Download Study sheet for Economics Exam and more Exams Economics in PDF only on Docsity! The Relatively Recent Arrival of Economic growth:
GDP per capita was largely stagnant prior to last 200 years,
Industrial Revolution:
‘The widespread use of power-driven machinery and the economic and social changes that
resulted in the first half of the 1800s
Also led to increasing inequality among nations
‘Modern economic growth: the period of rapid ceonomic growth from 1870 onward
Labor Productivity: the value of what is produced per worker, or per hour worked
(sometimes called worker productivity)
ODP. the value ofthe output ofall final goods and servives produced
Measured in 3 (theoretically) equivalent ways:
1. Total dallar value of what consumets purchase in the ecemamy (expenditure approach) - Demand
2. Total Dollar value of what the country produces - Supply
Total National Income
[TRRGESUTPING - when a country's exports are larger than its imports (imports-cxports)
(Trad deficit - when a country’s imports exceed exports; calculated as (imports-exports)
Supplied GDP Measured hy what is produced Supply’
Durable goods - long-lasting good like cartetrigerator
a country in a given period (ex. year)
5 year change: 1.67(1-+0.028)°S ~ $1.92 trillion
1 year change: If South Korea has GDP of 1.67 trillion with a growth rate of 2.8%
1.67 taillion * (1.028) = 1.72 willion
Physical Capital: The plant and equipment that firms use in production; including
infrastructure ( roads, bridges, railroads)
‘Human Capital: the aecumulated knowledge (from education and experience), skills, and
coxperlise thal lhe average worker in an coonumy possesses
‘Technology: all the ways in which existing inputs produce more or higher quality, as well as
different allogether new products.
Invention: advances in knowledge
Innovation: putting advances in knowledge to use in a new product or service
Capital Deepening: when society increases capital per person
3 Factors of economic growth
‘Capital: Increase in human asset (skills, training, workforce)
‘Thuman Capital Deepening: Investing skills, training, workforce, education
Physical Capital Deepening: (roads, infrastructure, buildings)
Economie Convergence:
‘How do poorer countries Develop?
Convergence: pattem in which economies with low per capita incomes grow faster than
economies with high per capita incomes,
Diminishing Marginal Returns: easier to increase worker productivity starting from a lower
base productivity
Ex: Low-income eountrivs adupt technologies, observe experien
‘Unemployment: Trying to find a job, but not getting one.
‘The adult population consists of:
Employed: Currently working for pay
‘Unemployed: Out of work and actively looking for a job
Out of the Labor force: Those who are not working and not looking for work
[abOF THREE! The number of employed plus the unemployed: (Employed + Unemployed)
[UnteniploymentIRate! The percentage of adults who are in the labor force and thus seeking jobs, but who do
not have jobs
iden Unemployment:
Part-time or temp workers looking for full-time or permanent work
Underemployed: Individuals who are employed in a job that is below their skills
Discouraged workers: Those who have stopped looking for employment due to lack of suitable positions
available
Labor Foree Participation Rate:
The percentage of adults in an economy who are either employed or who are unemployed and looking fr a
job {Total Labor Fores _\ 199
Labor farce participation Rate = [,T6tal adult population }
‘Uncmploy:ment in the Short Rum
Cyclical Unemployment: unemployment closely tied to the business cycle, like higher unemployment during,
azecession
From the standpoint of the supply-and-demand model of competitive and llexible labor markets,
‘unemployment represents something of a puzzle
Unemployment and Equilibrium in the Labor Market
In labor market with flexible wages, the equilibrium will occurat_ =F =
wage W and Quantity
Number of people who want jobs (S) the number of jobs available (D) a
‘Why wages might be sticky Downward
Implicit Contract: an unwritten agreement in labor market that the employer will ry to keep wages from
falling when the eoonomy is weak or the business is having trouble, and the employee will not expect
hhuge salary increases when the economy or business is strong ‘
:fficiency wage theory: the theory that the productivity of
workers will inerease ifthe employer pays them n
Some unemployment necessary to motivate workers
Adverse selections of wage cuts agreement: if employers
redueo wages for all workers the best will leave
Belter olf firing some workers Lan cutting wages paberira
Insider-oulsider model: those already working for the firm are “insiders” who know the producers; the
other workers are “outsiders” who are recent or prospective hires
Relative wage coordination argument: workers may accept wage cuts if everyone else
gels them too
Frictional unemployment: unemployment that occurs as workers move between jobs
Structural Unemployment: unemployment that occurs because individuals lack skills valued by employers
Natural Rate of Linemployrment: The rate of unemployment due to structural and frictional forces in the
economy; zero eyelieal unemployment
Full employment: when the actual unemployment rate is equal to the natural unemployment rate
Potential Real GDP: economy is at full unemployment
[NOfWUFABIE pods - short
Services - intangibles, entertainment, healthcare or education
‘Structures - building used as residence, factory, office, building, retail store
(Change in inventoties - good that has been produced, but not yet sold
‘The problem of Double counting:
Final goods and serviees - output used direetly for consumption, investment government, snd trade purposes
Intermediate goods - output provided to other businesses at an intermediate stage of production, not for final users (Excluded from
GDP calculation)
Gross National Product (GNP) - output produced by countries labor and business regardless of location
GDP is within borders; GNP is nat
(NNP) Net national produet - GNP - value of depreciation,
Real GDP: Nominal GDP adjusted for inflation
Nominal GDP: measured al priecs that exis! at (hat time (current prices
Recession: a significant decline in national output/GDP
Depression: an especially lengthy and deep decline in output
Peak: during the business cycle, the highest point of output before a recession bens
‘Trough: during the business cycle, the lowest point of output in a recession, before a recovery begins
Exchange rate: the value or price of one currency in terms of another currency.
ved good like foad and clothing
not adjusted for inflation
Inflation: a general and ongoing rise in the level of prices in an entire economy
Index number: a unit-free number derived from the price level over a number of years, which
makes computing inflation rates casicr
Base year: arbitrary year whose value as an index number economists define 2s 100
CPI Index comes from “basket of goods and services”; “typical set of consumer purchases”
CPI biases:
Substitution bias: it does not take inta account that people can substitute zway from goods whose
price rise considerably
‘Qualitynew goods bias: it does not account for improvement in the quality of existing goods or the
invention of new goods
Core Inflation Index: Takes the CPI and excludes volatile economic variables, like energy and good
prices
GDP Deflator: a measure of inflation bascd on the prices of all GDP components (consumption,
investment, government, net exports, everything) [oe
‘Most accurate measure of Inflation .
Hyperinflation: very high typically accelerating inflation
Often defined of at least 50% per month
If wage growth keeps rising with prices, inflation may not be a big deal
But inflation can still have negative consequences including:
Unintended redistribution of purchasing power
Blurred price signals
Difficulties in long term planning
Fixed Interest rate as a borrower makes you BETTER off through inflation
Borrowers with Nominal debt will benefit:
Because the debt stays the same in nominal terms, and so becomes smaller in real terms
Lenders with nominal assets will tose:
Because the sum is repaid it will be worth less in terms of the goods or services it can buy
Financial assets, cash, pensioners
The inerease in nominal minimum wage has not kept up with inflation resulting in a decline in the
real minimum wage
‘The inerease in nominal minimum wage has not kept up with inflation resulting
ina decline in the real minimum wage
This implicitly redistributcs purchasing power away from minimum wage
workers to their employers
Inflation=blurred price signals wiich convey information about supply and
demand in an econo;
to economy
Incex in 2016 was 103.2
Incexin 2077 was 106.8
usinesses and individuals find it harder to react
DP etenddate