Understanding Economic Growth: Measuring GDP and Its Impact on Standard of Living, Quizzes of Economics

Download Understanding Economic Growth: Measuring GDP and Its Impact on Standard of Living and more Quizzes Economics in PDF only on Docsity! TERM 1 Measuring the Economy What is GDP? DEFINITION 1 GDP is a measure of the amount of goods and services a nation produced within its bordersproduction generates income. So, GDP is roughly a measure of national income TERM 2 Measuring the Economy What is Real GDP? DEFINITION 2 Real GDP is a price adjusted measure, often called output TERM 3 What does GDP measure? DEFINITION 3 economic health - looks at GDP over time within a countryEconomic Size - used to make cross country comparisonsEconomic Power - used to make cross country comparisons TERM 4 Ways of measuring the Economy by GDP per person: DEFINITION 4 GDP per capita or per personGDP per population TERM 5 GDP may be used as a measure of... DEFINITION 5 Standard of livingWell Being of its citizens TERM 6 Measuring Economic Growth DEFINITION 6 economic growth is the annualized percentage change in Real GDP (output) over a given time period% change example: US real GDP in 2011=14 trillion and in 2012 = 15 trillionWhat is the % change? 15-14/14 = .007 = 7% TERM 7 What is Economic Growth? What is Short Run Economic Growth and Long run ' '? DEFINITION 7 The annualized change in real GDP (output) over a given time periodShort Run: is a period of a few years (3 to 5 years or less) even quartersLong Run: a period longer than a few years (more than 3-5 years) TERM 8 Know the Long Run Growth Rate of GDP can depend on what the long run period is. Longer periods probably show larger growth rate.... DEFINITION 8 A long run average is viewed as "control tendency" and may e used in judging short run macro performance and forecasting economic growth in the future TERM 9 Alternative Measure of Economic Growth: DEFINITION 9 Sometimes economic growth is measured by the percentage change in real GDP per capita% change real GDP per capita = % change in real GDP (or economic growth rate) minus % change in population (growth rate)this reflects changes in standards of livingExample: % change in real GDP is 2% and pop growth rate is -.5 % then 2-(-.5)=2.5% TERM 10 The Importance of Economic Growth: Rule of 70 DEFINITION 10 Time period for x to double equals 70 / period growth rate in XExample 70 / 2 % = 35 years for x to doubleIf China's GDP per capita is 5,000 and this real GDP per capita grows at 10% per year. How many years will it take their GDP per capita to double?70 / 10 = 7 years it will be 10,000 TERM 21 Recession DEFINITION 21 downturn in GDP accompanied by positive inflation ratetypical cause: interest rates that are too high which reduces spendingother indicators: stockpiles of inventory, declines in tourism, sales of movie tickets, restaurant tickets, increase in grad school applications TERM 22 Depression DEFINITION 22 downturn in GDP accompanied by negative inflation rate (deflation)typical cause: falling asset prices, a credit crunch, and spending fears TERM 23 Unemployment DEFINITION 23 an individual is considered to be unemployed if he doesn't currently have a job and has actively sought paid employment in the past 4 weeks TERM 24 Labor Force DEFINITION 24 L consists of all individuals over the age of 16 who are employed whether part or full time (E), plus those counted as unemployed UL=E+UIndividuals not in the labor force do not have a job and are not looking for them TERM 25 Unemployment rate DEFINITION 25 the percentage of the labor force that is unemployedUR=U/L=U/(E+U)The UR is a one number statistic that conceals a lot of information about the underlying employment picture TERM 26 Latest News on Unemployment DEFINITION 26 Current US unemployment rate is 8.3% . The UR is a one number statistic that conceals a lot of information about the underlying employment picture The UR declined from 8.3% to 8.1. Why was this not greeted as good news? The decline happened because people gave up looking for jobs TERM 27 Labor force participation rate DEFINITION 27 L/ population = 63.5% TERM 28 Long term unemployed DEFINITION 28 Have been unemployed for 27 weeks or more Average length of time (in weeks) of unemployment double highest before since 1950 during the great recession TERM 29 Inflation DEFINITION 29 a sustained increase in the average level of prices inflation reduces the purchasing power of a given level of income it's like getting a pay cut and can hard standard of living the inflation rate is measured as the percentage change in a price index TERM 30 Index DEFINITION 30 An index is a unit-less number. It is the movements or changes in the index that are revealing an index is usually calculated by taking a statistic in one year and evading it by the statistic in a designated base year the index in the base year is always 1 (or 100) In 2012 GPA index: 4/3.5 = 1.14 TERM 31 Consumer price index DEFINITION 31 core CPI = CPI minus food and energy prices used in wage negotiations, financial planning TERM 32 Producer Price Index DEFINITION 32 leading indicator of CPI Inflationaverage change over time of selling prices received by domestic producers of goods and services TERM 33 GDP Deflator (P) DEFINITION 33 The broadest measure of inflationshows how much a change in the base year's GDP relies upon changes in the price level TERM 34 Personal Consumption Expenditure Index (PCE) DEFINITION 34 used by feda measure of prices in goods and services targeted towards individual consumers TERM 35 How is inflation measured? DEFINITION 35 inflation is measured as the annualized percentage change in the CPI July 2011 CPI (225.9), June 2012 CPI (229.5), July 2012 CPI (229.1) % change in CPI = 229.1-225.9/ 225.9 =.014 TERM 46 What is the Fed? DEFINITION 46 -the fed is the central bank of the United States-the fed was created in 1913 by an act of congress as a lender of last resort-Chairman of the Fed: Ben Bernanke TERM 47 FOMC: Federal Open Market Committee DEFINITION 47 consists of 12 members-7 are governors of the fed reserve system-5 are presidents of the districts federal reserve banks-NY fed president has a permanent position TERM 48 What are the economic goals of the fed? DEFINITION 48 to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates-dual mandate: economic growth and low inflation TERM 49 Monetary Policy DEFINITION 49 action by a central bank to influence the money supply and interest rates to achieve its goals - typically low inflation and sustainable economic growth- a central bank has the ability to influence the private banking system and private sector, but not control over it-Why? Monetary policy only works to the extent that private banks and households and businesses act in concert with the central banks objectives TERM 50 Three Monetary Policy Tools DEFINITION 50 1. Open market operations (and quantitative easing) this is the most commonly used policy tool2. Changes in the discount rate (largely symbolic moves)3. Changes in the required reserve ration (RRR)-this has never been used by the Fed as "monetary policy"-China does use this as monetary policy TERM 51 Open Market Operations DEFINITION 51 purchases or sales of treasury securities, initiated by a central bank, from or to private banksused when the economy is in recession, has high unemployment, or weak growth TERM 52 Open Market Sales DEFINITION 52 used when the economy has high inflation, or the inflation rate is starting to rise, or the economy appears to be overheating TERM 53 Open market purchases DEFINITION 53 OMP of treasury securities by the central bank from private banks lead to:increase in reserve balances of private banks- this is also called increase in "monetary base" TERM 54 Increase in Bank reserve balances may lead banks to be more willing to make: DEFINITION 54 more loans to customers TERM 55 reductions in interest rates: DEFINITION 55 may cause more households and businesses to take out loans and spend TERM 56 Quiz: What effect does an OM have on the monetary base and the federal funds rate? DEFINITION 56 monetary base decreasefederal funds increasefederal funds rate - the interest rate banks charge other banks when lending money to themdiscount rate - the interest rate the fed charges banks when it lends money to them TERM 57 Standard Open Market Purchase DEFINITION 57 -increased spending leads to:-increase in real GDP (production) and decrease in the unemployment rate-may cause an increase in the inflation rate, depending on how big the change in the money supply is and how much slack there is in the economy TERM 58 Open Market Sales DEFINITION 58 work in reverse and are used to fight inflation TERM 59 3 Standard Monetary Policy Tools DEFINITION 59 -changes in the central bank lending rate (this is called the discount rate or primary credit rate in the US)-the interest rate the Fed charges on loans to private banksIn Principle..Cuts in the discount rate are designed to encourage banks to borrow funds from central banks and lend them outIn Practice..private banks rarely borrow from the central banks unless in dire circumstances - typically announced in concert with changes to federal funds rate TERM 60 Changes in the Required Reserve Ratio DEFINITION 60 RRR is the percentage of customer deposits a bank is legally obligated to hold as required reserves3% for smaller banks and around 10% for larger banks-decrease in RRR then increase reserves in banking system has to lend and then increase in money supply then decrease federal funds rate and other interest rates- increase in RRR works in reverse-changes in RRR not used in US but is used in China as monetary policy