a better diet are healthier and more productive.

type of efficiency-wage theory emphasizes the link between wages and worker turnover. Workers quit jobs for many reasons with the frequency with which they quit depends on the entire set of incentives they face so the more a firm pays its workers, the less often its workers will choose to leave thus, a firm can reduce turnover among its workers by paying them high wages.

type of efficiency-wage theory when a firm pays high wages, it attracts a better pool of workers to apply for its jobs and thereby increases the quality of its workforce if the lower wages it will attract less workers.

type of efficiency-wage theory high wages make workers more eager to keep their jobs and thus motivate them to put forward their best effort. If the wage were at the level that balanced supply and demand, workers would have less reason to work hard because if they were fired, they could quickly find new jobs at the same wage.