ECN 203 Study Guide - Quiz Guide: Potential Output, Output Gap, Autonomous Consumption
● National Production
○ Gross Domestic Product
■ Value of all new production in the nation during a given year (or quarter)
■ Measure of output of economy
● Things that are produced that don’t have a market value
● New production
○ Actual GDP vs. Potential GDP
■ Actual GDP
● Real or actual value of all goods and services produced
■ Potential GDP
● The ideal or maximum possible GDP for that country of
unemployment is at a minimum and all industries, offices and
services, are operating at maximum possible output
● Potential GDP = maximum and sustainable level of production
● Long-run trend of of national output
■ Actual and potential GDP are used to produce an indicator of the relative
economics condition of a country
■ Difference between potential and actual GDP is the output gap
● Found by comparing the potential GDP to the actual one
■ Economic boom = actual GDP can surpass the potential GDP
■ Economic Recession = the actual GDP will be less than the potential
GDP
○ Recession
■ Actual GDP falls for over 2 consecutive quarters
■ Actual GDP < Potential GDP
■ Period of general economic decline and is typically accompanied by a
drop in the stock market, an increase in unemployment, and a decline in
the housing market
● Labor-related Concepts
○ Labor Force= Employed + Unemployed but looking for work
○ Unemployment Rate (%)
■ ((Unemployed but looking for work) / (Labor force)) * 100
○ People in population but not in the labor force:
■ Children
■ Retirement
■ Disabled
■ Discouraged Workers
● People who look for a job for a long time but then give up
■ Institutionalized Population
● Criminals
● Mentally Disabled
● Full Time Students
○ Types of Unemployment
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■ Frictional Unemployment
● Occurs because of workers who are voluntarily between job
■ Structural Unemployment
● Changes occur in market economies such that demand increases
for some skills while other job skills become outmoded and are no
longer in demand
● Example:
○ Invention of the automobile increased demand for
automobile mechanics and decreased demand for farriers
■ Cyclical Unemployment
● Downturns in overall business activity
■ The Natural Rate of Unemployment
● The unemployment rate when economy is production at Full GDP
● Frictional + Structural
○ Price Level
■ Price Level
● Overall average of priced in the economy
■ Inflation
● A rise in price level
● Lower purchasing power of money
■ Deflation
● A fall in price level
● Higher purchasing power
○ Cost Inflation
■ Equity Costs
● Inflation hurts people receiving fixed income
● (Unexpected) Inflation hurts lenders, while (unexpected) deflation
hurts borrowers
■ Efficiency Costs
● Inflation undermines money’s role
● Inflation increases cost of borrowing, leading to less investment
● When inflation is very high (hyper-inflation), money becomes
useless and economy stalls
○ Price Index
■ A price index is a measure of the price level
■ Important Price Indices:
● Consumer Price Index
○ CPI Measures the price level of products and services a
typical consumer buy
■ Based on a typical household’s shopping basket
■ CPI = ((Cost of Basket target year) / (Cost of Basket base
year))* 100
● Producer Price Index
● GDP Deflator
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