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Free Market Philosophy
People Are Free To Choose How To Direct Their Own Lives
What does capitalism promote?
National Income Accounting
Calculated $ amount of all total goods & services produced within US Borders
Who controls the GDP data?
US Bureau of Economic Analysis
What is GNP
Gross National Product
This is the market value of all goods and services produced by U.S. citizens both here and abroad.
What are two factors that influence Net Exports/Imports?
- Balance of Trade Report
- U.S. Import / Export Bank
Are goods/services that are produced for final use or consumption.
Are goods/services that are purchased in order to help produce the final good or service.
Are Intermediate goods counted as part of the final GDP?
- Because the value of final goods includes the value of all intermediate goods. (want to avoid double counting or inflating the GDP result)
What "Financial Transactions" are EXCLUDED from the GDP? (4)
- Public Transfer Payments
- Private Transfer Payments
- Stock (and Bond) Market Transactions
Second Hand Sales (ex used car)
WHY? Because these transactions don't really add to the real GDP.
What are the two approaches to GDP?
Expenditure & Income Approach
Which is the most common method used in calculatng GDP?
is a measure of actual production that takes out inflation.
•The Nominal GDP
is a defective measure because it doesn’t discount inflation.
What are some other OBV shortcomings of the GDP?
- Increased Standard
- of Living and
- Improved Product Quality Is Not Measured
- •The Underground
- Economy Not
- To The Environment Is
- Not Counted (e.g. Pollution)
- sources of Well-Being
- Not Measured (e.g. more leisure time, less crime and better schools.)
Government spending that is financed by borrowing is often referred to as?
What 4 areas of Federal Expenditures stand out?
- 1. Pension & Income Security
- 2. National Defense
- 3. Health
- 4. Interest on Public Debt
A marginal tax rate is
the rate at which tax is paid on each additional unit of taxable income.
- Ex: 80K
- 1-16,750 = 10%
- 16,751 - 68,000 15%
- 68,000 - 137,000 25%
tHE AVERAGE TOTAL tax rate is
Total tax paid divided by total taxable income.
- Taxes that go towards two Federal Programs
- Social Security & Medicare
Corporate Income Tax
Levied on a corporations profit
the difference between its total revenue and it total expenses.
Sales and excise tax
Taxes on commodities or on purchases
Local gov get 71% from this!
Benefits -received principle
of taxation asserts that households should purchase the goods and services of government in the same way they buy other commodities.
Abiliy to pay principle
of taxation states that the tax burden should be spilt up according to income and wealth.
- Pro = More $ = more taxes
- Reg = Less$ = Less Taxes
- Proportional = flat taxes/flat rate
Corporate tax rate is a proportional tax rate at ____%
Phases of business cycle
- Peak: Temporary Maximum
- Recession: Decline in total output & employment
- Trough:Output & Employment Bottom out
- Expansion: Real GDP, Income, Employment Rises.
Real GDP Per Capita
- Real GDP Divided by
- Total Population
The Rule of 70
Approx # of years to double REAL GDP
- Annual % Growth
What are two main sources of economic growth?
- Workers ability to increase production
- Personal motivation / Work Ethic
Also.... Land, labor, capital, Entper
- Leading Indicators – These tell us what to expect in the
- Coincident Indicators – These tell us what is happening now in
- the economy.
- Lagging Indicators – These usually are the last to change as
- the economic cycle progresses
Marginal workers who have not been able to find work for 12 months and are excluded from the official unemployment statistics.
Measures those who have jobs or are seeking jobs.
What makes up the "Labor Force"
Employed + Unemployed
What makes up the "Total Population"
Employed + Unemployed + Under 16/Prison + Not in Labor Force
Types of unemployment
- Frictional Unemployment:
- These R ambitious workers who have good talents & R simply seeking better jobs.
- Structural U:
- These workers have skills that are no longer in demand and they haven’t been trained or educated themselves with new skills
- Cyclical U:
- This is unemployment that is a
- result of the decline of the business cycle or the start of a recession
Full employment occurs when
- the number of job seekers = job openings
What is GDP Gap?
Difference between actual GDP and the potential GDP.
Okuns % of potential GDP.
States that for every 1% of UE that exists over the natural rate of full-employment rate....... there will be a loss of 2
What are some noneconomic costs of UE?
- Loss in self-esteem
- Increase in drugs, alcohol, crime, suicides
- Family breakups & DIvorce
How do we measure inflation in US?
- is the rise of the general price level. Inflation reduces the purchasing power of the dollar.
Measure by using Consumer Price Index (CPI)
- CPI = Price recent Market Basket -Last Yr
- __________________________ X 100
- Last Yr Market Basket
Excludes volatile food & energy prices
Types of inflation:
Gen Rule: Money
Supply Growth > GDP = INFLATION
Demand Pull Inflation:price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices increase.
Cost-Push Inflation: develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy. Because there are fewer goods being produced (supply weakens) and demand for these goods remains consistent, the prices of finished goods increase.
- Anticipated Inflation:
- –Nominal Interest Rate
- –Real Interest Rate
- –Inflation Premium
- Unanticipated Inflation:Inflation that catches people by surprise.