- Intermediate goods that go into the making of the final good are not counted
- Only goods that are produced within a country count towards GDP. Therefore, production for an American company in China would only count towards China's GDP
- Financial Transactions are not included in GDP
- Secondhand sales are not included
- Underground economy not included which can mean the illegal drugs, black market, or babysitting
Expenditures Approach: GDP= C+I+G+Xn
- Consumption- durable/ non-durable consumer goods, services
- Investment- machinery, equipment, tools, construction, changes in inventory
- Government Spending- spending for public services, social capital. DOES NOT include transfer of payments like Social Security, etc
- Net exports= Exports-Imports
Simple Circular Flow- This is actually a simplified version
Inflation- rise in general level of prices
- Anticipated- built into economic decisions
- Unanticipated inflation- not expected
- Helps
- wages increase, so government receives more
- businesses raise prices prior to raising wages
- debtors technically have to pay back less than what's owed
- Hurt
- people on fixed income
- Creditors and savers
Nominal GDP- not adjusted for inflation
- NGDP= current year outputs x base year prices
Real GDP- adjusted for inflation
- RGDP= NGDP/ CPI (in hundredths)
Price Index- measure of price of a "market basket" in a given year compared to price of identical "market basket: in a reference year
- CPI= Price of market basket in specific year/ Price of same basket in base year x 100
- CPI (in hundredths) = NGDP/ RGDP
Unemployment- Natural rate is about 4~5% or 5~6%
- Employed
- Currently working
- Part time workers
- Noninstitutionalized civilian population 16 and over
- work in family business, 15 hours or more per week with no pay
- DOES NOT include working under the table or in the underground economy
- Unemployed
- must be looking for work in last 4 weeks
- temporarily laid off from work
- Labor Force= Employed + Unemployed
- Unemployment Rate doesn't include Marginally attached workers who have given up looking for work, discouraged workers who no longer have required skills, and underemployed workers who has jobs below their still set
- Types
- Frictional- when workers move from one job to another, new entrants/ re-entrants to labor force-----NORMAL part of healthy economy
- Structural- change in technology will take away people's jobs like machines taking over factory labor
- Season- seasons or holidays like Mall Santas are unemployed when it's not Christmas season
- Cyclical- results from recessions and economic downturns----HARMFUL. Healthy economy= no cyclical unemployment= FULL EMPLOYMENT
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