ECON 201 Study Guide - Midterm Guide: Black Market, Intermediate Good, Menu Cost
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11 Apr 2018
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2nd Midterm
Macroeconomics: study of economy as a whole
Business cycle: periods of economic expansion and economic recession
● Expansion: total production and total employment are increasing
● Recession: total production and total employment are decreasing - caused by fall in AD
● Level of employment affected by business cycle in the short -run not long-run
Economic growth: ability of an economy to produce increasing quantities of goods and
services
Inflation rate: percentage increase in the price level from one year to the next
● When inflation is anticipated: paper money loses value and firms incur menu costs
● When inflation is unanticipated: actual inflation rate can turn out to be different than
expected inflation rate
○ Income is redistributed as some people gain and some lose
GDP: market value of all final goods and services produced in a country during a period of time
● Final: purchased by a final user
● Intermediate good or service: input into another good (ex: tire)
● Used goods not included
● GDP=income= expenditure
Transfer payments: payments made by the government to households for which the
government does not receive a new good or service in return
● Ex: social security payments
Components of GDP
● Consumption: spending by households on goods and services not including spending
on new houses (spending on houses included in investment)
○ Services: medical care, education, haircuts
○ Nondurable goods: food and clothing
○ Durable goods: automobiles and furniture
● Investment: spending by firms on new factories, office buildings, machinery, inventory
and buying new houses
○ Business fixed investment: office buildings and machinery
○ Residential investment: new houes
○ Changes in business inventories: stocks of goods produced but not sold yet
● Government purchases
● Net exports
● Value-added method: market value a firm adds to a product = difference between price
for which the firm sells a good and price it paid other firms for intermediate goods
● GDP does not include:
○ Household production
○ Underground economy: buying and selling of goods and services that is
concealed from the government to avoid taxes and regulations
○ Value of leisure
○ Not adjusted for pullitions or negative side effects of production
○ Not adjusted from changes in crime or social problems
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○ Measures size of pie but not how it is divided
Nominal GDP: value of final goods and services evaluated at current year prices
Real GDP: value of final goods and services evaluated at base year prices
● Holds prices constant → better measure of changes in production from one year to the
next
● Measures changes in quantity of goods and services produced in the economy
Price level: average prices of goods and services in the economy
● When price level is increases, real GDP is greater than nominal GDP in years before the
base year and less than nominal GDP for years after the base year
Employed: someone who has a job or temporarily away from his or her job
Unemployed: someone who is not at work but available for work and has actively looked for
work
Labor force: sum of employed and unemployed workers
Unemployment rate: percentage of labor force that is unemployed
●
● Average time: 10 months
● Types:
○ Frictional: short-term unemployment that arises from the process of matching
workers with jobs (temporary AD shocks)
■ Seasonal: unemployment due to factors of weather ex: toursim
○ Structural: unemployment that arises from a persistent mismatch between the
skills or attributes of workers and the job requirements (minimum wage, unions,
long run trend)
○ Cyclical: unemployment caused by a business cycle recession
● Natural rate of unemployment: normal rate of unemployment consisting of frictional
unemployment and structural
● Efficiency wage: above-market wage that firm pays to increase workers’ productivity
Labor force participation rate: percentage of the working age population in the labor force
●
Employment- population ratio: percentage of working-age population that is employed
●
Consumer price index (CPI) : measure of the average change over time in the prices a typcial
urban family of 4 pays for the goods and services they produce
●
● Measures cost of living
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find more resources at oneclass.com