1. maintaining employment of human resources at relatively high levels; meaning that there are enough jobs
2. maintaining prices at a relatively stable level so that consumers and producers can make better decisions
3. achieving a high rate of economic growth; meaning growth output per person over time
Real Gross Domestic Product (RGDP)
total value of all final goods and services produced in a given period
What other goals are important?
1. quality of life- reduce bads (pollution and crime) and increase goods (education and health services)
2.fairness in distribution of income or wealth
3. self-sufficiency in the production of certain goods and services
Employment Act of 1946
a commitment by the federal government to hold itslef accountable for short-run economic fluctuations
Full Employment and Balanced Growth Act of 1978
Consequences of high unemployment
1. lower unemployment sends stocks to rise and vice versa
2. unemployment can cause financial insecurities and anxiety. Also tension and despair
What is the unemployment rate?
the percent of the population ages 16 and older who are willing and able to work but are unable to obtain a job
Unemployment rate= number of unemployed/civilian labor force
# of people aged 16 and older who are available for employment
an individual who has left the labor force because they could not find a job
Categories of Unemployed workers
1. job losers- an individual who has been temporarily laid off or fired: 49%
2. job leaver- those who quit their jobs: 12%
3. reentrant- an individual who worked before and is now reentering the labor force: 30%
4. new entrant-an individual who has never had a job: 9%
What is underemployment?
a situation in which a worker's skill level is higher than necessary for a job
How long are people usually unemployed?
Duration: Percent Unemployed
less than 5 weeks: 39%
5-14 weeks: 30%
15-26 weeks: 15%
27+ weeks: 16%
What is the labor force participation rate?
% of the population in the labor force
What is frictional unemployment?
unemployment that results from the workers searching for suitable jobs and firms looking for suitable workers; leads to seasonal unemployment
What is structural unemployment?
unemployment that results from workers not having the skills to obtain longterm employment; more long term and serious because workers dont hve marketable skills
What is cyclical unemployment?
unemployment due to short term cyclical fluctuations in the economy
What is the natural rate of unemployment?
the median unemployment rate, equal to the sum of frictional and structural unemployment when they are at a maximum
When there is full employment what is the potential output?
the amount of real output the economy would produce if its labour and other resources were fully employed, at the natural rate of unemployment
Why does unemployment exist?
obstacles prevent wages from adjusting and balancing the quantity of labor demanded
What is minimum wage?
an hourly wage floor set above the equilibrium wage
What is collectiver bargaining?
unions negotiate their wages and benefits collectively through their Union officials
What is the Efficiency Wage?
theory stating that higher wages lead to greater productivity
What is Unemployment insurance?
-recipients must have worked a certain length of timeand only lost their jobs because the employer no longer needed them
-recipients make half their salary for only 26 weeks
-this sometime leads to longer periods of unemployment
What is price level?
the average level of prices in the economy
What is inflation?
rise in the overall price level; decreasein the purchasing power of money
What is deflation?
decrease in the overall price level; increasing the purchasing power of money
What is the consumer price index (CPI)?
the measure of the trend in prices of a basket of consumable goods and services to guage inflation
Who loses with inflation?
-lowers incomein real-terms for people on a fixed-dollar income
-can hurt creditors when they loan someone money with a fixed interest rate
-inflation can discourage investment and economic growth
-can raise one nation's price level relative to price levels in other countries
What is hyperinflation?
extremely high rates of inflation for sustained periods of time
What is relative price?
the price of a specific good compared to the price of other goods
What is menu cost?
the costs imposed on a firm from changing listed price
What is shoe-leather cost?
the cost incurred when individuals reduced their money holdings because of inflation
What is the nominal interest rate?
the reported interest rate that is not adjusted for inflation
What is the real interest rate?
the nominal interest rate minus the inflation rate, also called the inflation adjusted interest rate
What is the business cycle?
short term fluctuations in the economy relative to the long term tren in output
What is expansion?
the output (real GDP) is rising significantly- the period between the trough of a recession and the next peak
What is a peak?
the pointin time when expansion comes to an end, thatis, when outputis at the highest point in the cycle
What is contraction?
when the economy is slowly down-measured from the peak to the trough
What is a trough?
the point in time when output stops declining when business activity is at its lowest point in the cycle
What is a recession?
a period of significant decline in output and employment
What is a depression?
severe recession or contraction in output
What is a boom?
period of prolonged economic expansion
What are the leading economic indicators?
factors that economists at commerce department have found typically change before changes in economic activity
What is gross domestic product (GDP)?
measure of economic performance based on the value of all final goods and services produced within a country during a given period
What is double counting?
adding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP
What is the expenditure approach?
calculation of GDP by adding the expenditures by market participants on final goods and services over a given period
What is consumption (C)?
purchases of final goods and services
What are nondurable goods?
tangible items consumed in a short perod of time; such as food
What are durable goods?
longer-lived consumver goods, such as automobiles
What are services?
intangible items of value provided to consumers, such as education
What is investment (I)?
the creation of capital goods to augmentfuture production
What is a fixed investment?
all new spending on capital goods by producers
What are producer goods?
capital goods that increase future production capabilities
What is an inventory investment?
purchases that add to the stocks of goods kept by the firm to meet consumer demand
What are government purchases in GDP (G)?
expenditures on goods and services
What is X-M?
What are factor payments?
wages (salaries),rent, interestpayments, and profits paid to the ownersof productive resources
What is gross national product (GNP)?
the difference between netincome of foreigners and GDP
What is depreciation?
annual allowance set aside to replace work-out capital
What is net national product (NNP)?
GNP minus depreciation
What is indirect business taxes?
taxes, such as sales tax, levied on goods and services sold
Whatis national income (NI)?
a measure of income earned by owners of the factors of production
What is personal income (PI)?
the amoutn of income recievedby households before personal taxes
What is disposable personal income?
the personal income available after personal taxes
What is price index?
a measure of the trend in prices paid for a certain bundle of goods and services over a given period
What is consumer price index (CPI)?
a measure of the cost of a market basket that represents the sonsumption of a typical household
What is the typical CPI shopping basket of goods and services?
foods and beverages-16
education and communication- 6
other goods and services-4
What is the GDP deflator?
a price index that helps measure the average price level of all final consumer goods and services produced
How do you calculate the price index?
(cost of market basket in current year/ cost of market basket in base year) x 100
What is the chain weighting system?
calculates changes in prices that uses base years from neighboring years
What is the producer price index?
a measure of the cost of goods and services bought by a firm
What is the gross domestic product per capita?
real output of goods and services per person
What is the classical school and Say's law?
The classical school believed that wages andprices adjust quicklyto changes in supply and demand. Jean Baptiste Say's law establishes that full employment can be maintained because total spending will be great enough for firms to sell all the output a fully employed economy can produce. The people who followed this were called classical economists.
Who is John Maynard Keynes?
He wrote The General Theory of Employment, Interest and Money which attacks the classical theories.
What is the short-run production function?
the relationship between real GDP and labor while holding capital, land, and technology constant
What is national saving?
the sum of pricate and public savings
What is a closed economy?
an economy with no international trade- net exports are 0 and imports are 0
What is private saving?
the amount of income households have left over after consumption and net taxes
What is public saving?
the amount of income the government has left over after paying for its spending
What is dissaving?
consuming more that total available income
What is the crowding out effect?
theory that governmentborrowing drives up the interest rate, lowering consumption by households and investment spending by firms
What is economic growth?
and upward trend in the real per capita output of good and services
What is the rule of 70?
take the nations growth rate and divide by 70
What is productivity?
the amount of goods and services a worker can produce per hour
What are the factors that contribute to economic growth?
1. the quantity and quality of labor resources (labor and human capital)
2. increase in the use of inputs provided by the land (natural resources)
3. physical capital inputs (machines, tools, buildings, inventories)
4. technological knowledge
What is innovation?
applications of new knowledge that create new products or improve existing products
What is research and development?
activities undertaken to create new products and processes that will lead to technological progress
Who is Douglas North?
an economic historian and won the Nobel Prize in economics in 1993. He made links between institutional changes and economic growth.
Who is Milton Friedman?
Won the Nobel Prize
Who is Thomas Malthus?
he was a reverand and an economist. He made 3 assumptions:
1. the economy was agricultural, with goods produced by 2 inputs,land and labor
2. the supply of land was fixed
3. human sexual desires worked to increase population
What is aggregate demand (AD)?
the total demand for all the final goods and services in the economy
What is an open economy?
a type of model that includes international trade effects
What are net exports?
the difference between the calue of exports and the value of imports
What is the aggregate demand curve?
graph that shows the inverse relationship between the price level and RGDP demanded
What is the interest rate effect?
increase in price level= households and firmsreduce their holdings of money and save more= supplyof loanable funds increases= interest rates fall= households and firmsare encouraged to borrow and spend= RDP demanded increases
vice versa for decrease in price level
What is the aggregate supply curve (AS)?
the total quantity of final goods and services suppliers are willing and able to supply at a given price level
What is the short run aggregate supply (SRAS) curve?
the graphical relationship between RGDP and the price level when output prices can change but input prices are unable to adjust
What are supply shocks?
unexpected temporary events that can either increase or decrease aggregate supply
What is stagflation?
a situation in which lower growth and higher prices occur together
What is cost push inflation?
aprice levelincrease due to a negative supply shock or increases in input prices
What is wage and price inflexibility?
the tendency for prices and wages to only adjust downward to changes in the economy