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What components make up total expenditures?
C + Ig + G + Xn
Total income?
Wages (labor), Rent (land), Interest (capital), Profit (entrepreneurs) + statistical adjustments
Why can’t we just use Nominal GDP?
N.GDP = P * Q
When prices go up, N.GDP will go up even if our quantity has not increased. So price changes can make NGDP misleading.
How do you get real GDP from nominal GDP?
RGDP = nominal GDP/Price index (hundreds)
What is an economic investment?
Money spent on NEW capital.
What does not count as an economic investment?
Money spent on buying old factory does not count. (not new)
Money spent on buying new sofa does not count (not capital).
Money spent on car to drive for Uber (does not)
What is an intermediate good?
All the steps before the final good. A final good is when the good is sold to the consumer and is meant for use, not for resale.
What is value added?
The difference between what the good cost and what the good sells for.
the wear and tear on capital
Capital stock
the total amount of capital we have, grows by net investment
Gross investment
the total amount of money spent on capital
net investment
Gross invest – depreciation
What are net exports?
Exports minus imports, how much we sell to foreigners minus how much we buy from them.
If the economy adds to its inventory of goods during some year, how does it affect GDP?
Positive changes in inventory should be added to GDP for the year
Real GDP per capita is found by:
Real GDP / Population
If the annual growth rate is 7%, how long will the country take to double?
70 / 7 = 10
Under what circumstances do rates of economic growth understate the growth of economic well-being?
GDP understates our well-being because product quality improves, we have more leisure time.
In what ways does GDP overstate our well-being?
Our environment is degrading
How do economic growth rates in follower countries compare to growth in leader countries?
Economic growth rates in follower countries is generally faster than in leader countries.
Because they can adopt technologies much more easily and cheaply.
The following institution arrangements promote economic growth:
Patents and copyrights laws that are strongly enforced.
Free markets.
Unrestricted trade between nations.
Widespread literacy and education
Efficient financial institutions
What is the equation for total output as it relates to worker-hours and productivity?
RGDP = worker-hours * productivity
If the number of worker-hours in an economy is 80 and its labor productivity is $3 of output per worker-hour, the economy’s real GDP:
80 * 3 = 240
More and better natural resources, workers and machines are determinants of what?
What factors do we need for growth?
Supply growth, demand growth to match it, efficiency
What are economies of scale?
As you produce more, the average total cost decreases..
What are some arguments for and against economist growth?
More material/more stuff is lets us live better lives.
Ex. We don’t need toilet paper but its nice to have.
The rich producing more allows for the poor to follow and also help themselves.
We are destroying our environment and forsaking moral teachings and value
Which industries or sectors of the economy tend to be affected most by business fluctuations?
Postponable items – consumer durables and capital goods
Differentiate between capital good and consumer goods.
Capital goods are meant for production or service
Consumer goods are meant to be used for utility
Most economists agree that the immediate cause of most business cycle variation is:
There was a sudden drop in demand (usually). Means less spending which means less income which means less sales which means less need for workers so they are laid off and the cycle continues.
Vicious cycle.
If there are 150 (millions) total population, 20 unemployed, 90 employed and 15 discouraged. What is the labor force?
Labor force = employed + unemployed
Labor force = 90 + 20 = 110
What is the unemployment rate?
Unemployed/Labor force
John just quit his job and is looking for work now, what kind of unemployment is this:
Frictional unemployment
What is the natural rate of unemployment?
NRU = Frictional + structural
It is the rate that has no cyclical unemployment
It is the rate at which we can produce potential GDP (good growth with low inflation)
NRU is also known as full employment
Ex: frictional = 2%
Structural is 4%
Then NRU = 2 + 4 = 6%
The presence of discouraged workers causes the official unemployment rate to be?
Too low. (understated)
The type of unemployment associated with recessions is called:
Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun’s law, the negative GDP gap as a percent of potential GDP is:
Actual unemployment – NRU = 4% ? this much people extra who are out of work…
Actual GDP is going to be less than Potential GDP by 8%
GDP gap = -8%
If actual GDP is less than potential GDP, how does actual unemployment compare to natural unemployment?
Actual unemployment must be greater than natural rate
If the Consumer Price Index rises from 200 to 260 in a particular year, the rate of inflation in that year is:
(Final – initial)/initial
(260 – 200)/200 = 30/200 = .15 = 15%
Demand-pull inflation is when..
Demand is too high and prices move up.
“when too much money is chasing too few goods”
Cost-push inflation may be caused by:
Negative supply shock (supply shifted left)
Ex: terrorist blows up oil field.
How do nominal and real income relate to each other?
Nominal = real + inflation
Real = nominal – inflation

You get a 5% raise and inflation was 1%, what happened to real income?
Real income rose by 4%

What are COLA’s?
Cost of living adjustments. Your income is tied to inflation.
What is hyperinflation and what’s the problem?
Prices are increasingly very rapidly and that makes money useless, everyone is broke and chaos ensues.
Who is hurt by inflation? Who is helped?
Fixed income receivers are all hurt
(borrowers are helped by inflation because they pay back their loan with cheap dollars)

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